Cohen & Steers Inc (CNS) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded Thursday, July 21, 2016. I would now like to turn the conference over to Adam Johnson, Senior Vice President and Associate General Counsel of Cohen & Steers. Please go ahead, sir.

Thank you and welcome to the Cohen & Steers second-quarter 2016 earnings conference call. Joining me is our Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler.

Before I turn the call over to Matt, I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. We believe that some of these factors are described in the Risk Factors section of our 2015 Form 10-K, which is available on our website at cohenandsteers.com. I want to remind you that the company assumes no duty to update any forward-looking statements.

Also, the presentation we make today contains non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. For disclosures on these non-GAAP financial measures and their GAAP reconciliations, you should refer to the financial data contained in our second-quarter earnings release and presentation, which are available on our website.

Finally, this presentation may contain information with respect to the investment performance of certain of our funds and strategies. I want to remind you that past performance is not a guarantee of future performance. This presentation may also contain information about funds that have filed registration statements with the SEC that have not yet become effective. This communication does not constitute an offer to sell or the solicitation of an offer to buy these securities. For more complete information about these funds, including charges, expenses, and risks, please call 1-800-330-7348 for our prospectus.

And with that, I'll turn the call over to Matt.

Good morning, everyone, and thanks for joining us today.

As I'm sure you have noticed, our earnings release now contains certain non-GAAP measures, which we believe provide greater transparency into our operating results. As this is a transition quarter, I will be speaking to both the GAAP and as-adjusted results. With respect to the second half of the year my comments will focus on the as-adjusted results.

Yesterday we reported diluted earnings per share of $0.53, compared with $0.42 in the prior year, and $0.39 sequentially. The first quarter included a non-cash expense of $1.9 million or $0.03 per share associated with the accelerated vesting of certain restricted stock units. As-adjusted earnings per share were $0.46 in the second quarter, compared with $0.42 in the prior year and $0.41 sequentially. Adjusted earnings for these periods excluded the results from seed investments, the dividend and interest income on those seed investments, and the non-cash expense on the accelerated vesting. Income taxes associated with these results have also been excluded.

Page 4 of the earnings presentation, which is available on our website, shows the current and trailing four-quarter trend in revenue, and breaks out investment advisory fees by vehicle. Revenue was a record $86.4 million for the quarter, compared with $83.5 million in the prior year's quarter, and $79.7 million sequentially. The increase in revenue from last quarter was primarily attributable to higher average assets under management. Average assets under management for the quarter were also a record at $55.9 billion compared with $53.3 billion in the prior year's quarter and $51.6 billion sequentially.

Operating income was $34.1 million compared with $31.2 million in the prior year, and $28.3 million sequentially. Operating income as adjusted was $30.3 million in the first quarter. Our operating margin increased to 39.5% from 35.5% last quarter. Operating margin as adjusted was 38% in the first quarter. The 150 basis-point increase from last quarter's adjusted operating margin was primarily due to lower G&A costs relative to revenue.

Page 5 of the earnings presentation shows the current and trailing four-quarter trend in expenses, which increased 5.7% on a sequential basis after adjusting for the accelerated vesting in the first quarter. Increases in compensation and benefits and distribution and service fees were partially offset by decreases in G&A and depreciation and amortization. The compensation-to-revenue ratio was 32.75% for the quarter, consistent with the guidance provided on our last call. The increase in distribution and service fee expense was consistent with the growth in average assets in our US open and mutual funds. The decrease in G&A was primarily due to lower costs associated with hosted wealth management marketing events. And depreciation and amortization declined $205,000 from last quarter.

As a reminder, the first quarter included a write-off of certain fixed assets that were taken out of service. We recorded a nonoperating gain net of non-controlling interest of $4.4 million in the second quarter, compared with a nonoperating gain of $859,000 last quarter. The nonoperating results were primarily due to unrealized gains on seed investments. As a result of our capital loss carry-forwards, income taxes are not recorded on gains associated with our seed investments. The effective tax rate of 35.5% for the quarter included the cumulative effect of an adjustment to reduce the full-year expected tax rate to account for the utilization of our capital loss carry-forwards.

Page 12 of the earnings presentation shows our cash, cash equivalents, and seed investments for the current and trailing four quarters, and specifies that portion of our cash and cash equivalents held outside the US. Our firm liquidity totaled $207 million, compared with $186 million last quarter, and stockholders' equity was $255 million compared with $238 million at March 31. We remain debt-free.

