Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Cohen <unk> Steers fourth quarter and full year 2019 earnings conference call.
During the presentation, all participants will be and they listen only mode.
Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press star one followed by the four on your telephone if at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Thursday January 20, Threerd 2019, I would now like to turn the conference over to Brian Heller Senior Vice President and corporate Counsel of Cohen <unk> Steers. Please go ahead.
Thank you and welcome to the common interferes fourth quarter and full year 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.
Furthermore, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund.
Our presentation also contains non-GAAP financial measures that we believe are meaningful in evaluating our performance.
These non-GAAP financial measures should be read in conjunction with our GAAP results.
A reconciliation of these non-GAAP financial measures is included in the earnings release and presentation to the extent reasonably available.
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 Cowen and steers dotcom.
With that I'll turn the call over to Matt.
Thanks, Brian and good morning, everyone. Thanks for joining today.
My remarks. This morning, we'll focus on our as adjusted results a reconciliation of GAAP to as adjusted results can be found on pages 19, and 20 of the earnings release War on Slide 16, and 17 of the earnings presentation.
Yesterday, we reported earnings of 74 cents per share.
Compared with 56 cents in the prior years quarter, and 65 cents sequentially. The fourth quarter of 2019 included cumulative adjustments to lower compensation and benefits and to increase income taxes.
Revenue was a record 109.8 million for the quarter compared with 93.6 million in the prior years quarter and 104.9 million sequentially.
The increase in revenue from the third quarter was primarily attributable to higher average assets under management.
Average assets under management were a record 71 billion compared with 60.8 billion in the prior years quarter and 68.6 billion sequentially.
Our effective fee rate was 56.5 basis points for the fourth quarter compared with 55.9 basis points last quarter.
The increase was primarily due to the recognition of performance fees, which were crystallized during the fourth quarter.
Operating income was a record 47.4 million in the quarter compared with 34.5 million in the prior years quarter and 40.7 million sequentially.
Our operating margin increased to 43.1% from 38.8% last quarter, primarily due to lower compensation and benefits when compared to revenue.
Expenses decreased 2.6% on a sequential basis, primarily due to lower compensation and benefits, partially offset by higher gionee.
The compensation to revenue ratio for the fourth quarter was 31.54% lower than the guidance, we provided on our last call.
The decrease in the ratio was primarily due to the deferral of certain open positions into 2025.
Higher fourth quarter revenue growth than we had projected.
And then adjustment to reflect actual incentive compensation to be paid.
For the year the compensation to revenue ratio was 34.62% compared with 34.51% in 2018.
The increase in DNA was primarily due to higher travel and entertainment expenses and an increase in sponsored wealth management conferences.
Our effective tax rate was 26.11% for the fourth quarter, which included a cumulative adjustment to bring the rate to 25.5% for the full year.
Page 15 of the earnings presentation sets forth, our cash corporate investments in U.S. Treasury Securities and seed investments the current and trailing four quarters.
Our from liquidity totaled 204 million at quarter end, compared with 246 million last quarter and our stockholders equity at quarter end was 214 million compared with 275 million at September Thirtyth.
From liquidity and stockholders equity as of December 30, Onest reflected the payment of a special dividend in December of approximately $94 million were $2 per share.
Over the past 10 years, we have paid a total $13 per share in special dividends.
We remain debt free.
Assets under management totaled a record 72.2 billion at December 31st an increase of 1.3 billion or 2% from September Thirtyth.
The increase was due to net inflows of 1.6 billion and market appreciation of 1.1 billion, partially offset by distributions of 1.4 billion.
Advisory accounts had net inflows of $91 million during the quarter, which included five new mandates totaling 263 million.
Four of which were included in last quarter's pipeline.
The mandates were into global real estate Us real estate global listed infrastructure and preferred portfolios.
These inflows were partially offset by outflows from certain global real estate preferred and global listed infrastructure portfolios, primarily due to client rebalancing.
Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan sub advisory had net inflows of 341 million during the fourth quarter compared with 9 million of net inflows during the third quarter.
This marks the second consecutive quarter of net inflows from Japan sub advisory after eight straight quarters of net outflows.
