Cohen & Steers, Inc. (CNS) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers First Quarter 2017 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, April 20, 2017. 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 first quarter 2017 Earnings Conference Call. Joining me are, 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 2016 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 the 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 sale or the solicitation of an offer to buy the securities. For more complete information about these funds including charges, expenses and risks, please visit our website. With that, I'll turn the call over to Matt.

Thank you, Adam. My remarks this morning will focus on our as-adjusted results, which exclude the after-tax financial effect associated with our seed investments, certain discrete tax items, and the effect of an accelerated vesting of certain restricted stock units in the first quarter of last year. Yesterday, we reported earnings of $0.47 per share compared with $0.41 in the prior year's quarter and $0.48 sequentially. Revenue was $89.7 million for the quarter compared with $79.7 million in the prior year's quarter and $89.5 million sequentially. The increase in revenue from the fourth quarter was attributable to higher average assets under management, partially offset by two fewer days in the quarter. Average assets under management for the quarter were $58.3 billion compared with $51.6 billion in the prior year's quarter and $57.4 billion sequentially. Operating income was $35.5 million for the quarter compared with $30.3 million in the prior year's quarter and $35.9 million sequentially. Our operating margin decreased to 39.6% from 40.1% last quarter. The expenses increased 1.2% on a sequential basis, primarily due to higher compensation and benefits, partially offset by lower distribution and service fees and G&A. The compensation to revenue ratio was 32.75% for the quarter, consistent with the guidance provided on our last call. The decrease in distribution and service fee expense was consistent with the decline in average assets under management in our U.S. no load open-end mutual funds. And G&A decreased 1.6% on a sequential basis, primarily due to lower travel and entertainment. Our effective tax rate for the quarter was 38%, consistent with the guidance we’ve provided on the last call. Page 12 of the earnings presentation displays our cash, cash equivalents, and seed investments for the current and trailing four quarters and indicates that portion of cash and cash equivalents held outside the U.S. Our firm liquidity totaled $218 million compared with $239 million last quarter and stockholders' equity was $273 million compared with $266 million at December 31, we remain debt free. Assets under management totaled $58.5 billion at March 31st, an increase of $1.3 billion or 2% from December 31. Assets under management in institutional accounts totaled $28.9 billion, an increase of $276 million or 1% from last quarter and open-end funds had assets under management of $20.4 billion, an increase of $785 million or 4% from last quarter. Assets under management in closed-end funds increased $255 million or 3%. We recorded total net inflows of $905 million in the quarter, an annualized organic growth rate of 6%. This marks the 10th consecutive quarter of net inflows. Institutional accounts had net inflows of $315 million in the first quarter, an annualized organic growth rate of 4%. Sub-advised portfolios in Japan had net inflows of $306 million in the quarter compared with $109 million of net inflows last quarter. Net inflows were primarily from U.S. real estate portfolios. Distributions increased slightly to $811 million in the first quarter compared with $800 million last quarter. Sub-advised accounts, excluding Japan had net inflows of $42 million with inflows from global real estate and global listed infrastructure portfolios being partially offset by outflows from large cap value portfolios. Advised accounts had net outflows of $33 million during the quarter and Bob Steers will provide some color on the level of activity and our institutional pipeline in a moment. Open-end funds had net inflows of $590 million during the quarter and annualized organic growth rate of 12%. Distributions totaled $174 million, of which $128 million were reinvested. Let me briefly discuss a few items to consider for the second quarter and remainder of 2017. With respect to compensation and benefits, we expect to maintain a 32.75% compensation to revenue ratio. We still expect G&A to increase between 4% and 5% from last year, the increase is driven by investments to strategically add to our distribution capabilities in the DCIO channel and in Europe, as well as higher mutual fund reimbursement costs, and increased costs for administering our collective investment trusts, both of which were generally associated with asset growth in those respected vehicles. Excluding these items, G&A is projected to be flat year-over-year. Finally, we expect that our effective tax rate will remain at approximately 38%. With that, I’d like to turn it over to Bob.