As a reminder, last quarter we revised our assets under management tables to reflect distributions as a separate line item and to classify dividend reinvestments as inflows. Total assets under management, which can be found on page 6 of the earnings presentation, totaled a record $58.7 billion at June 30, an increase of $3.7 billion or 7% from March 31. Assets under management in institutional accounts totaled $29.6 billion at June 30, an increase of $1.7 billion or 6% from last quarter, and open-end funds had assets under management of $19.8 billion, an increase of $1.6 billion or 9% from last quarter. Assets under management in closed-end funds increase 4% to $9.4 billion.

For the quarter, we reported net inflows of $2.3 billion, an annualized organic growth rate of 17%. This marks the seventh consecutive quarter we have recorded net inflows, and our highest quarter of net inflows since the second quarter of 2011. Page 9 of the earnings presentation shows net flows by investment vehicle. Institutional accounts recorded net inflows of $1.1 billion in the second quarter, an annualized organic growth rate of 16%. During the second quarter, subadvised portfolios in Japan recorded net inflows of $840 million compared with $864 million of net inflows last quarter.

Distributions increased by $99 million to $752 million from $653 million last quarter. The continued increase in distributions has been driven by the recent strengthening of the yen as well as growth in the funds from net inflows and market performance.

Subadvised accounts ex-Japan recorded net outflows of $30 million. Advised accounts recorded net inflows of $327 million during the quarter. Inflows of $550 million from global listed infrastructure and multi-strategy real asset mandates that were included in last quarter's pipeline, were partially offset by outflows of $240 million from US and global real estate, mostly due to client rebalancing. This marks the fourth consecutive quarter we have recorded net inflows into advised accounts. Our president, Joe Harvey, will provide some color on the level of activity and our institutional pipeline in a moment.

Open-end funds recorded net inflows of $1.2 billion during the quarter, an annualized organic growth rate of 25%. This marks our highest quarter of open-end fund net inflows since the first-quarter of 2007. Distributions totaled $375 million during the quarter, of which $268 million were reinvested.

Given the recent market reaction to Brexit, I thought it would be helpful to discuss our business and to quantify our exposure in Europe. Our European business has been focused on developing institutional advised and subadvised relationships. European clients comprised approximately $2.9 billion of our assets under management at June 30, of which $75 million were based in the UK. On the investment side, European listed securities comprised approximately $3.6 billion of our assets under management at June 30, $1.4 billion of which were in the UK.

Let me briefly discuss a few items to consider for the second half of the year. With respect to compensation and benefits we expect to maintain a 32.75% comp to revenue ratio. We still expect that G&A will increase approximately 1% to 2% from last year. And finally, we project that our effective tax rate as adjusted will remain at approximately 38%.

And with that I would like to turn it over to Joe Harvey.

Thank you, Matt, and good morning everyone.

We experienced positive trends in the second quarter and faced some challenges; yet overall we were pleased with our results. Markets were volatile in the quarter but strongly favored our core asset classes compared with the S&P 500, which returned 2.5%. Measured by the indexes, MLPs and commodities led the returns across our strategies at 20% and 13% respectively. US REIT returns were also strong at 7%, as were natural resource equities at 7%.

Markets expressed seemingly inconsistent expectations as the quarter progressed. The 10-year treasury yield declined to 1.5%, suggesting slow growth, disinflation, and a flight to safety amidst Brexit concerns, yet oil and commodity prices continue to rally. These conflicting signals are hard to reconcile, especially in light of our view that inflation should accelerate towards 4% into 2017, driven by rising energy, rent, and food prices. While part of the inflation bump should be temporary, rising wages, prospects for additional central bank and fiscal stimulus, and the likelihood that commodities have entered a new bull market, suggest to us that the positive market performance in real assets will continue while the fixed income bull market has less and less room to run. We are increasingly wary of the signals from the bond market, considering the ever increasing influence of central banks.

Turning to investment performance, page 11 of the earnings presentation provides a high-level overview of our relative performance and Morningstar fund rankings. For the quarter, 5 out of our 10 core strategies outperformed or were in line with benchmarks. Similarly, 5 of 10 strategies outperformed or were in line for the trailing 12 months. Our commodity-related strategies, commodities, natural resource equities, and MLPs have performed well relative to benchmarks so far this year. Our preferred strategy, which underperformed in the first quarter as global bank credit concerns spiked, had a strong second quarter while navigating Brexit, and is closing in on the benchmark this year while beating peers. Our US and global real estate strategies had their second consecutive quarter of underperformance. We got a few things wrong on property sector and country positioning, and the yield squeeze hurt as we have been positioned for improving economic growth through lower yielding, growth oriented companies. We are confident in our investment processes and teams and their ability to adjust and outperform going forward.

