Cohen & Steers, Inc. (CNS) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Cohen & Steers Fourth Quarter 2011 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, January 26, 2012. I would now like to turn the call over to Mr. Sal Rappa, Senior Vice President and Associate General Counsel. Please go ahead, sir.

Thank you, and welcome to the Cohen & Steers Fourth Quarter and Full-Year 2011 Earnings Conference Call. Joining me are Co-Chairman and Co-Chief Executive Officers, Marty Cohen and 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 factor section of our 2010 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 pro forma or non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. For detailed disclosures on these pro forma metrics and their GAAP reconciliations, you should refer to the financial data contained within the press release we issued yesterday, as well as in our previous earnings releases, each available on our website. Finally, this presentation may contain information with respect to investment performance of certain of our funds and strategies. I want to remind you that past performance is not a guarantee of future performance. For complete information about these funds including charges, expenses and risks, please call 800-330-7348 for a prospectus. With that, I'll turn the call over to Matt.

Thank you, Sal. Thanks everyone for joining us this morning. Yesterday, we reported net income of $0.36 per share compared with $0.29 in the prior year and $0.22 sequentially. The fourth quarter of 2010 included a $0.06 per share after tax expense attributable to the launch of the Cohen & Steers Select Preferred and Income Fund and an after tax gain of $0.03 per share due to recoveries on the sale of previously impaired securities. After adjusting for these items, earnings per share were $0.32. We reported revenue for the quarter of $59.4 million compared with $51.8 million in the prior year and $61.6 million sequentially. Despite a slightly higher effective fee rate, revenue declined almost 4% sequentially as a result of lower average assets under management. Average assets for the quarter were $40.3 billion compared with $32.8 billion in the prior year and $42.9 billion sequentially. Our effective fee rate for the quarter was 54.5 basis points, up from 53.7 basis points last quarter. The increase was primarily due to net outflows in our subadvisory channel. Subadvisory accounts are lower-fee paying, so a decline in this channel will have a positive effect on our effective fee rate. Operating income for the quarter was $22.8 million compared with $13.1 million in the prior year and $22.4 million sequentially. Last year’s quarter included closed-end fund launch costs of $4.1 million. Excluding these costs, operating income was $17.2 million. Our operating margin increased to 38.4% from 36.3% last quarter. The 200 basis point increase was primarily due to a lower compensation-to-revenue ratio and lower G&A. Pre-tax income for the quarter was $25.2 million compared with $18.2 million in the prior year and $17.6 million sequentially. Last year’s quarter included the closed-end fund launch costs of $4.1 million and a $1.5 million recovery on the sale of previously impaired securities. After adjusting for these items, pre-tax income for last year’s quarter was $20.8 million. You will recall the sequential quarter included a $5.2 million loss on the seed investment in our Global Long-Short Real Estate Hedge Fund. For the year, we recorded net income of a $1.23 per share compared with the net income of $1.07 per share last year. The 2010 results included aftertax gains of $0.17 per share on recoveries of the securities sold and closed-end fund launch costs of $0.06 per share. After adjusting for these items, earnings per share for 2010 were $0.96. Assets under management totaled $41.3 billion at December 31, an increase of $2.7 billion or 7% from the third quarter. The increase in assets under management was attributable to market appreciation of $3.7 billion partially offset by net outflows of $1.1 billion. For the year, assets under management increased $6.8 billion or 20%. The increase was due to net inflows of $7.4 billion, partially offset by market depreciation of $598 million. Our 2011 organic growth rate was 22%. At December 31, our U.S. real estate strategy comprised 45% of the total assets we managed, followed by global and international real estate at 32%, large cap value at 