Thanks, Matt and good morning. Before I get into our first quarter results, for perspective I think it will be useful to explain our strategies regarding resource allocation at Cohen & Steers. The resource allocation process for us entails prioritizing investments and opportunities that have a higher probability of generating significant organic growth, while simultaneously finding efficiencies and cost savings wherever possible. With these goals in mind, we are continuing to strategically add to our global investment and distribution teams. What gives us confidence to spend despite the current industry headwinds is our conviction that real assets and alternative income strategies are gaining share of portfolio allocations globally. Institutional search activity continues to grow for all of our strategies, but especially in infrastructure, real estate, multi-strat real assets, and preferred security strategies. Listed infrastructure as an example is currently experiencing exceptionally strong institutional demand. It appears that institutional investors are looking to capitalize not only on the looming prospect of higher government spending, but also on the secular and seismic shift in supply chain logistics for B2B and B2C e-commerce as we are seeing in the retail sector. As a result, we have developed new and more targeted strategies within listed infrastructure that invest in companies related to logistics and separately the beneficiaries of current and prospective public works infrastructure programs. Similarly, interest in our blended multi-strat real asset strategy is growing as well. In this instance, because the risk tolerance is very widely among prospective investors, we are now offering a balanced version of our real asset strategy, which lowers volatility through higher weights in tips and credit. Additional integrations are in the works as well. Also demand for preferred security strategies remains strong in the wealth channel and is expanding in institutional channel. And here too we have product expansion opportunities such as our new low duration portfolio. To capitalize on these and other opportunities, we are adding headcount to a number of our investment teams in order to add breadth and depth to our existing capabilities. Complementing this we have and continue to broaden our institutional distribution capabilities across the board, including regionally in Europe, Hong Kong and Tokyo. And domestically by expanding our DCIO consultant relations and direct sales teams. Listed real asset and alternative income strategies have generated consistent and significant organic growth, because active management works and asset allocations are increasing. This is what gives us confidence that spending now to broaden our real asset and alternative income strategies and expand our distribution reach globally will generate additional organic growth and diversify our asset base. Although, we are investing for growth, we are also mindful of the margin pressures facing the industry and are carefully managing our cost structure. To that end, we have formed an internal task force aimed at more formally searching for efficiencies and cost savings. In addition we are utilizing technology wherever possible to improve productivity throughout the organization. Although we are confident that expanding our organization will produce new and meaningful growth opportunities, we believe at the cost of this investments can be partially mitigated through diligent productivity and cost management. Turning to the first quarter investment performance. With the exception of global listed infrastructure, all of our real asset strategies lag behind the S&P 500, following the post-election pattern of risk-on investing. That said, all of our strategies except for commodities had positive returns and 5 out of 10 core investment strategies outperformed their respective benchmarks in the quarter. With the laggards being commodities, resource equities, real assets and international real estate. Over the past 12 months 67% of our AUM is in outperforming strategies and 91% of our open-end fund assets are in 4 or 5 star funds. Asset flows in the quarter were again positive as Matt mentioned and we’ve now achieved net inflows for 10 consecutive quarters. Bolstering our view that demand for our real asset and alternative incomes revenue strategies is broadening out. We experience net inflows in 8 out of 10 strategies with only large cap value experiencing any material outflows. Our open-end funds registered net inflows of $590 million for 12% organization growth rate. As has been the case in the past we experienced strong net inflows into our top performing U.S. real estate fund and our preferred securities fund. However, we also had $155 million of net inflows into our low duration preferred fund. This fund was recently approved and added to the Merrill Lynch and Wells Fargo platforms and is an excellent example of the growing opportunities and demand that we are experiencing from an expanded product set. Advisory net outflows were a modest $33 million and the pipeline of awarded, but unfunded mandates shrink slightly from $330 million in the fourth quarter to $317 million in the first quarter. On the surface both metrics where slightly disappointing. However, it’s not a typical for the first quarter to be seasonally weak and as I said upon search activity is now strong and improving. We are currently a finalist competing for 11 mandates totaling over $1.2 billion across multiple strategies. And we expect that most if not all of these searches will be concluded in this quarter. In addition, we’ve been awarded two new model delivery sub-advisory mandates, which are AUA and not included in our pipeline figures. One is focused on MLPs and the second on global preferred securities. Importantly, each of these opportunities gives us access to new wealth market in Asia, one in Taiwan and the other in South Korea. We expect both will fund in this quarter. Sub-advisory ex-Japan net flows were solid $42 million for a 3% organic growth rate. In Japan, we remain one of the only U.S. REIT sub-advisors with net inflows before distributions. Our net inflows in the quarter were $305 million and total distributions were $811 million. Obviously we are very upbeat about the prospects for our product and market opportunities. We’re also as committed as ever to active management in our space. And our decision to devote additional resources to pursue investment and growth opportunities reflects our optimism. With that, I would like to open the floor to questions.

