Q3 2019 Earnings Call
Welcome to the cone and fears third quarter 2019 earnings conference call.
During the presentation, all participants will be and I'll listen only mode.
Afterwards, we will conduct a question and answers I said.
At that time, if you have a question. Please press the wind <unk> followed by the four on your telephone.
Right anytime during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Thursday October 17th 2019.
I would now like turn the conference over to Brian <unk> Senior Vice President corporate counsel of corn in theory.
Please go ahead.
Thank you and welcome to the cone and Steers third quarter 2019 earnings Conference call.
Joining me are Chief Executive Officer, Bob Steers, our President, Joe Harvey and our Chief Financial Officer, Matt Stadler.
I want to remind you that some of our comments and answers to your questions may include forward looking statements.
We believe these statements are reasonable based on information currently available to us.
But actual outcomes could differ materially due to a number of factors, including those described in our most recent annual report on Form 10-K , and other FCC filings, we assume no duty to update any forward looking statement.
Also our presentation contains non-GAAP financial measures that we believe are meaningful and evaluating our performance.
These non-GAAP financial measures should be read in conjunction with our GAAP results. A reconciliation of these GAAP financial measures is included in the earnings release and presentation.
The earnings release in presentation as well as links to our FCC filings are available in the Investor Relations section of our website.
At Www Dot com, one and steers dotcom.
With that I'll turn the call over to Matt.
Thank you Brian Good morning, everyone and thanks for joining us this morning.
My remarks will focus on our as adjusted results.
A reconciliation of GAAP to adjusted results can be found on pages 18, and 19 of the earnings release and on Slide 16, and 17 of the earnings presentation.
As a reminder.
In August 1st we began including model based portfolios and assets under management.
Oh periods included in both the earnings release and the earnings presentation have been recast to reflect this reporting change.
Revenue operating income and margins were unaffected.
But our effective fee rate decreased by about one and a half basis points as a result of including these assets and fees in the calculation.
Yesterday, we reported earnings of 65 cents per share compared with 64 cents in the prior years quarter and 62 cents sequentially.
Revenue was one of 4.9 million for the quarter compared with 98.2 million in the prior years quarter and one on 1.8 million sequentially.
The increase in revenue from the second quarter was primarily due to higher average assets under management and an additional thing in the quarter, partially offset by lower investment advisory fees from Cowen and Steers Realty shares or CSR, our flagship mutual fund.
You will recall that last quarter, we informed you that effective July 1st CSR reduced its expense ratio by approximately 10% and that we expected. This would reduce second half management fees by approximately $2 million.
We also mentioned that incremental net inflows into CSR would represent higher margin business as there was a lower revenue share component associated with it.
Our effective fee rate, which now includes model based portfolios was 55.9 basis points for the third quarter compared with 56.5 basis points last quarter.
The decrease was primarily due to the full quarter effect of the reduction in csrs expense ratio.
Operating income was 40.7 million for the quarter compared with 39.4 million in the prior years quarter and 38.8 million sequentially.
Our operating margin increased 38.8% from 38.2% last quarter.
<unk> expenses increased 1.9% on a sequential basis, primarily due to higher compensation and benefits and gionee.
The compensation to revenue ratio was 35.75% for the quarter consistent with the guidance provided on our last call.
And the increase in June eight was primarily due to higher recruitment fees.
Although distribution and service fee expense was relatively flat from the second quarter. It is noteworthy that the increased costs, resulting from higher average assets under management in U.S. open end funds was more than offset by a $520 million redemption from a high cost intermediary that eliminated it's real estate allocate.
And during the quarter.
Our effective tax rate was 25.25% for the quarter consistent with our prior guidance.
Page 15 of the earnings presentation sets forth, our cash corporate investments in U.S. Treasury Securities and seed investments for the current and trailing four quarters.
Our from liquidity totaled 246 million at quarter end, compared with Jordan 18 million last quarter and stockholders equity at quarter end was 279 million compared with 256 million at June Thirtyth, and we remain debt free.