While the markets provided tailwinds for absolute returns in AUM, we were even more pleased with our industry-leading organic growth. We recorded net inflows of $2.3 billion in the quarter, bringing year-to-date inflows to $3.7 billion. Our US open-end funds led the way with $1.2 billion of net inflows. As Matt mentioned, this was our best quarter for flows since the first quarter of 2007. Gross mutual fund sales are on record pace this year and redemptions have been the lowest in two years. Open inflows were led by our five-star funds and preferreds and US REITs. Consistent with prior quarters, Cohen & Steers preferred securities and income fund led the way with $715 million of net inflows. What is new is a greater flow contribution at $492 million from our US REITs fund, Cohen & Steers real estate securities fund, which was recently placed on the Morgan Stanley focus list.

Institutional advisory had $327 million of net inflows, led by the funding of a pipeline mandate and multi-strategy real assets. This mandate by a public pension plan seeded our fourth collective investment trust, which is administered by SEI. We are excited about this CIT as it demonstrates the growing interest in real asset allocations, as well as our strategy to grow in the retirement market.

Japan subadvisory had inflows of $840 million, primarily in US REITs, which continue to be one of the most popular mutual fund categories in Japan, as negative yields catalyzed the squeeze for yield. We continue to have an active level of business development for our preferred strategies in Japan. This year, we have seen a notable uptick, in RFP activity. Through the first half of 2016, we have completed almost double last year's pace. This increased activity is dominated by US REIT and global REIT searches. In addition, we have seen more modest increases in searches for our preferred and multi-strategy real asset strategies.

While commodity RFP activity hasn't picked up yet, we see signs of increasing interest as commodities have begun to emerge from a five-year bear market. We believe the increased search activity is being driven by growing allocations to alternatives in real assets. Investors face a severe asset allocation challenge of finding strategies with both attractive return and diversification potential. Most pension funds have a return bogey of about 7%. And fixed income allocations are falling short of this return objective, and may increasingly disappoint on diversification. And the aversion to drawdowns in equities remains high. The negative yield environment has made this asset allocation even more difficult. In 3/4 of developed markets, sovereign bond yields are negative or less than 1%. As a result, investors are scrambling for yield and we believe our strategies will continue to benefit.

The significant uptick in REIT searches has several drivers in our view. REITs provide a strong combination of what investors need today: yield, total return potential, and diversification characteristics. What is more, over the past several years REIT returns have fallen slightly behind private real estate returns, even though over the long term they have consistently outperformed core private real estate. In response, institutions who allocate to both private and public real estate may be looking to shift to REITs for relative value. Global REIT searches have picked up recently, which, if sustained is a change in trend. Due to global macro challenges, international REITs have underperformed US REITs, and we have seen outflows in global real estate in most channels, in spite of our much-improved performance. We have also watched with interest the Brexit induced closures of daily liquidity private property funds in the UK. This manifestation of a design flaw should bump interest in REITs in the retirement channel. We will keep you apprised as these trends evolve.

Our institutional pipeline of awarded, unfunded mandates stands at $243 million, below our average for the past several years. The decline compared with the last quarter was due to fundings, partially offset by two awarded mandates in preferreds and multi-strategy real assets. We are awaiting the decisions on $1 billion of mandates where the manager has not been selected.

Looking forward, we are highly focused on executing the strategy we articulated in our annual letter to shareholders and reviewed with you at a high level on last quarter's call. The pace of change in our industry is accelerating, with continued outflows from equities, market share gains by ETFs, investors looking for managers to [double over], and distributors responding to the DOL fiduciary rule before it is finalized, and while it is being challenged in the courts. All of this makes sense to us. Said simply, we are focused on being a specialist manager in delivering more for less. We continue across all fronts to enhance our branding capabilities in real assets. This includes adding investment professionals to some of our teams, including analysts for macro and economic research, asset allocation, commodities, natural resource equities, and preferreds.

We have growing confidence in what appears to be a new bull market in commodities as we have written in our white papers. This should lead to improving demand across our broader lineup of real asset strategies beyond real estate and infrastructure, with multi-strategy real assets being the centerpiece, followed by commodities, MLPs, and natural resource equities. Accordingly, we are developing additional vehicles and strategies to round out our product offerings. This includes, by example, an offshore commodities vehicle and a second version of our multi-strategy real asset portfolio designed for lower volatility through a greater allocation to TIPS.