Distributions from these portfolios totaled 308 million compared with 304 million last quarter.
Sub advisory excluding Japan had net inflows of Threed net outflows of 302 million, resulting from the termination of three non strategic relationships that we initiated as well as client rebalancings, primarily out of preferred global real estate and global listed infrastructure portfolios.
Open end funds, which had record assets under management of 30.7 billion at December 30, Onest recorded net inflows of $1.6 billion during the quarter.
Distributions, which included the payment of yearend capital gains totaled 947 million 751 million of which was reinvested.
And now I'd like to briefly review a few items to consider as we begin the new year.
As you are aware, we recently hired Dan Charles as head of global business development.
Dan's initial focus is on assessing reorganizing and expanding our institutional distribution efforts and we expect that he will be adding strategic hires to this core business channel.
We project.
But the impact of these strategic hires combined with an increase in stock amortization the filling of the open positions that were deferred from 2019.
In the full year effect of last year's New hires will result in a compensation to revenue ratio of 34.75%.
Slightly higher than 2019.
We expect DNA to increase by about 5% from the 46 million we recorded in 2019.
After finishing last year essentially flat to 2018, we intend to make incremental investments this year in technology, which will focus on the automation of certain manual processes as well as marketing, which will support our efforts to expand institutional distribution.
We expect that these investments over time will improve both our efficiency and profitability.
We expect our effective tax rate will increase to 25.75% in 2020.
And finally, we made two filings during the fourth quarter. The first one was to register a rights offering for cone and steers quality income Realty Fund one of our closed end funds.
Assuming the rights offering which expires in mid February is fully subscribed the funds assets under management would increase by approximately 625 million including leverage.
The costs associated with the rights offering will be borne by the company.
The second filing was to register a new closed end fund.
The closed end fund market has moved to a place where typically the costs and expenses associated with an IPO are covered by the issuer.
We would expect to do the same if the new closed end fund offering moves forward.
We expect that any company born costs associated with these offerings would be excluded from our as adjusted results.
And now I'd like to turn it over to Joe Harvey, who will discuss our investment performance.
Thank you, Matt and good morning.
This morning, I will address our investment performance and talk about our vision for sustaining investment excellence.
For most of 2019 several of our asset classes led markets due to just rights.
Goldilocks conditions of slow, but positive economic growth.
Low interest rates and favorable credit spreads.
The macroeconomic environment began to shift in the fourth quarter as monetary easing by central banks globally.
Along with the increasing likelihood of China trade deal bolstered expectations for improving global growth.
While our asset classes performed solidly in the fourth quarter, they lagged higher beta segments of the markets such as tech as well as the S&P 500, which returned 9% on the powerful macro upturn.
Among our asset classes resource equities and commodities performed best in the quarter anticipating the upturn in growth.
And global and international strategies outperformed us strategies.
Looking at the combination of both absolute returns and our relative performance 2019 was one of our best performance years I can remember.
This reflects the favorable environment that I, just described plus strong execution by our investment teams.
In the fourth quarter seven of our nine core strategies outperformed their benchmarks.
For the past year eight of nine core strategies outperformed.
We produced some terrific alpha for the full year well in excess of our targets.
Yes, real estate exceeded its benchmark by 610 basis points.
Global and international real estate exceeded each by over 400 basis points resource equities exceeded by 570 basis points and low duration preferred succeeded by 650 basis points.
The one strategy the underperformed for the full year was midstream energy, which fell short of its benchmark by 160 basis points.
Measured by OEM, 96% of our portfolios are outperforming on a one year basis, 97% are outperforming over three years and 98% are outperforming over five years.
89% of our open end fund AUM are rated four or five star by Morningstar.
Looking forward I'd like to touch on three areas.
The ramifications of low interest rates for our asset classes.
Our focus on sustaining performance through our next generation investment team initiatives.
And our initiatives for investment strategy innovation.
If interest rates stay low and so long as economic growth is positive our asset classes should be positioned for attractive relative returns.
Underlying asset values and real estate and infrastructure should have a stable to upward bias.