Assets under management, which now include model based portfolios totaled 70.8 billion at September Thirtyth, an increase of 4.2 billion from June Thirtyth.
The increase was due to market appreciation of 3.8 billion and net inflows of 1.1 billion, partially offset by distributions of 644 million.
This marks the first time since the second quarter of 2011 that we have recorded net inflows into each of our vehicles open end funds advisory, Japan sub advisory and sub advisory ex Japan.
Advisory accounts had net inflows of 441 million during the quarter, which included six new mandates totaling 274 million three of which were included in last quarter's pipeline and an additional funding from an existing client.
Inflows, which were broadly base went into global real estate U.S. real estate preferred and global listed infrastructure portfolios.
Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan sub advisory had net inflows of 9 million during the quarter compared with net outflows of 224 million during the second quarter.
Distributions from these portfolios totaled 304 million compared with 333 million last quarter.
Sub advisory excluding Japan had net inflows of 62 million, primarily due to an additional funding from a strategic OCI O partner into a global listed infrastructure portfolio.
Open end funds recorded net inflows of 616 million during the quarter, which as mentioned earlier included $520 million redemption from an intermediary that eliminated it's real estate allocation.
Distributions totaled 213 million 165 of which were reinvested.
Let me briefly discuss a few items to consider for the fourth quarter.
With respect to compensation and benefits, we expect to maintain a 35.75% compensation to revenue ratio.
We projected DNA for 2019 will be in line with the 46 million we recorded in 2018.
And we expected our effective tax rate will remain at approximately 25.25%.
Now I'd like to turn it over to Joe Harvey, who will discuss our investment performance.
Thank you Matt.
Good morning, I will address our investment performance share some high level thoughts about our us right strategy and summarize common attributes that define our strategies.
Our investment performance, both absolute and relative has continued to be very strong reflecting favorable macroeconomic conditions of positive economic growth and low interest rates as well as ongoing returns from the investments we have made and our teams and processes.
In the third quarter eight of our nine core strategies outperformed their benchmarks.
For the latest 12 months the same eight of nine core strategies also outperformed.
Measured by Aylwin, 96% of our portfolios are outperforming on a one year basis, 98% are outperforming over three years and five years.
These batting averages are consistent with last quarter, and we're obviously pleased with them.
88% of our open end fund AUM are rated four or five star by Morningstar.
Against the favorable macro backdrop in the quarter concerns about slowing growth prompted the fed to cut short term rates by 50 basis points and a 10 year treasury yield declined to 1.7%.
A new round of quantitative easing in Europe also helped to pin down yields.
This benefited absolute performance for rates for infrastructure and preferred.
Trade wars and concerns about global growth pressured commodity prices, which contributed to negative returns in the quarter for resource equities and midstream energy.
This quarter I'd like to spotlight, our us right strategy.
It's began to outperform in the fourth quarter of last year, when it became likely that interest rates and Pete.
Some investors fear they have missed the rally one factor that is misunderstood is that most generalist equity managers are underweight reads.
On average the data show they are just 75% weighted versus the gics sector weight.
As a result, I believe there's meaningful demand potential that based on our experience we'll chase performance.
Another question, we feel relates to investor concerns about how reads would perform in a recession remembering the last one when rates were disproportionately hit by the liquidity crisis.
We believe that reach should perform differently and defend well index and the next recession, assuming it has an average one because the banking system as much better capitalized and commercial and residential real estate state ecosystems are much healthier.
This year and for the latest 12 months, we're on track to have one of the best periods of Alpha generation in our Usthree strategy since the financial crisis, specifically, our core US re strategy returned 25.8% over the past year outperforming by 550 basis points Earl.
Earlier this year, we changed our benchmark to include a broader universe of real estate sectors, including higher growth digital real estate sectors.
This benefited our clients and that this index is up performed better than our prior benchmark.