9%, global infrastructure at 7% and preferred securities at 5%. Assets under management in our institutional accounts totaled $25.4 billion at December 31, an increase of $1.4 billion or 6% from the third quarter. The increase was due to market appreciation of $2.5 billion partially offset by net outflows of $1.1 billion, virtually all of which were from our subadvisory relationship in Japan. I should note that most of the $1.1 billion of awarded mandates that Bob Steers referenced on our last call did not fund during the quarter. Marty Cohen will provide an update on the status of these mandates in a few minutes. For the year, assets under management increased $5.8 billion or 29%. The increase was due to net inflows of $6 billion, partially offset by market depreciation of $284 million. Our 2011 organic growth rate for institutional accounts was 31%. Open-end funds had assets under management of $9.6 billion, an increase of $1 billion or 12% from the third quarter. The increase was due to market appreciation of $916 million and net inflows of $91 million. For the year, assets under management increased $1.1 billion or 13%. The increase was due to net inflows of $1.3 billion, partially offset by market depreciation of $152 million. Our organic growth rate for 2011 in open-end funds was 15%. In our closed-end funds, assets under management totaled $6.3 billion, a 5% increase from the third quarter and for the year assets under management decreased $68 million or 1%. The last page of our earnings release contains a schedule of assets under advisement which include Exchange-Traded Funds, model-based strategies and unit investment trusts. Fees associated with these assets are included in the statement of operations under the caption Portfolio Consulting and Other Income. Model-based strategies include assets from the major U.S. wirehouses as well as assets from a new arrangement with Daiwa. For the quarter, the majority of the net inflows into model-based strategies were from this new arrangement. So although we recorded net outflows in our institutional account assets under management, we had offsetting inflows into our assets under advisement. Moving to expenses, on a sequential basis assets decreased 7%. The decrease was primarily due to lower employee compensation and benefits, distribution and service fees and G&A. The compensation to revenue ratio was slightly lower than the guidance we provided on the last call and was 35.6% for the year. The sequential decrease in distribution and service fee expense was in line with the decrease in the average assets of our open-end no-load mutual funds and the decrease in G&A was primarily due to fund reimbursements related to the launch of our private real estate multi-manager strategy and lower professional fees. Non-operating income included $1.7 million gain on the seed investment and our Global Long-Short Real Estate Hedge Fund. Typically gains and loses attributable to seed investments are recorded on the balance sheet as a component of other comprehensive income. But given the proportion of our ownership in the fund, the economics are reflected in the non-operating section of the statement of operations. Turning to the balance sheet, our cash, cash equivalents and investments totaled to $184 million compared with $160 million last quarter. Our stockholders equity was $231 million compared with $215 million at September 30 and we remain debt free. Now, I will briefly discuss a few items to consider for 2012. Based on our preliminary projections we estimate that our effective tax rate should be about 36%. With respect to compensation and benefits we expect our compensation to revenue ratio will be about 34%, down from the 35.6% we recorded in 2011. We project G&A to increase by approximately 5% in 2012 and with respect to the first quarter of 2012 we expect G&A to be more in line with the second quarter of 2011. The increase in G&A is due to a higher level of business activity including increased marketing efforts supporting the launch of our real estate, real asset, open-end mutual fund. Marty will provide some context regarding this launch in a moment. We expect that our effective fee rate for 2012 will be between 54 and 55 basis points and finally fee waivers will expire on 2 of our closed-end funds. Based on current asset levels these items will generate approximately $1.5 million of incremental revenue in 2012. Now, I would like to turn it over to Marty Cohen.

