Cohen & Steers, Inc. (CNS) Q1 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers First Quarter 2014 Financial Results Earnings Call. [Operator Instructions] As reminder, this conference is being recorded, Thursday, April 17, 2014. I would now like to turn the conference over to Mr. Adam Johnson, Senior Vice President and Associate General Counsel. Please go ahead, sir.

Thank you, and welcome to the Cohen & Steers' first quarter 2014 earnings conference call. Joining me are Chief Executive Officer, Bob Steers; Executive Chairman, Marty Cohen; 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 2013 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 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 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 registrations statements with the SEC that have not yet become effective. This communication shall not constitute an offer to sell or the solicitation of any offer to buy these securities. For more complete information about these funds, including charges, expenses and risks, please call 1(800) 330-7348 for a prospectus. With that, I'll turn the call over to Matt.

Thank you, Adam. Good morning, everyone, and thanks for joining us today. Yesterday, we reported net income of $0.43 per share compared with $0.34 in the prior year and $0.43 sequentially. The first quarter of 2013 included an after-tax expense of $0.10 per share, primarily due to costs associated with the offering of Cohen & Steers MLP Income and Energy Opportunity Fund. After adjusting for these items, earnings per share in the first quarter of 2013 would've been $0.44. Revenue for the quarter were $72.8 million, compared with $72.5 million in the prior year and $73.4 million sequentially. Our effective fee rate for the quarter was 57.4 basis points, up slightly from 57.2 basis points last quarter. The increase is primarily due to the continued shift in the mix of our average assets under management. Operating income for the quarter was $27.6 million, compared with $20.7 million in the prior year and $29.4 million, sequentially. Excluding the closed-end fund offering costs, operating income for the first quarter of 2013 was $28.5 million. Our operating margin decreased to 37.9% from 40% last quarter. The decline was primarily due to lower compensation and benefits in the fourth quarter, resulting from the cumulative effect of an adjustment to incentive compensation, partially offset by a decrease in the G&A to revenue ratio this quarter. Pretax income, net of noncontrolling interest, was $30.6 million for the quarter compared with $23.3 million in the prior year and $31.3 million sequentially. Excluding the offering costs, pretax income for the first quarter of 2013 was $31.1 million. Assets under management totaled $49 billion at March 31, an increase of $3.1 billion or 7% from December 31. The increase in assets under management was attributable to market appreciation of $3.2 billion, partially offset by net outflows of $116 million. Average assets for the quarter were $47.7 billion compared with $47.4 billion in the prior year and $47 billion sequentially. At March 31, our U.S. real estate strategy comprised 52% of the total assets we managed, followed by global and international real estate at 20%, preferred securities at 10%, global listed infrastructure at 10% and large net value at 6%. Assets under management in institutional accounts totaled $24.5 billion at March 31, an increase of $1.6 billion or 7% from the fourth quarter. The increase is due to market appreciation of $1.8 billion, partially offset by net outflows of $220 million, the majority of which were from global and international real estate strategies in sub-advised accounts. Institutional net outflows continue to abate and are at the lowest level since the third quarter of 2011. If you annualize first quarter flows, institutional accounts had a 4% decay rate. Open-end funds had record assets under management of $15.1 billion at March 31, an increase of $1.1 billion or 8% from the fourth quarter. The increase was due to market appreciation of $1 billion and net inflows of $104 million, which included $232 million of redemptions from 2 discretionary model-based platforms. If you annualize first quarter flows, open-end funds had a 3% organic growth rate. Assets under management in our closed-end funds totaled $9.4 billion at March 31, an increase of $439 million or 5% from the fourth quarter due to market appreciation. Moving to expenses. On a sequential basis, expenses increased 3%, primarily due to higher employee compensation and benefits, partially offset by lower G&A. The compensation to revenue ratio for the quarter was 33%, consistent with the guidance provided on our last call, and a sequential decline in G&A was primarily due to lower marketing and technology expense. On a sequential basis, nonoperating income net of noncontrolling interest increased $1.1 million. The increase was primarily due to higher returns from our seed investments. Now turning to the balance sheet. Our firm liquidity totaled $177 million compared with $182 million last quarter. Stockholders' equity was $233 million, compared with $224 million at December 31, and we remain debt free. Let me briefly discuss a few items to consider for the second quarter and the remainder of 2014. With respect to compensation and benefits, we expect to maintain a 33% compensation-to-revenue ratio. We expect G&A to increase in the second quarter and to approximate the amount recorded in the second quarter of last year. The increase is primarily due to higher marketing expenses related to our real asset strategies, including our real assets institute and higher business-related travel. For the full year, we expect G&A to be consistent with the amount recorded in 2013. And finally, our projected tax rate was approximately 36.5% for the quarter. The variance from the 37.5% rate provided in our guidance on the last call was the result of higher nonoperating gains than previously forecasted. The increased nonoperating gains will result in no associated tax expense due to the expected utilization of capital loss carryforwards. We expect that our effective tax rate will approximate 36.5% for the remainder of the year. And with that, I'd like to turn it over to Bob.