As important we have gotten a lot of sector in stock selection positioning correct, including being overweight the new economy property types and underweight regional malls.
Tombo Joanne who heads our us real effort has done a great job leading this team.
Recently, we announced the soft close of a one of our US right mutual funds Conan stairs real that real estate Securities fund or see aside.
The soft close demonstrates our commitment to delivering our excess return objectives.
CSRI, which has a five star rating is managed differently than our core us right strategy.
And invest across the market capitalization spectrum of reads and Opportunistically invest an option strategies and re debt or international real estate Securities.
In contrast, our core strategy focuses on high quality larger cap real estate equities.
We have meaningful usthree capacity, which will allow us to continue to offer our core strategy in a variety of vehicles and solutions.
Our core right strategy is offered through two mutual funds, which are managed similarly Cohen <unk> Steers Realty shares is rated Forestar and recently added a full range of share classes and Kona stairs institutional Realty shares, which is designed for institutional investors and just earn its fifth Morningstar stock.
Our.
Shifting topics, we recently held our annual Investor Conference and I'd like to share a portion of my presentation, which frame the common attributes of our strategies.
Overlay helps guide our new strategy development.
First our strategies are grounded in great secular investment ideas. Examples include the securitization of real estate first in the West and then globally.
The massive need for infrastructure investment, including a subset, which is the build out of North American energy infrastructure.
The growth in the preferred market due to bank regulatory capital changes.
Second our strategy is focused on asset classes that complements stocks and bonds by virtue of being returned enhancers yield enhancers or diversifiers.
Our flagship refund Conus tiers Realty shares is a great example of a return enhancer, having generated 11.9% annually over 28 years.
An example of a yield enhancer as preferred.
Which are increasingly being used by institutions searching for alternative income, particularly insurance companies.
Third specialists like Conus tiers have a competitive advantage in our asset classes through dedicated uninterrupted research the application of that research or through in depth knowledge of complex security structures as in the case of preferred.
Just think of an expert specialists advantage versus a generalist who is spread across 11 gics sectors.
Fourth our holdings offer tax efficiencies either through their corporate structures or the tax treatment of their dividends tax efficiency is becoming more appealing in their wealth channel as investors seek relief from taxes and contemplate a potentially higher tax regime going forward.
Finally, our asset classes are experiencing rising portfolio allocations.
Typically at the expense of stock bond and core style box allocations. This stems from the asset allocation dilemma were fixed income doesn't come anywhere close to meeting pensions, 7% return target and investors are leery of drawdown risk with equities.
Investors are increasingly using our strategies in new ways, such as multi strategy solutions focused approaches where completion strategies to better achieve portfolio outcomes.
With that ill turn the call over to Bob Steers.
Thank you Joe and good morning, everyone.
As the third quarter progress the star seem to comment alignment for many of our strategic priorities.
Most importantly, as Joe pointed out investment performance remained strong across all of our key portfolios and investor demand remains high for real asset alternative income strategies.
This powerful combination of strong performance and then demand strategies produced 1.1 billion of net inflows.
Matts earlier comment on flows bears repeating because it's important.
Each of the wealth advisory and sub advisory channels, including Japan, where net positive in the quarter for the first time since the second quarter of 2011.
Consistent with the recent trend the strong net inflows into the wealth channel were driven by sales into our Usthree and preferred securities funds.
In addition, wealth benefited from a significant acceleration in DCIO flows and modestly positive open end fund results in Europe .
Advisory experienced positive net flows in the U.S. Europe Middle East and Asia.
As we've spoken about in the past our overarching goal is to leverage our strong investment performance and growing distribution platform to achieve positive organic growth in all channels simultaneously, which we realized this quarter.
While we don't expect to be able to deliver these results every quarter, our current product and distribution plans give us a good opportunity to continue to do so when the economic and capital markets stars are aligned as they are now.
Turning to our results by channel wealth generated 616 million of net inflows in the quarter.