Thank you. [Operator Instructions] Our first question comes from the line of Ari Ghosh with Credit Suisse. Please proceed.

Hey, good morning guys. So, I believe that the outflow in the advisory channel was related to a mandate moving to passive. So I was just wondering if this client had more assets with you and also if you had a sense for additional at-risk assets that may move to asset strategies across your channels?

Sure. I didn’t hear all of your question Ari but in term -- just to address the one question about the redemption in advisory that related to a large cap value mandate where with the client we manage several accounts and for this one account they went passive. And as I’m sure, you know in terms of the industry trends for the core style boxes that's where you are seeing the most switching from active to passive. Large cap value assets are very small part of our asset base, so there is not lot of potential for that to continue going forward.

Got it, thanks. And then maybe if you can give us an update on the CITs including your partnership with SCI, I would just imagine that there was a fair bit of retirement money in motion from DOL [ph] and one fee seasonality. So I was just wondering about the velocity of flows here as you look to grow your retirement footprint. And also if you're seeing any increased competition from cheaper passively managed targeted funds.

Hi, this is Todd Glickson from the product and marketing group. Just to comment on your question about CITs and it's a good one. You saw the uptick in our flows from up last year. It’s safe to say with our focus on DCIM more of that will continue. We're working with our current clients that are investors in our retirements products to evaluate whether or not the CIT is the right vehicle for them separate and apart from what they're invested in now. And as we look at the new business that comes in with more and more frequency that they're certainly looking at that constructs, so I don't think there is anything, but positive news as it relates to that. And as we look to open new offerings, we're going to be very -- or new strategies, we're going to be very thoughtful about what the best wrapper is. So if we think that the appetite is more retirement focused in general, we may lead with the CIT as opposed to [indiscernible] product. It really just depends on distribution opportunities, but it is safe to say that more frequency you'll us trafficking in that space.

Great, thanks for taking my questions.

Thank you. Our next question comes from the line of John Dunn with Evercore ISI. Please proceed.

Hey, guys. Question on fee compression, I mean clearly it's most pronounced in the classic style boxes, but looking outside of that are there any strategies where you guys are feeling pressure on fees. And also as more competitors try to crack into growth based strategies, can you just talk about some of the home quarter advantages you guys have?

Sure, this is Todd Glickson again. Perfect question, we talked a little bit about it last quarter. One of the things that we continue to be vigilant about is our price point versus our peers. So we always look at a couple of things, not only where we're priced relative to our peers, but also the peers that we think are most like us. As it relates to the asset classes that we traffic in and Bob talked about it before, you can clearly see the advantage of active management there is over time an alpha component that's been relatively consistent and high over the benchmark. And I think that gives us a little bit of comfort as it relates to our price point, but we stay focused on being competitive. As it relates to competition, certainly ETFs are out there. For us it gets back to where active works, where passive works, we think that there is a place for both in the spaces that we plan. Active has got some pronounced benefits that we see and that the market believes to be true. So we'll continue to be vigilant, but in terms of where we are now we feel comfortable, but rest assured we're examining those price points on a regular basis to make sure that we stay on top of it.