Thanks, Matt, and good morning. On our last call, we mainly discussed why liquid alternatives, in general, and real assets in particular, represent an historic secular growth opportunity for Cohen & Steers. We also laid out our plan designed to position Cohen & Steers as the leader in real asset investing. Today, my focus is on the benchmarks for success in executing our real asset strategies. The key metrics on our dashboard will be as usual, investment performance, but also marketing initiatives, new markets, and vehicles and organic growth rates. In the first quarter, real asset strategies delivered strong absolute and relative returns, and demonstrated why allocations are beginning to increase in almost every channel. Historically, real asset strategies tend to perform well in periods when stocks and bonds are underperforming, and that's exactly what we witnessed in the quarter with the MSCI World Index turning 1.4% and the Barclays Global Ag 2.4%. By comparison, real asset portfolios excelled. Our U.S. and global REIT strategies returned 9.9% and 3.8%, respectively, and all of our other real asset portfolios achieved similarly high absolute returns. Global listed infrastructure returned 6.8%, MLPs 5.9%, active commodity 5.7 and our multi-strategy real asset portfolios 4.0%. With the exception of the active commodity strategy, our real asset portfolios performed about inline with their respective benchmarks. The preferred and large cap value portfolios also performed well, generating 5.7% and 3.7% total returns, respectively. And most importantly, all of our investment teams are in place, fully staffed and working well. In the quarter, we launched a series of new marketing initiatives designed to enhance our position as the investment and thought leader in the real asset space. The centerpiece of this effort is the Cohen & Steers Real Assets Institute [ph]. Each month, our real asset teams travel to a major U.S. city to present the benefits of allocating to real asset strategies. In each location, we conduct separate sessions targeted to top financial advisory firms, RIA firms and institutional consultants. Our first 2 institutes were held in Houston and Atlanta, and the reception in both locations exceeded our expectations. The remainder of the year is booked and we're now planning for 2015. Also, this fall, we will be conducting our first major institutional client forum focused on listed real assets investing. Thought leadership and selling the knowledge gap will be essential for any firm looking to capture the anticipated allocation shift into real assets and we're committed to being at the forefront of that opportunity. With respect to our product lineup, we've made progress towards our goal of offering our real asset strategies to all channels and investors by expanding the range of vehicles through which our portfolios can be accessed. Last December, we launched the open-end Cohen & Steers MLP and Energy Opportunity Fund in recognition of the ongoing strong demand for MLPs. By May 1, we expect also be live with our open-end active commodities fund. For institutional investors and DC gatekeepers, the CIT, or Collective Investment Trust vehicle, is becoming increasingly popular. We currently manage a CIT focused on global infrastructure and plan to add both U.S. and global REIT CITs in the second half of 2014. Looking ahead, we're evaluating the launch of several new European funds focused on commodities and global listed infrastructure. Finally, I'd like to discuss asset flows. Helped by strong investment returns, and despite a 1% annualized organic decay rate, our end of quarter assets grew by 7%. Importantly, this modest 1% decay rate does not, in our view, reflect the growing investor demand that we're experiencing across channels. Our open-end funds had net inflows of $104 million in the first quarter despite $232 million of outflows tied to 2 discretionary model-based platforms, both of which elected to eliminate their respective REIT allocations in January. Actual retail flows, excluding these 2 model-based platforms would have resulted in a 10% annualized organic growth rate. These flows were accelerating through quarter end and with the addition of the MLP and commodity funds, and as the Real Assets Institute [ph] rollout continues, we're confident that we can sustain strong organic growth in this channel. Ours sub-advisory channel experienced net outflows of $176 million or 4% annualized organic decay rate. While not where we want to be, we continue to see improving flow trends in Japan, and are optimistic that this positive trend will continue. Lastly, the institutional advisory channel had net outflows of $44 million. Asset flows were modest, both coming in and going out, and we ended the quarter with $235 million of awarded but unfunded mandates. But the most notable trend in the quarter was a breakout in the volume of announced searches, meeting requests, RFPs and RFIs. Global listed infrastructure, commodities, REITs, and multi-strat real assets, in that order, generated the strongest interest. Obviously, if this trend continues, it bodes very well for the balance of the year for the advisory group. Looking forward, the key metrics on our dashboard are all currently moving in the right direction. Our investment performance, marketing initiatives and new vehicle rollouts are all gaining traction and resulting in growing investor interest, as planned. And now, I'd like to open the floor to questions.