Thanks Matt and thanks for listening this morning. I have just a few comments I would like to add to Matt’s remarks. First, we think it’s notable that essentially all of our asset growth in 2011 came from net inflows. This is in contrast to the substantial and chronic industry wide net outflows from equity products, so we certainly bucked the trend there. Our open-end fund gross and net sales were the best since 2007 and as you are aware our subadvisory inflows for the year were at record levels. For the year, U.S. real estate enjoyed the highest in net inflows followed by our preferred securities strategy. The only notable net outflows were from global and international real estate funds. In sympathy, we think, with investor concerns about slowing growth in Asia and recessionary trends in Europe. Divergence in investments returns was very notable. U.S. real estate was up 8.3% last year while international real estate was down 8.9%. By the way this trend has change somewhat this year. As of this morning, so far this year U.S. real estate is up about 6% while international real estate is up about 8%. As Matt mentioned we ended the year with nearly a billion of institutional mandates still yet to fund. But I am pleased to say that some of those mandates have funded in January and the balance are expected to fund in the next month or so. Second, with the respect to performance, as always, it remains our highest priority. Though our 3, 5 and longer term track records are still extremely good, 2011 was a mixed year for us. Our real estate strategies underperformed their benchmarks early in the year, but they have been lately in an improving trend. Similarly our long short real estate strategy lagged for much of the year, but has recently improved substantially. We're seeing continued improvement in large cap value and we are also starting to see net inflows into that strategy. The whole dividend growth theme is getting more investor attention and we see this having very good potential for us. Our preferred securities performance is again industry leading and our open-end fund is now in excess of $700 million in assets. That's after less than two years. The third point I would like to make is that we are now live with our open-end real assets mutual fund. The fund is a combination of primarily real estate, natural resource equities and commodities. For the first time, we are using subadvisors that are leaders in their respective areas: Investec Asset Management for natural resource equities and Gresham Investment Management for commodities. This is a major undertaking on our part and we are mobilizing all of our marketing and distribution resources to support this launch. We believe that this as an investment that makes a great deal of sense today, not only because of the prospect or potential for inflation, but more importantly because of the diminishing supply of resources and the increasing demand for them as world population and economies continue to grow. The ability to offer turnkey investment solutions such as this, is something that financial advisors and investors should find very appealing and if we are right, this could be an important driver of our future asset growth. In summary, as we begin the year we feel very good about our line-up of investment strategies and believe that they are in every case appropriate for the economic and financial market environment that we foresee for the next several years. As Matt alluded to, we think we have done a good job of controlling costs and realizing expected economies of scale. This is an ongoing challenge, I think not just for Cohen & Steers, but for the asset management industry. But with 2012 off to a good start, we are seeing some good market tail winds and good flows; we think we are well-positioned for another year of growth. I would like to take a minute in closing, just to elaborate on what Matt mentioned with respect to our flows in AUM in Japan. Six months ago, we illuminated the size of the Japanese real estate fund market relative to the REIT market in general and our company in particular. We felt that this was important to disclose because it’s significant to our assets. Since then, many analysts have been trying to reconcile Japanese fund flows and their effect on U.S. and global real estate securities pricing as well as our company’s asset growth. I think it’s worth pointing out that this is a very complex relationship. We manage a large number of funds for Daiwa and those funds are in turn distributed in subfunds by many other banks and financial intermediaries. As Matt mentioned, there are certain sleeves in this portfolios that are managed in model based UMA type program. This has become more substantial and it is for this reason we reintroduced the schedule at the end of our press release, which shows assets under advisement. We don’t think it’s productive for us or analysts to try regularly reconcile what you may see in Japanese mutual fund statistics and link them back to the REIT market or our business. What is meaningful is the assets under management that we report in the subadvisory category, which includes a good number of U.S. and foreign relationships and whose revenues are reported in net investment management fees. The assets under advisement that we report include a large number of model-based UMA type and other programs as well as ETFs that are used in numerous channels and whose revenues are reported in Portfolio, Consulting and Other Fees. We would rather not get into a lot of granularity on this because I think it could be misleading due to its complexity and, as well, out of respect to the confidentiality of all of our client relationships. But we do want to direct our shareholders and analysts to the schedules that provide a succinct and accurate view of exactly of how our business is doing. So at that I would like to stop and ask -- answer any questions you all may have.