And to the answer with respect to the home-court [ph] advantages and real estate strategies, I think the question was framed in terms of new entrants into the space. And I would say we're not seeing a lot of new entrants to this space. We've got a lot of competition both on the active side and on the passive side. In terms of our home-court advantages, it's the size and the experience of our team and it's a global team. When you think about real estate with us, we run many strategies U.S., global, and regional. When you think about the competition, which is primarily from passive, the most penetration has occurred in the U.S. Historically, active managers have had a high batting average of outperformance. Last year, that wasn’t the case, only about 5% of active managers outperformed last year, that’s very unusual. This year active managers, I think are going to have a pretty good year and one reason just and give you some perspective is that retail, which you probably read it about in the press is under a lot of stress and those companies have underperformed. And if you are active in your underweight retail you are doing well versus the passes indexes. Just thinking about the home quarter advantage more broadly, when you think about global we think that active has a lot to offer, when you think about the different ways, we can add Alfa through country selection, security selection, emerging markets, hedging currency. Now that’s a place and we think that there is going to be increasing demand for global mandates because of how well the U.S. markets have performed looking backward, but the global space is one where active brings a lots to the table.

Got it. And then on expenses ticket to the 4% to 5% G&A is going to be ramped in the next few quarters. Can you give us a sense of what the topography of that might be quarter-to-quarter? And then with the internal task force, would you say that a goal of that task force might be to slow the G&A rate below the increase this year?

Well John, I’d say the goal of task force is just to rationalize all the expenses and make sure we are getting the appropriate value there. So it’s not a target, it’s just a discipline. I think with respect to the increase in the G&A, I basically just say it’s pro rata over the remaining three quarters.

Okay, great. Thank you very much.

Thank you. Our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed.

Thanks, guys. I guess just on the advisory and some advisory ex-Japan both of those channels. It sounds like you guys are making and have been making some investments given the outlook on allocations into some of the product categories. Have you guys mentioned kind of the uptick on the finalist that you are in. Just wanted to get a sense, can you give us any numbers maybe year-over-year feel on how that’s progressing. Just to get some sense on if you are seeing more and more traction you guys are making these investments and as institutions allocating more into these strategies?

I don’t think we have any hard data in terms of year-over-year. We’ve -- periodically we try to compare the volume of RFPs and things like that year-over-year. But what we are finding is that a majority of the searches that we are involve with currently don’t utilize consultants and sometimes they use RFPs and sometimes they don’t. I would say that the volume that we are seeing now easily is more diverse than we have seen in the past, because we are seeing for example preferred security strategies, which here before have been virtually exclusively a retail product, we are seeing institutional interest of domestically and internationally in preferred. We are also seeing, as I mentioned in my comments, a major uptick in interest in listed infrastructure probably impart due to all of the discussions about fiscal stimulus here and elsewhere and along the way and I think one of our other home quarter advantages is some of these newer strategies whether it’s low duration preferred, a logistics subset of global infrastructure, a public works. The home quarter advantage is no one else does this we don’t have any competition yet. And so, it’s exciting that we have both new and existing relationships who want to explore with us the possibilities of these new strategies. So we are working with these institutions, we are working with CIOs at wealth management firms who themselves are trying to define real assets, define listed infrastructure and we are in the room with these folks helping to refine exactly how to capitalize on the trends and infrastructure and elsewhere. And so that's our real home quarter advantage and that's what's exciting about this pipeline the diversity of it and how it's evolving.

I'd add too in terms of the diversity of 11 mandates that we're in the final score it represents seven different investment strategies, so that's one area of diversity. But there is another area of diversity and that's the type of institution that we're engaging with. And this expands a spectrum of public funds, sovereign wealth funds, healthcare organizations, insurance companies and diamonds. And I think that speaks more to the investments we've made in people to target some of these markets in the advisory space.

And I would add we're still -- we're just beginning to see some green shoots and our more recent commitments to rebuilt our European staff last year and DCIO efforts, which also include institutional efforts and virtually none of these mandates or searches in the current pipeline M&A from those sources. So we're fully expecting incremental growth from those newer endeavors.

Okay, that's helpful. And then quick follow-up, just on Japan, I think some of the products in the market distributions have been reduced. Just wanted to get a sense on when that occurs how you expect that to kind of impact maybe the demand given other competing products in the market. And I know you guys don't control that, but just wanted to get a sense on how you’ve seen that progress overtime?