[Operator Instructions] Our first question comes from the line of Adam Beatty with Bank of America Merrill Lynch.

First, just a question on the difference between the performance of U.S. REITs and global REITs, and what you're seeing as the main drivers there, and maybe what you expect in terms of possible convergence going forward.

Adam, this is Joe Harvey. I would say that the main difference relates to underperformance in Asia, primarily due to the emerging market issues and, principally, the slowdown in China. In the U.S., we still think we're about midway through the real estate cycle. And if you recall last year, the REITs underperformed equities by a substantial amount and we felt that -- and I think we mentioned on the last call -- there was still more to go in the REIT return cycle. One of the things that helped REIT performance, we believe, was the decline in the 10-year treasury yield, which sustained the correlation to the 10-year yield which we started to observe after the taper discussions last May. We think that that's just a phenomenon and that will have to be worked through, and when you look at the fundamentals of real estate in the U.S., they're still quite strong and we've got more to go in the cycle. In terms of convergence, yes. I'm mean, we would expect, ultimately for Asia, to begin to pick back up. But it's going to require more evidence that China is bottoming and emerging markets are working through their economic cycles.

Thanks, Joe, I appreciate that color. I guess a follow-up on -- kind of international in terms of product development. You mentioned rolling out some new European funds. Should we expect kind of a gradual build-out of regional funds for different global regions, and is that opportunistic, or are you going to kind of stick to a plan regardless of short-term fluctuations?

Actually, we're not planning on adding any regional funds. The strategies that I alluded to in Europe would be related to infrastructure, commodities, some of our non-real estate strategies. We're pretty well-covered around the world with our various real estate vehicles.

Got it. Thanks for the clarification. And then finally, just a follow-up on the couple of lumpy redemptions you mentioned, I think, under open-ended but you used the phrase model-based. And I was just wondering if -- I guess I think a model base in terms of the AUA driving the portfolio consulting revenue. Is there a distinction there that I'm missing? Maybe just some clarification there.

Yes. These were outflows from our funds. They were model-based discretionary programs at large financial service organizations and they're 2 different organizations separately, and so far, mistakenly, decided to eliminate their REIT allocations. Well, it has nothing to do with our performance and we would fully anticipate that when the allocations change, that those allocations will come back to us.

[Operator Instructions] Our next question comes from the line of Mac Sykes with Gabelli & Company.

Are you surprised by the progress of institutional flows? Should that have been different over the last few months? I'm just trying to reconcile expectations versus the addition of some key pieces last year and ramping up product offerings.

I don't think we're surprised. Some of the inputs, with regard to our strategic shift over the last few years, included the fact that some of the leading sovereign funds and endowment funds in the world already have 20% to 30% allocations to real assets. And we fully anticipated that the rest of the world would gradually follow. And we anticipated that the institutional market would follow first, and ultimately retail, particularly upon witnessing increasing inflation and economic activity would also follow. I guess if there was a positive surprise, it's the fact that global listed infrastructure really started to warm up last year and now I would say it's heating up, and it's just a widespread -- it's not spotty, it's not 1 region or even 1 type of institution. The interest in global listed infrastructure, including MLPs, is extremely strong and maybe the early strength there has surprised us a little bit.