However, as Matt pointed out even these strong results are understated as their net of a $520 million redemption out of a brokerage firms model portfolio. Following the decision to eliminate its entire U.S. and global reach allocation.
With regard to our DCIO initiative, we generated 112 million of net inflows in the quarter and 431 million year to date versus only 4 million one year ago.
Charlie Wenzel, who leads this team along with national accounts in the rest of the wealth group deserve recognition for building a valuable franchise in the retirement space.
Okay.
Advisory had a solid quarter with 441 million of net inflows, primarily derived from six new clients, including three from the EMEA region.
Not unlike our de CIO initiative, Mark came to leaves our EMEA business development team has successfully grown this initiative from early green shoots to another secular growth opportunity.
In addition, we're beginning to capture some important new advisory mandates in Japan, which also has been an important strategic initiative.
The pipeline of awarded but unfunded mandates ended the quarter at 578 million just slightly below the 618 million beginning backlog and activity levels remain elevated.
Sub advisory ex Japan produced 62 million of net inflows and as we disclosed earlier this year, we've elected to retain only those relationships that we view as strategic.
To that end, we have terminated most of our single product sub advisory mandates and have launched an initiative to reach out to leading OCI autos and similar intermediaries, we're committed to our asset classes.
Long term the goal is to improve gross inflows, while reducing the potential for entire asset class redemptions, such as we saw in well this quarter.
Japan sub advisory posted 9 million of net inflows pre distributions and $295 million of net decay. After distributions. This marks the first quarter of net inflows since the second quarter of 2017 and was driven primarily by exceptionally strong absolute and relative returns in our U.S.
Real estate strategies.
Looking ahead, we're encouraged that our absolute and relative performance is strong and that every distribution channel is generating positive organic growth.
In addition to the momentum that we are experiencing in our traditional distribution channels. The closed end fund marketplace after being dormant for years has recently reopened.
We are the sixth largest issuer in the closed end fund marketplace and in the current environment a number of our existing funds are trading at premiums.
Not surprisingly several closed end fund distributors have expressed serious interest and partnering with us in the near future and we are currently pursuing a number of options.
Lastly, we announced that Dan Charles has joined Cowen and Steers as executive Vice President and head of global distribution overseeing all business development activities worldwide.
Dan served in a similar role at William Blair and before that Janus capital group.
This new position reflects the growth of our distribution platform.
The convergence of the institutional and wealth marketplaces.
And our goal of sustaining positive organic growth.
I will stop there and ask the operator to open the line two questions.
Thank you.
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One moment please for the first question.
And our first question is from the line of Michael Carrier with Bank of America. Please go ahead.
Good morning, and thanks for taking the questions.
Just the first one given that you guys do have strong performance in the products.
Hi, the head of distribution just wanted to get your take on the opportunities or the areas that you. When you kind of look at the landscape, where maybe color engineered historically.
Has not been.
Capturing as much opportunity, maybe others in the industry and you see.
More potential growth it seems like in the wealth space you guys have done a great job.
Just on the institutional side where are those.
Because of opportunity.
Good question.
You know as obviously, we're pleased that were on inflows in each of our key channels that said.
Theres the open end fund or seek have.
Lineup in Europe is performing wealth and investment standpoint, but we're not where we want to be in terms of business development.
And we're in the process of bringing in some new leadership, there, Dan Charles and Mark Haines, our leading that up and so we expect better things coming out of our wealth business in Europe going forward.
And as as well as advisories done we think we can be more productive there both in the U.S. and internationally. So those are the two areas where.
You should we should look for improvement.
Nothing's broken, but we think we can do better in both of those.
Okay. That's helpful and then.
Matt I think.
Recently like over the past here too I think when we thought about expenses in margin you just given some of the investments.
Costs.
It seemed like margins were going to be kind of around these levels.
But I guess just given the strength that we're seeing in their performance.
Additional in addition to the net inflows.