Then factoring in diversification benefits our asset classes should continue to experience rising investor allocations, thereby driving flows and further supporting performance.
This view is driven by our our assessment of investors needs.
Starting with returns the 7% return bogey that most pension funds have as a high hurdle considering the current interest rate regime.
Second in the sustained low interest rate environment thirst for income is acute.
Third and importantly.
Investors diversification amidst a pricey bond market, while recognizing that hedge funds have fallen short of the return part of their value proposition as diversifiers.
And for the tax sensitive investor the need for tax advantage returns would be even more value and what could be a rising tax regime in the future.
Finally, we are deep into the private equity cycle and they're seeing some investors begin to place a greater value one liquidity and become more cautious about we work type issues in private equity.
Set simply our strategies are in demand.
There was no greater imperative that Cohen, <unk> steers and sustaining our excellent investment performance.
We have many avenues to help achieve this objective and it starts with developing our next generation investment talent.
In terms of leadership in the fourth quarter, we announced that John Shea succeeded me as Chief investment Officer.
John Joint Cohen, <unk> steers as a REIT analyst 15 years ago and has produced outstanding results since assuming leadership of our global real estate investment team in 2012.
Over the past three years. He has also taken on leadership of our economic research and asset allocation teams.
John's career path is a testament to what talented professionals can achieve on our platform.
It also illustrates our approach to succession planning, which we consider to be an ongoing focus part of our culture rather than an event.
We look forward to John leading our investment department to New Heights.
We continue to develop next generation portfolio managers by assigning portfolio management and leadership responsibilities to those that have what I call. It factor that is portfolio managers, who can consistently generate alpha and lead a team and doing so.
Furthermore, process wise, we will continue to incorporate quantitative research into our fundamental processes and continue to integrate research and decision making across investment teams.
As a side note. This sounds simple, but there is both a science and in our to making cross team research effective and producing alpha.
We will put the right players and the right seats seeking diversity of experience thought and decision, making we will continue to focus our resources on factors. We believe can be predicted consistently and have efficacy and producing also.
And we will continue to use technology to expand our datasets and increase efficiency.
Over the past five years the investments we've made in head count have paid off with alpha.
While this year, we expect modest additions to head count and investments.
We will continue to add when we find areas, where we can enhance alpha.
Accompanying our talent and process plans, we commenced a strategic review of our strategies in products and have identified several areas to round out our real asset and alternative income lineup.
Next step is to identify the best way to create or extend investment capabilities in those areas, whether it's through acquisition team lift outs or hiring to support supplement our internal teams.
The strategies, we are targeting or extensions of our core strategies.
They generate attractive income and would help expand our multi strategy capabilities and example of what we are targeting broadly is real asset debt.
Meantime, we continue to build track records and thematic portfolio strategies, including small cap infrastructure digital infrastructure and Nexgen real estate, which focuses on new economy and specialty property types.
We believe this strategy will appeal to the pension market globally as e-commerce headwinds for retail real estate as a global challenge.
We have developed other thematic portfolios for the wealth channels, such as tax advantaged preferred for the closed end fund market.
Our goal with strategy innovation is to provide new avenues for growth, while keeping RPM teams on the cutting edge and providing opportunities for our next generation portfolio managers.
In closing, while our investment performance has never been better our from an investment team culture as one of continuous improvement that culture will help guide our course as we navigate the next five years.
I will now ill now turn the call over to Bob Steers.
Thanks, Joe and good morning.
Last year was characterized by the powerful one two punch macro tailwinds for real assets and alternative income strategies and income and industry leading investment performance.
Asset flows and investment returns were strong from the start of the year and only got better as the year progressed.
Steady economic growth accompanied by low inflation and interest rates presented the optimal environment for both the investing and gathering of assets and our strategy.
The numbers tell the story.
For the year net inflows were 3.7 billion for a 6.5% organic growth rate driven by record gross flows of 16.5 billion.
The wealth channel led the way setting records and both the quarter and for the full year and ended with peak momentum.
Last year also benefited from the emergence of three recent growth initiatives EMEA advisory.
Hello, and Japan institutional.
All three key channels delivered significant asset growth last year.