In terms of distribution, our wealth management team is performing well and we seek to better balance sales in real assets compared with preferreds and real estate. Institutionally, we have hired a sales professional to join Mark Haynes, our recently added Head of Business Development in Europe. Also announced this morning, we have hired an experienced new Head of Consultant Relations, Dennis Rhody, from Franklin Templeton, and we continue to expand our presence in the DCIO channel. Sales campaigns and white papers are similarly geared toward enhancing our market share in real assets. We look forward to reporting on our progress next quarter.

This concludes our formal remarks. Operator, please open the lines for questions.

(Operator Instructions)

The first question is from the line of Adam Beatty with Bank of America Merrill Lynch.

Thank you and good morning. I just wanted to ask about Brexit, from another angle in terms of some of the disruption in the real estate market there. What extent, or what magnitude you would expect from that, and whether or not -- it sounds like your exposure right now is manageable. So, whether or not that might lead to some buying opportunities or whether it is just better [ring-fenced] at this point. Thanks.

I'll concentrate my comments on real estate and just as a high-level remark, I think that Brexit over the long term will be good for the UK. It will result in some short-term pain, probably a brush with recession. But long term, I think it is good that they can control their own destiny apart from being tied to Europe.

In terms of commercial real estate in the UK, we are expecting prices to decline anywhere from 5% to 15% or 20%, depending on the property type, and the biggest declines are being expected in the office market. However, we think that for some other property types such as industrial, where for example the decline in the pound, it could be good for trade that it will be continued interest in the property markets in London.

I mentioned in my remarks the comment about the daily liquidity property funds and this has always been a big topic for us because we provide liquidity to our investors. Daily, and without fail.

We have never been able to understand why you can provide daily liquidity from an asset class that inherently is not liquid. So we have not tried to be involved in those types of vehicles and we do think, as I mentioned, that particularly for our certain channels like retirement, where daily liquidity is very important, that it could result in increasing interest in what we do in listed real estate.

Thank you. I appreciate your perspective there. And then turning to Japan, I wanted to get an update on the diversification of accounts there and how you were flows -- obviously the DAIWA account is larger and perhaps more susceptible to net redemptions whereas the others are maybe faster growing. Just wanted to get your comments around that. Thank you.

Our business in Japan is still concentrated with our partnered DAIWA asset management. It still is very concentrated in US REITs. We have expanded our business development team in Japan. Not just to help support DAIWA and the improved flows that we have seen in US REITs but we have also been pursuing with other distributors and asset managers our other strategies.

As I mentioned, the preferred strategy as you might expect with some of the highest yields in the global capital markets, it will continue to be of interest. We have a lot of discussions that are going on with distributors for new strategies, new versions of preferred security strategies. We're also spending time in the institutional market. That, as I am sure you are aware is something that takes some time. There's a process involved.

We do not have a lot to report there today. We're encouraged by the increased activity in the preferred area.

Great. Thank you for taking my questions.

The next question is from the line of Ari Ghosh with Credit Suisse.

Good morning guys. Could you give us a quick update on how mutual fund flows are tracking quarter-to-date compared to Q2.

And ff you have any color on what distributions should look like for the rest of the year? Just focusing on -- on the end denominated piece if you have more clarity on that, assuming nominal markets and unchanged FX. Thanks.

I think the -- we will be providing information in another few days or week or so on the July flows. But everything has been continuing to track pretty consistently subsequent to June 30, on the open end funds.

On the distributions, I think, we had consistently said that we had about a $2 billion to $2.1 billion annual bogey on distributions and in my points I had mentioned that number was increased of late because of the strengthening yen and the growth of the funds that we subadvise there, that's on the Japan side.

The numbers that we just cited are probably notwithstanding an adjustment in the currency. The new bogey which is a high-class problem given the growth in the funds.

Got it. That's helpful. Just as a follow-up, if you could touch on the appetite for preferreds outside the US retail channel. Maybe you can talk about some of the underpenetrated segments, new product launches, or geographies you are exploring? Thanks.

As we mentioned, because of the high yield on preferreds, in a zero interest rate environment there, they are very much in demand. Heretofore, it's been primarily a retail strategy. We've been seeing growing interest from financial intermediaries, and institutional, and clients. In our pipeline, for example as I mentioned, we have one new mandate for an insurance company.

When you look outside the US, we don't have a open end fund vehicle. But that is something that we are talking about and potentially could happen over the next year. We believe that because of the yield environment and with the growing issuance of preferreds by banks, and to a lesser extent insurance companies, to help meet their capital requirements, that there is going to be continued growing interest in the preferred market.

Great. Thanks for taking my questions.

The next question is from the line of [John Dunn] with Evercore ISI.