I would just add to that, in terms of a couple of other strategies. When you look at commodities, remember that we brought on our commodities team about 1 year ago. And when you think about the institutional due diligence cycle and the fact that commodities have been a underperforming asset class, those 2 factors have made it probably a little bit slower relative to what you've seen in the past year, but similarly, we're seeing a lot of activity in terms of RFPs and searches, and our team is showing very well. And with the performance in commodities in the first quarter, I think it's going to be a little bit of a wake-up call for those that have been holding off on allocations to commodities. As it relates to real estate, we talked over the past couple of calls, our relative performance and the fact that last year was a year when we turned it around to the positive side. And there, too, if you think about the search process cycle, it's going to just take a little bit of time for that activity to start to generate results.

On Japan, I wonder if you could provide some additional color. Just any changes in appetite given the strong market results from '13. And how should we think about mapping your potential there for this year and maybe beyond?

Well, interest and reach, in general, in Japan continues to be strong and, in fact, is increasing industry-wide. As Joe mentioned, we were among, if not, the top performer last year. I think we got some awards for being a leading REIT manager in Asia last year. And so, frankly, I think you're seeing inflows into all REIT funds, and Japan is picking up. And I would say that with regards to our relationship there, interest activity and focus is all picking up as well. So we can't project, but we were pleased with the results in the first quarter and the direction looks very positive at this moment.

Great. And on the AUA[ph], did I miss that in the release?

Mac, we quantified the AUA and the schedule in the back, but it was really condensed, it wasn't flow information and we think that it didn't get a lot of air time. We had it in our release this time, with respect to the impact on portfolio consulting and other. But we didn't feel that, that was a particularly useful schedule, so we eliminated it in the release.

Could you just tell me what the number is?

Yes. The end of the first quarter was about $5.2 billion. And that's low-fee paying, it's ETF, a couple of ETFs that we have and so it's not really -- you could see on portfolio consulting and other that it's becoming a lesser material number for us.

[Operator Instructions] Our next question comes from the line of John Dunn with Sidoti & Company.

It sounds like there is potential and you've spoken to it, in Japan just now and in Europe before. Are there any other regions where you think institutional demand is building?

Well, one of the things that we're pleasantly surprised at is some initial increase in demand in Europe for commodities and listed infrastructure. Europe has been a relatively flat or slow growth market for us in the REIT space, but we are seeing some very encouraging interest in our non-REIT strategies and that's why we're considering launching several funds there, designed mainly for institutional investors.

Got you. And then on institute, is that going to be something that's ongoing, maybe past 2015? Given, likely, the fact that, that -- realize this is going to be here for a while. And then also just -- maybe you could just talk a little bit more about the reaction of the advisors that you met in Houston and Atlanta.

Sure. The institute is a way of life for us, and when we refer to that, I think we think of it both as retail and institutional. Yes, we're already planning into 2015. On the retail side, we're currently focused exclusively on the Merrill system. That'll take us through this year. The reception has been great. There's been interest expressed in other retail systems. And, again, in an evolving asset class like real assets, education is critical. And so for example, in the Merrill system, their strategists are recommending a 3% to 11% allocation to real assets along with their recommendation for financial advisors to increase their liquid alternatives as well. The advisors have been slow to implement those strategies, mainly because they're uncertain as to what it is and why they should be interested. And so, in effect, we're partnering with our distribution partners to help them educate their advisors so that they'll implement their strategic recommendations. And it really is a contact sport, it's something that we're committed to and we're also delivering the same approach to our institutional partners, institutional consultants and others. And we think that that's important to move the asset class forward and it's also important to solidify our position as the leader in this space.

Mr. Johnson, at this time, we don't have no other telephone questions in queue.

Great. Well, thank you, all, for listening in this morning, and we'll speak to you again at the end of the next quarter.

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