With the realignment of the sub advisory channel complete after the termination of multiple non strategic relationships. We are now poised for future growth.
Another trend last year was the steady rebound in the Japanese sub advisory flows which ended the year net positive including distributions in the fourth quarter.
Lastly, although the advisory channel did post positive net flows last year. The results in the U.S. were well below our expectations and we're taking action to regain our momentum in this important marketplace.
As I said, the well channels that multiple records in the quarter for the year net inflows of 4.7 billion for the year exceeded the previous record of 3.2 billion by almost 50%.
Gross inflows increased 39% to 12.5 billion. Despite the soft close of our largest U.S. refund.
And redemptions declined to 7.7 billion down from 9.4 billion in the prior year.
In addition to strong demand for our rate and preferred security strategies. The wealth channel was the direct beneficiary of two of our three key growth drivers, the CIO and Bank Trust and insurance companies.
Do you CIO open end fund net inflows last year were 676 million compared to only 9 million in the prior year with positive flows at every key intermediary.
Net asset growth derived from Bank Trust in insurance companies increased 27% and generated 877 million of net inflows for the year.
Also last year. The are a market became our largest open end fund channel, achieving 19% organic growth and total assets of 8.7 billion.
Encouragingly the year ended with accelerating momentum.
Open end fund net inflows in the fourth quarter were 1.6 billion, which was the highest since the first quarter of 2007.
You asked rate open end fund net inflows in the quarter were a record 643 million again, even with the soft close of our largest and best selling fun.
And DCIO net inflows were a record 245 million capping a breakout year for this important channel.
We anticipate that they are a market will continue to experience rapid growth and then response, we are growing and transitioning our broker dealer relationship management team to a hybrid model, which will allow us to maintain continuous coverage of investment teams regardless of the platform.
For the year, the advisory channel delivered $567 million of net inflows.
The only back the Union there was both good news and bad news. The good news was that EMEA, and Japan booked 622 million and $178 million of net inflows respectively.
And the outlook for both regions is positive.
However, in North America, we had 303 million of net outflows for the year, which was obviously disappointing.
As was mentioned already Dan Charles joined US last year as head of global business development and he's focused on implementing a reorganization plan to return the US advisory business segment to positive organic growth, which should be in place by mid year.
In the quarter Advisory net inflows were 91 million generated from five new fundings totaling 263 million.
I've noticed that geographic diversity of these new client relationships with to us to Japanese and one term and mandate.
We ended the quarter with a pipeline of awarded but unfunded mandates of approximately $700 million up from 578 million last quarter and with a healthy backlog of undecided finals.
As I mentioned at the outset, it wasn't transitional year for our sub advisory business.
Of the $1.3 billion, a full year net outflows 1 billion was initiated by CNS and an additional 420 million represented the final exit from our large cap value strategy.
With large cap value and non strategic partners behind us our focus going forward will remain on developing deeper and more sustainable strategic relationships, primarily with financial as CIO dose.
In the quarter of the 302 million of net outflows 148 million represented the termination of our last three non strategic relationships with the remainder of the net outflows simply year end rebalancing.
Looking ahead the stages now set for a resumption of growth for sub advisory ex Japan channel.
Japan sub advisory flows showed persistent improvement throughout the year and ended the year net positive even including distributions.
After distributions net inflows for the full year were 1.4 billion down by more than half from 3.1 billion in 2018.
Momentum is turning increasingly positive with the last two quarters generating positive net inflows before distributions and capped by the 33 million of net inflows after distributions in the fourth quarter.
We are cautiously optimistic looking into 2020 that the current trends will persist.
In addition, we expect to announced several new product and distribution launches early this year, which should be additive to our existing relationships in Japan.
Given the current environment growth prospects for this year appear very favorable.
The positive macro tailwinds that sustained strong demand for our strategies have continued into this year.
We believe.
Thats sub advisory and Japan sub advised advisory both of which experienced significant or can't organic decay after distributions last year.
Our now poised to deliver materially improved results going forward.
All things being equal we also expect much improved results from the advisory group led by a return to positive organic growth in the us.