How are you thinking about the margin.
In this environment it seems like you've gotten better I don't know theres additional expense initiatives that are in place that that would ramp up or if we could potentially see more operating leverage in this type of environment. If it continues.
Yes.
I think I think the latter part of what you just said is probably most on point with the with the leverage when looking at our revenue growth. So for year to date versus how Gionee is trend that I think thats been.
Very well control, so having having DNA kind of like flat year over year.
Is a big positive I think everybody in the firm's taking cost control very seriously.
Client related activities are really being scrutinized and we're seeing the fruits of that with these projected results, where I think the leverage would would come from would be obviously on the comp line, where over the past three or four years weve.
Been hiring.
Selectively where we needed to get some departments up to scale and then just from.
Ongoing regulatory and two challenges continuing to address those and selectively adding to our investment teams that said, we think we're pretty pretty much built.
To to the extent that we don't create new vehicles, and new strategies that would be a little complex and would need some.
Specific staffing.
Thank you could look to see.
The headcount expansion kind of leveling off now for the most part so thats, where in 2020 and beyond we should be able to see.
Some expansion in the margins.
Okay. Thanks, a lot.
Yes.
Our next question is from the line of John Dunn with Evercore ISI. Please go ahead.
Good morning.
It looks like flows in Realty shares improved each month over the course of the quarter.
Are you guys see in.
I know.
Real estate Securities hasn't.
Yet clip so close but are you seeing any flows getting redirected from real estate securities to Realty shares.
Or is it just a pickup in demand for this strategy.
Yes, we're seeing CSR sales in the quarter up 33% and it went from outflows to inflows in the quarter.
But.
I think part of the plan is true for.
Possible flows that we're going to go into real estate securities getting shifted to that fund is that have you seen any evidence of that.
Not really I mean sales and see OSI were up 3% net inflows up 7%.
I think what we are seeing.
His redemptions and both declining substantially.
Gotcha, and then you mentioned advisory and Japan, it's been while since you've talked about that can you give a little more color on.
Where those.
Mandates, where and with who maybe.
Yes, sure I'd say, our institutional effort is picking up in Japan and.
In terms of a newly awarded mandates we've got three in Japan to for.
Global real estate and one for listed infrastructure, so that shows the breadth of.
Our reach and Japan.
I would note that on the.
Both of the real estate mandates there takeaways from existing allocations, where our competitors have not performed and that's a trend that we're seeing globally.
On the infrastructure front that that is a and a.
Third allocation for the existing investor.
So where the third manager and so that demonstrates the growth in the infrastructure allocations.
And we're seeing that institutionally not not so much and wealth.
And also here to four.
Given our current licensing status in Japan.
We've only been able to.
Develop new business through intermediaries.
Our license will is about to be upgraded before the end of the year for sure.
So that will free our team over there to go direct to institutional investors and so.
We're getting some good traction with with with one arm tied behind our backs. So I think the fact that we're we're becoming better known we're gaining mandates from very well known pension funds and insurance companies.
Once our license.
Upgraded.
We would hope to build on that momentum.
Got it and just one quick one I think that pipeline is seasonally has been strong going into the ended the year any outlook on where activity might go in the fourth quarter.
It's hard to say John .
All I can say is that.
No.
The.
The stars do seem to be in alignment for what we do there is a.
Strong demand institutionally for.
For non cyclical stable income non correlated asset classes.
And.
And on the wealth side, particularly as we wind into.
An election year next year tax advantaged strategies, which many if not most of ours are.
Is really gaining quite a bit of traction in the wealth channel.
Thanks, guys.
Thanks, John .
Our next question is from the line of Robert Lee with KBW. Please go ahead.
Hi, This is Jeff Dresdner on for Rob Lee Thanks for taking my question.
Just had a quick question on the special dividend is there any reason not to expect.
Another year end special dividend this year.
I'd also just a reminder, on the cash the operating cash balance you'd like to maintain.
Well.