[Operator Instructions] And our first question comes from the line of Michael Carrier with Deutsche Bank.

Maybe I -- one question just on new products and then some of the distribution opportunities that you guys have touched on in the past. So I guess in terms of the real asset product, like it sounds interesting, particularly given this environment, so when you look at channels, I think you mentioned the U.S. retail channel, but any other distribution opportunities for that product and any expected demand? And then on the distribution side, I think it might have been last quarter you mentioned some new relationships in Europe. So any update there in terms of traction or any other areas where you see in those opportunities?

Well, with respect to the real asset fund as Marty mentioned we are very excited about it. That’s something we’ve been working on for virtually 2 years. It’s a fairly complex fund that we have made simple for investors. The fund itself was declared effective just yesterday or today, it's not yet available on the all the major wire-house and other platforms, but we expect it to be available virtually everywhere in the March time period. We’ve gotten extremely favorable feedback from all of the distributors particularly because a turnkey real asset fund that takes a fairly sophisticated approach to real asset investing dovetails with virtually every firm’s intermediate and long-term outlook. And it's one of the only, if not the only, fund of its kind that is delivering both these various different real asset strategies, but also doing it with open architecture with best-in-class managers running each of the core strategy. So it’s really I think an important new product launch for us and ultimately we hope to have it available in all of our channels, not just U.S. retail. With respect to other distribution relationships outside the U.S., there is really nothing new to report. I think we mentioned, we added an important new relationship in the fourth quarter of last year and the flows have begun, but they are growing gradually at this point.

And then just when we look at the flows in the quarter, we look over the past, could be 7 years, but definitely the last 2 years, the flows have been very strong so when we look at the $1 billion or so on the output [ph] side, just the areas that were weak and I appreciate what you said in terms of the institutional pipe, a lot of that didn't fund so that will be coming in the first quarter. And then also, the model-based strategies like those assets coming on even though they are not in AUM [ph]. So just what drove it in the quarter? And then in terms of the outlook, particularly on those model-based strategies, like was there any kind of step-up this quarter and then we should see ongoing growth ahead or is this level of growth like could that continue because obviously your assets almost doubled in that line item?

As I mentioned, there were outflows in global and inflows into U.S. and that was in accordance with the investment environment. So the same is true in our subadvisory channels as it is in retail and every other. And that’s pretty much all there is to say to that. What it will be in the future; we don’t know and it could be -- things could reverse and global becomes popular as I mentioned. International is doing better than U.S. so far this year. So we can’t really predict. As we’ve always said, our goal as a firm is to be available in every channel for those investors that want that particular strategy and we’ll see at the end of next quarter, or this quarter, how that plays out.

Maybe just initially, early in the year here, what we’re seeing is actually retail as we think of it as our open-end fund business is off to a very, very encouraging start. The institutional pipeline is measured by RFP activity is near, or at historic highs, and looking at our subadvisory and non-U.S. distribution partner business in totality, we don’t see outflows currently. Obviously, the fourth quarter was hopefully an anomaly which reflected the volatility and uncertainty particularly in August and September of the prior quarter and I think that had an affect on the timing of the investment of some of these committed mandates and there is no doubt that all of the uncertainty and volatility in the third quarter had a little bit of an impact on the fourth quarter, particularly in October. But right now with volatility having subsided substantially recently, we’re very encouraged by the early flows in all of our channels.

Our next question comes from the line of Adam Beatty with Bank of America.

First, just a question on the sequential decrease in compensation ratio; I guess from a performance standpoint, absolute returns in Q4 were pretty good and performance might have lagged a bit, but similar sort of to the run rate for the year. So I was wondering what drove the decrease in comp?

We provided comp ratio as a guide but it’s the main driver of the second [ph] comp at the end of the year is as much of a top down, as it is a bottom up. So we went through the process that we go through every year that’s based on market and merit.

We apologize for that. We are not encouraging all of you on the call to run for the exits. We're going to tone that down...

Okay. So using a top down approach and the market and merit, we set compensation where we thought it was appropriate and in order to get there, there was a slight decline in the fourth quarter. But we had said 35.5 all along and we wound up at the end of the year with 35.6. So I think, I'd look at it that overall, we maintained the 35.5-ish ratio, but it’s a good proxy and it’s a good guideline, but there's been years where it's spiked in the fourth quarter and then there's years where it’s flat and then there's years where it's slightly down.

Just a question also on the net flows for U.S. real estate. Seemed like redemptions were pretty stable, actually ticked down a little bit, but the gross sales maybe came down a little. Do you feel there is any seasonality in that or what was driving that?

You’re talking about the fourth quarter number?

Yes, I am.

As I mentioned earlier I think to some extent and I hate to use this terminology, but I think following Q3, October was a risk-off type environment. So I don’t think there was seasonality, I think there was a reaction to the European debt issues and the tremendous volatility on the downside that we saw in the equity markets in August and September.