Lastly, the wealth channel began 2020 with strong momentum and should also benefit from several new growth opportunities.
In addition to the rapid acceleration in growth from the DCIO Bank Trust and Ri initiatives, we are poised to add significant new assets from the recently reborn closed end fund market.
As Matt indicated we are currently in the market for shareholder rights offering for the covenants steers quality income Realty fund and have filed for tax advantage preferred Securities Fund IPO, which is tentatively scheduled for this coming April .
If the current macro conditions remain intact.
We are poised for a continuation of last year's growth trends with improved results from our laggard business segments and supplemented by multiple incremental sources of growth.
With that I'm going to stop and would ask the operator to open the floor to questions.
Thank you.
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One moment please for our first question.
Our first question is from the line of Mike Carrier with Bank of America. Please proceed with your question.
Good morning, Thanks for taking the questions.
First one just on.
Joe I think you're talking about just allocation trends.
I think you and you guys gave some color outflows youre also talking about rebalancing.
I guess, just curious given the strain to the performance of the strength of the asset classes.
How do you think about like those too when you think about going forward.
Secondly, client client trends meeting increasing allocations to some of the asset classes you guys are winning the business versus rebalancing just given the great performance that you guys pad.
Some of the asset class.
This is Joe that's a tough question and answer because it's all market dependent but based on the strength, particularly in real estate securities.
Last year, we saw some some clients take their allocations down a little bit I.
I didn't say was it was significant.
If.
Our asset classes, we continue to perform well, we'll see we'll see a little bit of that but I guess, what I was trying to say in my comments is that when you look at the macro backdrop and you really think about the low interest rate environment that we have and that we're well into a cycle there aren't too many asset classes that are.
Dislocated.
Thats going to be a lot of pressure to.
Generate the portfolio.
The results that I talked about whether returns or income or diversification. So I think that provides a real strong tailwind for the things that we do.
And one dynamic as it relates to that real estate that we talked about on these causes that.
The the low return environment also exists in the private markets. So when you look at what we do relativity allocations size wise in the private markets.
We can be a big beneficiary of structural changes that are taking place there and I've talked in the past about how.
Investors don't want to lock themselves up and low returns late in the cycle or they don't want to allocate more to retail real estate all of those trends are pushing some very major asset owners.
Increasingly into the public markets then on infrastructure, we've got the dynamic where it's tough to find private assets. So that money has been.
Spilling over into the to the listed markets. So I think we have a lot of Tailwinds is clearly market in regime dependent but as both Bob and I have laid out were.
Pretty positive about the demand for what we do.
Yes that makes it makes sense.
And then maybe just as a follow up.
The product comment that you had in terms of innovation.
Just trying to get a sense, yes, I think you mentioned the real asset dead strategy around that.
Some thematic areas when you think about like making those decisions on these new products I'm, assuming you are seeing the demand by the clients.
You mentioned that are somewhat similar to what color engineered has from a product and you just take a skill set.
When you think about the sizing mania those markets are the opportunity relative to how while you guys have done in real estate or the preferred strategy.
I don't know Theres away I know these things can take many years senior to play out, but just trying to get a sense of why those strategies and and with that kind of market opportunity on the you guys dig is possible.
Well real assets are our large asset classes, but again, it's tough to quantify as you say when you think back about two our preferred strategy.
When we started at 14 years ago. It wasn't considered to be an asset class and frankly in some circles, it's not consider to be an asset class today, but we've done a substantial business in an area, where we saw an opportunity.
To create alpha in the inefficient market.
And slow and steady is created a.
Very big business.
When we think about.
A broader real assets suite.
Particularly with the needs for income we think there are some pretty.
Exciting ways to if we had capabilities like real asset debt.
To a mix and match that with.
Equity real asset strategies and create.
Range of a product strategies that can be.
Multi strategy or across capital structure, and we have those types of mandates already there not significant parts of our business, but we see the demand for strategies like that and if we can create these capabilities. It's just going abroad in our appeal to.
Not all investors, but a wider range of investors.
Okay. Thanks, a lot.
Thank you.
Our next question is from the line of John Dunn with Evercore ISI. Please proceed with your question.