Thanks. You talked about some of the -- in the global REITs area, some underperformance versus US and different structures et cetera. But looking forward, with global rates where they are, do you think there is eventually is going to be a pickup in demand for those over the next -- over the medium term?

Could you restate your question? I didn't get the gist of it.

On global REITs, just given where looking forward, where global rates are, do you think there could possibly be a pickup in demand for it as a product but in specifically for your strategy given that you have improved performance?

Over the past couple years we've not seen a lot of global search activity but in the RFP activity that I mentioned, REIT searches overall picked up a lot and global has been a big part of that.

Just to reiterate some of my comments, while five, six years ago there was a very significant trend toward allocating to global. Over the past couple years it has slowed down because of the global macro challenges that we all know well, whether it's Europe or the economy in Japan, slowing growth in China et cetera.

So when you look at the performance of the global REIT market, internationally those companies have underperformed the US REIT market. Because the search activity in global is picking up, its likely that some of that interest is focused on that underperformance, international versus the US and thinking about improving global growth.

Again, the increase in RFP activity is pretty recent. I think we need to see what is going to happen over the next months and year, but we are encouraged by the pickup in global REIT searches.

I think you had a little bit of outflows in the advisor channel for US REITs. Has there been any change in the discussions, the client discussions, of the billion dollars in discussion, what are the major areas comprising that pre-pipeline?

That includes US REITs, global REITs and preferreds.

The demand for US REITs in the advisory channel? Just having had a little bit outflows this past quarter.

John, it's Bob, the outflows in the quarter are mainly due to rebalancing. US REITs that have performed extraordinarily well. And you may be seeing, as Joe alluded to, some reallocation out of US into global. You are seeing, and I think, in money starting going to go back into emerging market strategies since they have underperformed for a long time and maybe represent relative value. It's really -- I think that's all it is.

Just wanted to check. Thanks guys.

The next question is from the line of Ann Dai with KBW.

Thank you and good morning. I was hoping to focus on the European in business. You talked about it briefly, can you give us an update on the work you are doing in Europe and what are some of the things that Marc Haynes has been most focused on his first half-year there.

As I think most of you know, about 18 months ago we decided to really take a fresh look and a new start to our business strategy in Europe where we managed about $3 billion of client capital. We think we should be doing much better than that.

So we undertook a market survey with [Branch] Associates. Marc joined us not too long ago; six months ago or so, put together a deep business plan including growing the team. Which Joe talked about, we are done growing the team.

Marc has been spending his first six months elevating the firm's profile. He was recently outspoken and well published on, what I would call, the private real estate open-end fund debacle in the UK. Which I think highlights the problems with investing in real estate in that mode and the benefits of investing [to listed].

The goal here is to elevate and develop relationships with both the consulting community, the financial institution channel for subadvisory business, and to get our existing and future products on platforms, as well as to deepen along with our new Head of Consultant Relations our Institutional Global Consultant Relations. Again Marc has been extremely active in that endeavor and now he will have three or four, two or three very senior people working side-by-side with him going forward.

Great. Thanks. Also on UK and Europe, you talked about the exposure AUM and securities-wise, could you provide a little color around what your internal conversations have been around Brexit focusing on the operations of the business and sales activity? And logistically how everything would work in that scenario?

Could you expand on that a little? Are you wondering whether we might be doing more hedging of our cash and fee streams, what is it you exactly you would like us to focus on here?

I am more focused on the daily operations of the business, whether you have people sitting in places where you might have to reconsider what offices people are in to do certain activities and things like that.

Sure. Our office is in London. We do not have any other offices in Europe. And in terms of our activities we can do them all in London just as we have. In terms of our offshore funds there, UCITS related vehicles and we don't expect there to be any impact on our ability to sell in the markets we are in now. Said simply, no impact on our operations.

Okay, thanks so much.

(Operator Instructions)

The next question is from the line of Mac Sykes with Cohen & Steers.

Good morning gentleman. Thanks for taking my question. Can you talk about setting up products in subadvisory going forward -- is there any way to reduce the distribution aspect? It seems like this mitigates to some extent your great efforts on asset gathering. I guess for the future, should we just assume this is the nature of the business in Japan?

The distribution policies for Japan funds are set by DAIWA asset management. We have no input on that whatsoever and so they are set by in part the market, and the market conventions and the decisions by the asset managers.

Thank you.

There are no other questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thanks for joining us on the call, as I mentioned we'll look forward to reporting our progress on all fronts next quarter.

Ladies and gentlemen, that concludes the conference call today. We thank you for participation and ask that you please disconnect your lines.