Sure. So as you point out it wouldn't be a surprise to see a reduction in the distributions there. As you point out we're not involved in the process. So we can't handicap when or if. But, when distributions are reduced the outcome is pretty clear, you see a uptake in redemptions, which is somewhat offset by the lower outflows from distributions. We -- I'll be going over to Asia this weekend and we've been through this process before. So again if and when it happens we have ramped up and are prepared to accelerate our support activities with the distributors in Japan to explain to them current fundamentals, valuations, the outlook and so forth. So we're prepared in the event that distributions are reduced. And we're hopeful given the fact that our relationships in Japan distribute somewhat differently than the other REIT managers there, which are mainly through wire house type channels whereas we're predominantly distributed through regional banks, which tends to be somewhat less volatile.

Okay, thanks a lot.

Thank you. [Operator Instructions] Our next question comes from the line of Ann Dai with KBW. Please proceed.

Hi, good morning. Thank you. Just looking at trends in inflows maybe from fourth quarter, it looks like growth inflows were a little bit slower in the quarter. And I understand some of that come from timing around the institutional mandates, but maybe just on the open-end mutual fund side of things, do you think some of that slowdown is related to the December rate hike? And based on conversations with your various distributors, do you think you expect to see some kind of similar effect from March and subsequent hikes?

I don't think, I think flows were affected by the environment post-election, and the bond market, the 10 year not really -- the Fed really I don't think is really much of a factor is really I think expectations for economic growth and substantially higher interest rates. So in that December-January period, we saw weakness in our preferred and other income oriented strategies. And as that has abated if not revered, we’ve seen the underline securities like REITs have for the last month or more have outperformed dramatically and flows have improved accordingly. So, we’re not really watching the fed, we are really watching the macroeconomic and where long-term interest rates are going.

Okay, understood. And one quick one on large cap value can you just give us maybe some more color on what those assets are today, is it $2 billion?

We’ll get the exact number, but it’s about $1.1 billion.

Okay.

It’s included in other.

Thank you. Our next question comes from the line of Mac Sykes with Gabelli. Please proceed.

Good morning gentlemen. Joe, could you extent a little bit more about the Amazon effects on retail sales and more terrific. I mean, I understand it maybe a relative advantage for REIT vesting as you suggested in terms of positioning. But could you just talk about the effects in terms of the overall impact to the REIT index in general in terms of just the health of commercial retail stocks?

That's a really good question, just to frame it quickly. About 18% of the market capitalization is represented by retail real estate companies. Part of them are big regional malls and closed mall stores and the reminder in neighborhood community shopping centers, which are typically anchored by a food store and pharmacy, et cetera. So, what’s really important is the quality of the retail property and said more simply how much barrier to competition or new supply in the physical space. So, within the regional mall sector, properties and companies that own malls that have a lot of competition are frankly going out of business. And that's been happening very slowly as we built supply of real estate here in the United States, but it’s been accelerated by the market share gains of e-commerce. These are secular trends it’s going to continue. We think that physical retail has an important presence, but it’s going to be shrinking and it’s going to get concentrated into the properties that are in dense markets or in high income markets that have natural barriers to supply. So, we’ve been reading in the press a lot of these scare stories about what’s going on in retail and we’re going to see more retailer bankruptcies, which obviously critical elements of the cash flows for retail real estate. It’s a secular trend, right now it’s taken another letdown. There will be survivors, our job is to know when the market over shoots in the types companies that will be survivors and to profit from the volatility in share prices and physiological presence in the market.

Thank you. And Matt, could you just remind us what percentage change in the corporate rate the impact to EPS? I know we’re still all contemplating taxes, but I just wanted to keep [indiscernible] tax reduction?

The 38% that we are seeing to non-GAAP versus what we book for GAAP.

No, no, if there was a 1% change in the corporate tax rate what would that mean in terms of increase in EPS?

I think we said it’s about $0.04 a share. I have to refresh my notes and get back to on that.

Thank you.

Thank you. And there are no further questions at this time. I will now turn the call back to presenters.

Well thank you all for joining us this morning. And we look forward to speaking to you again in July. Thank you.