Okay. So people just held off putting new money in?

I think so, yes.

And then lastly on, I mean, I guess heading into 2012, 2 of the opportunities sort of broadly in the investment world that have been identified are -- maybe the chance to buy assets cheaply in Europe or in Asia and the other is may be to -- for some to get assets from financial institutions who are in effect forced sellers by having to build capital and what have you. Just wondering, just hoping to get a take from a real estate perspective on those potential opportunities -- whether you see opportunities in those areas in 2012?

Sure. Well, for our real estate security strategies, we believe those companies will have an opportunity to acquire assets as the deleveraging process continues to evolve both in the U.S. and to a greater extent in Europe. In the U.S., as we look out of the next 3 years, we’re starting to hit the peak in debt maturities and while because of the normalization of the credit markets and the fact that capital is mobilized, companies aren’t going to be in a position to steal things. Its going to create a lot of transaction activity and we think the winners will be those companies that have operating platforms to buy the assets that maybe under-leased and use that as a way to create alpha, buy an asset from the owner that needs to refinance, doesn’t have the equity and the property to do so, maybe as an occupancy problem and if you have a company with a platform can make the most money in that situation. But as opposed to early 1990s we don’t think that companies are in a position to steal things. In Europe, it’s an evolving situation because of the deleveraging of the banking system and of course because one of the ways of doing that is to shrink balance sheets. We think that’s going to put even more stress on the real estate system and companies, the realty major types companies there that have access to capital are in a great position to take advantage of that situation. It’s much earlier in that process in Europe and the opportunities are going to come in several forms, but that’s something that our company and we as a firm are focused on.

Our next question comes from the line of Alex Blostein with Goldman Sachs.

Marty, I appreciate your comments earlier about not really willing to get into specific subadvisory relationships you guys have, so maybe you’re just sticking to schedules that you guys did provide. Gross sales ticked down sequentially quite a lot, so maybe you can provide a little more granularity on what exactly happened there? And then I guess one of the larger funds that you guys have interference [ph] still has a fairly high yield that some might argue is not very sustainable. So in your outlook for the subadvisory bucket as a whole, how do all those features kind of fit in together?

Well, I think the subadvisory, the results in subadvisory channel were the same as they were in all the other channels, and that is, U.S. real estate was in a redemption mode and global was in -- I am sorry -- U.S. real estate was in a low for the quarter was kind of a low net flows and global with outflows. I don’t know what your…

I mean if you look, obviously I get the net, but the gross if you look at subadvisory last quarter inflows were $2.7 billion and this quarter it went down to $349 million. And that’s -- it just feels like it’s a much sharper decline than any other bucket did you guys have sort of seen out there?

It was the largest decline and it had the largest inflows previous to the quarter so that maybe it was a result of that. A lot of investors in all of our subadvisory relationships, there was a lot of positive momentum earlier in the year and, as Bob mentioned, as we got into the third and fourth quarter that momentum starts to dissipate.

So may be just slower sales across the board basically there.

Yes.

And then the new disclosure that you guys started to break out on the assets under advisory I guess, how should we think about I guess the underlying products that the model-based strategies are tied to. So are these are all kind of REIT assets, so when we try to model it out should sort of go inline with your own investment performance or there is just other products in there. So, maybe on an asset class and product basis, it would be helpful to get some color?

We don’t want to get into -- take this small table and blow it up into many different categories. But it is basically, you all know what model-based strategies are. They are UMA, SMA type platforms in the U.S. and as we mentioned outside the U.S. The UIT business has been very steady for us and it’s a number of different strategies and the ETFs are, they are basically our largest, 2 is our Cohen & Steers Realty Majors Fund. And that’s pretty much what it is.

Okay. But again, to think on equity even broader buckets and no color on that?

We don’t have fixed. We may have some preferred models.

Well, it's global REIT, it's large cap value and it's preferred. I mean, those are the 3 biggest strategies that we have in that bucket.

Mr. Rappa, there are no further questions at this time. I will now turn the call back to you.

Well, thank you all for listening in and we will speak to you at the end of the first quarter, but call if you have any questions. Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.