Good morning, guys I wanted to ask about.
The retail funds now that.
Size closed and ER.
More months away from CSR lowering the expense ratio new share classes, maybe just talk a little to that what the early innings of that kind.
Kind of pivot you guys are seeing.
Thanks for the question John we're seeing very.
Very good take up we were pleased that the transition in September .
From a soft closed and obviously, we had been working on repositioning.
Both.
CSR and our institutional fund.
In anticipation of the soft close.
And.
Fortunately they are all four or five star funds.
We got the share classes and expense ratios.
Realigned appropriately.
And also our national accounts team did an extraordinary job, making sure that CSR was.
Recommended on the right models and platforms just as the Cxi. The soft close fund was so I would say that the the transition was seamless the take up is accelerating and we couldn't be more pleased with how the.
And you have the push and pulls the low rate environment versus.
That is growing secular allocations, what's the outlook for infrastructure and what could get it.
Cook and better.
Well.
That's a tough question to answer because.
There isn't just one infrastructure strategy for example, so as you're probably aware midstream Energy's had a real tough go of it.
For a while now and.
So certain segments.
Of that marketplace have have lagged.
Look I think for infrastructure to pick up.
Both absolute and relative performance needs to improve.
Thank as Joe mentioned the stars are in alignment for real asset allocations, including infrastructure to go up meaningfully over the coming year in years.
Because they are great diversifiers they are unique sources of income.
And so.
We do anticipate allocations to be going up and we have to compete we have we have.
Two or three excellent competitors, just just as we do in real estate and.
We have to maintain or improve performance and again I think the market demand is not as robust for anybody as recent preferred.
But.
There is demand and we do anticipate that it's going to accelerate.
Great. Thank you.
Thank you.
We have in mind, Gary if you would like to ask a question. Please press star one followed by the four on your telephone.
Our next question is from the line of Robert Lee with KBW. Please proceed with your question.
Great. Thanks.
Thanks for taking my questions, just maybe we'd like to dig in a little bit more in Japan, Subadvisory mean, certainly you've seen.
Dramatic improvement in momentum there, but could you maybe flesh out a little bit of.
What do you feel like has.
Changed about the marketplace that maybe the cycle could hopefully make them more sustainable and.
Maybe drill into some of the.
More specifics of the products that.
Our being marketed there.
Sure well again.
As I think everyone knows the Japanese retail market is.
Notoriously unpredictable so.
Talking about sustained trends is a tough.
Is it tall order, but.
Following industrywide dividend cuts a year two years ago.
That effect has begun begun to wane for.
A number of us refunds in particular in the marketplace.
We have fared better than most because our performance is just.
A whole standard deviation above our competitors.
The demand for income continues.
Some of the.
Previously Hot New fund launches in that marketplace, which were focused on technology.
Hi, robotics things like that kind of fizzled.
And without a lot of because as in the market I think investors just come back to.
Reed switch have great absolute returns, great income and our product.
As is.
Stands out in the marketplace.
Going forward.
I might add one other thing our best selling fund.
Is distributed primarily not by wire houses.
By regional banks.
And so those flows have been and continued to be more sustainable.
Then those managers, whose funds are distributed by securities farms.
Going forward there is interest from new partners on new products.
Joe has spoken about earlier more broadly.
Next generation.
Real estate, which is portfolios focused on e-commerce and related.
Sort of new Gen. New next generation real estate other strong interest in that and and other concepts and we are hopeful that we'll be able to talk more specifically in the very near future about new product offerings, such as that with.
New and substantial distribution partners.
That are incremental to our existing.
Relationship lineup.
Great and this really quick and I apologize if I missed it could you quantify what the current.
Our unfunded backlog is.
It's about 700 million.
Great. Thanks for taking my questions.
Sure.
Thank you.
No further questions at this time I will now turn the call back over to Mr., Bob Steers to continue with the presentation are closing remarks.
Great well. Thank you all for joining us this morning and for your questions and we look forward to reconnecting next quarter. Thank you.
That does conclude the conference call for today, we thank you all for your participation and we ask that you disconnect. Your lines. Thank you and have a great.