As we say every year the board at its fourth quarter meeting.
Discusses our cash needs and.
As you pointed out we have in recent years had a special.
Special distribution to shareholders and I'm sure that will be a topic of discussion at the board meeting.
Okay. Thanks, and then maybe a quick follow up.
Are you seeing any upward pressure on the expense side on distribution or or tech spending I know you touched on some other line items for the for the expenses. Thanks.
The.
The distro expenses tend to be episodic if you will because it's we've had a pretty steady state of late but those are things that they.
Discussions happen ad hoc.
We have we haven't seen one in awhile, but we've had had some in the recent past.
Tech spending has been.
Incorporated in our or run rate, we look at our cash spend and much of that is capitalized and amortized over overtime. So thats all included in DNA and so we've been able to.
Appropriately.
Accelerate where necessary our technology spending which has now mostly.
Pivoted.
To helping to generate alpha.
So there is initiatives with the technology Department and our investment department to to maximize.
Alpha and that's also built into our cash spend and it has been capitalized and being amortized. So when we say DNA is going to be flat year over year that includes.
Our tech spending.
Got it thank you very much.
Ladies and gentlemen, as a reminder to register for a question. Please press the one.
By the four on your telephone.
Our next question is from the line Matt Thanks with Gabelli. Please go ahead.
Hi, good morning, everyone.
Good morning that.
A couple questions. The first is on yes.
Maybe you could just talk about your strategy there.
Marketing side product innovation and perhaps.
Operating some of the principles in the investment process.
Sure well.
That's a getting greater and greater focus here and we've invested quite a bit already and thats really.
An area, where well first we believe in it but.
Increasingly it's that's as part of the antsy to be in the game in terms of having.
Yes, she integrated to into your investment process and.
We've got a long history on the on the GE part of the governance part of that as we help shape the governance for the right strategy. So that just gives a sense of our.
Our commitment to it in our understanding of how it can influence.
Security evaluations and our investment process. So.
We are having have incorporated DSG into our investment processes.
We also are communicating that with.
Our investors and asset consultants.
But looking forward. We're also in the lab developing investment strategies are more.
Specifically tied to.
Alpha sources, and SG and the two strategies that are top of the list are.
In real estate and renewables.
Subset of infrastructure. So this is going to become very important for the industry and we've we've calibrate our our commitment and investment in it commensurately.
Great and then this is a two parter for the closed end funds, maybe you just expand on your statement about the opportunity.
This about product innovation or increasing asset.
Assets in the existing vehicles.
And then secondly, or thirdly, do you anticipate the costs for asset.
To be lower.
We are more favorable than in the past cycles.
So.
As I mentioned earlier the.
Then fund market has been pretty active this year, both in Ipos and rights issues.
Most of which have have been very successful and so we are evaluating both of those options.
If.
On the IPO side it would.
A.
It wouldn't simply copy in existing strategy.
Then would likely have.
Tax advantaged aspect to it.
Rights issues.
Similarly, if if our funds are trading a significant premiums that something that we would opportunistically consider.
As you're probably aware the cost of.
Raising new money.
For the sponsor ourselves and the closed end fund market is actually significantly higher than it has been in the past as the sponsors essentially paying 100% of the underwriting distribution costs, which could.
Range as high as 4% of the total raise.
And by our calculation.
If we were able to have a substantial raise and.
I think the raises this year have ranged from.
200, 250 million to an excess of $1 billion.
At those levels, the ROI, even with a 4% cost would be very attractive for permanent or semi permanent capital.
Great.
Translations and nice quarter.
Thank you.
Hi, there are no further questions on the phone lines at this time I'll turn the call back to Bob Steers for closing remarks.
Great well, thank you all for dialing in.
And for your questions and we look forward to speaking with you at the end of the fourth quarter.
Thank you.
Ladies and gentlemen that does conclude the conference call for Kim we thank you for your participation and ask that you. Please disconnect your lines.