Cohen & Steers Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 26, 2023

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen and Steers 4th Quarter and Full Year 2022 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded Thursday, January 26, 2023.

Speaker 1

I would

Operator

now like to turn the conference over to Brian Heller, Senior Vice President and Corporate Counsel of Cohen and Steers. Please go ahead.

Speaker 2

Thank you, and welcome to the Cohen and Steers 4th quarter and full year 2022 earnings conference call. Joining me are our Chief Executive Officer, Joe Harvey our Chief Financial Officer, Matt Stadler and our Chief Investment Officer, John Chai. 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 accompanying Q4 and full year earnings release and presentation, our most recent annual report on Form 10 ks and our other SEC filings. We assume no duty to update any forward looking statements.

Speaker 2

Further, None of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicle. Our presentation also contains non GAAP financial measures referred to as adjusted 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 and presentation as well as links to our SEC filings are available in the Investor Relations section of our website atwww.cohensteers.com.

Speaker 2

With that, I'll turn the call over to Matt.

Speaker 1

Thank you, Brian. Good morning, everyone. Consistent with previous quarters, my remarks this morning will focus on our as adjusted results. A reconciliation of GAAP to as adjusted Results may be found on Pages 18 and 19 of the earnings release and on Slides 16 and 19 of the earnings presentation. Yesterday, we reported earnings of $0.79 per share compared with $1.24 in the prior year's quarter and $0.92 sequentially.

Speaker 1

Revenue was $125,500,000 for the quarter compared with $159,700,000 in the prior year's and $140,200,000 sequentially. The decrease in revenue from the 3rd quarter is primarily attributable to lower average assets under management across all three types of investment. Our effective fee rate was 57.8 basis points in the 4th quarter compared with 58 basis points in the 3rd quarter. Operating income was $50,900,000 in the quarter, compared with $82,600,000 in the prior year's quarter $60,100,000 sequentially. And our operating margin decreased to 40.5% from 42.8% last quarter.

Speaker 1

Expenses decreased 6.8% when compared with the 3rd quarter, primarily due to lower compensation and benefits expenses and lower distribution and service fees. Compensation and benefits expenses were lower in the 4th quarter when compared with the 3rd quarter, primarily due to a reduction in incentive compensation to reflect the actual amount expected to be paid. This reduction was more than offset by the sequential decline in revenue and as a result, the compensation to revenue ratio was 36.4% for the 4th quarter. For the year, the compensation to revenue ratio was 34.9%, an increase of 40 basis points from last quarter's guidance of 34.5%. And the decrease in distribution and service fees was primarily due to lower average assets under management and U.

Speaker 1

S. Open End Funds. Our effective tax rate, which was 25.95 percent for the quarter, included a cumulative adjustment to bring the rate to 25.4 percent for the year, an increase of 15 basis points from last quarter's guidance of 25.25 percent. The higher effective tax rate was primarily due to the effect of the non deductible portion of executive compensation on lower than forecasted pre tax income. Page 15 of the earnings presentation sets With our cash and cash equivalents, corporate investments in U.

Speaker 1

S. Treasury Securities and liquid seed investments for the current and trailing 4 quarters. Our firm liquidity totaled $316,100,000

Speaker 2

at quarter end

Speaker 1

compared with $269,900,000

Speaker 3

last quarter.

Speaker 1

As mentioned on previous calls, our business has become more capital intensive. Potential uses of capital range from funding the upfront costs associated with closed end fund launches and rights offerings, Seating new strategies and vehicles, co investing in private real estate vehicles and making various one time investments to grow our firm infrastructure as our business scales. Our new corporate headquarters in New York City The associated build out and related technology infrastructure is an example of that. In order to provide us with the financial flexibility to Earlier this week, we announced that we arranged for $100,000,000 3 year senior unsecured revolving credit As you know, we have historically been debt free, meeting our capital needs and commitments organically. Consistent with that long term philosophy, it would be our intent to repay any amounts borrowed under the credit facility with cash from operations as soon as profitable.

Speaker 1

Assets under management were $80,400,000,000 at December 31, up slightly from $79,200,000,000 at September 30. The increase was due to market appreciation of $3,500,000,000 partially offset by net outflows of $1,100,000,000 and distributions of 1,200,000,000 Assets under management declined $26,200,000,000 from December 31, 2021. The decrease was due to market depreciation of $20,900,000 net outflows of $1,600,000,000 and distributions of 3,600,000,000 Joe Harvey will be providing an update on our flows and institutional pipeline of awarded Let me briefly discuss a few items to consider for 2023. First, regarding our expected compensation to revenue ratio, we intend to balance the anticipated revenue decline that will occur from our year end assets under management being about 12% below 20 22's average assets under management with a disciplined approach towards human capital. In addition to the increase in compensation expense from higher stock amortization, Salary increases and the full year impact of our 2022 new hires, we plan on making controlled investments in our business In order to broaden our product offerings, expand our public and private distribution efforts, and most importantly, to maintain our strong investment performance.

Speaker 1

As a result, we expect our compensation to revenue ratio to increase to 38.5% from the 34.9% reported in 2022. Next, we expect G and A to increase 12% to 14% from the $52,600,000 reported in 2022. The majority of this increase relates to costs associated with our new corporate headquarters at 1166 Avenue of the Americas. Excluding these lease costs, we would expect G and A to increase 4% to 6%. By relocating to 1166, We are able to expand our footprint and create a next generation state of the art working environment at more favorable economic terms.

Speaker 1

In addition, we intend to make incremental investments during 2023 in our existing technology, including the implementation of new systems We'll add efficiencies and expand our capabilities, cloud migration and upgrades to our infrastructure and security. And we expect that sponsored conferences and travel and entertainment costs will increase in 2023 as business travel resumes to more normal levels. Finally, we expect that our effective tax rate will increase to 25.5%. Now, I'd like to turn it over to our Chief Financial Chief Investment Officer, John Shea, to discuss our investment performance. Thank you, Matt, and good morning.

Speaker 1

Today, I'd like to briefly cover 3 areas. First, our performance scorecard 2nd, how our major asset classes performed in the quarter. And finally, our 2023 investment outlook. In particular, I want to focus on real estate and topics such as how we expect public and private real estate to perform, Our view on recent non traded REIT redemptions and our initiative to be a market leader providing research and advice to clients across both public and private real estate. Turning to performance, in the Q4, 4 of 9 core strategies outperformed their benchmarks.

Speaker 1

Over the past 12 months, 8 of 9 strategies outperformed. While our batting average in the quarter was lower than normal, The magnitude of underperformance by strategy was generally modest and all related to strategies that ultimately outperformed in the year. Measured by AUM, 74% of our portfolios are outperforming their benchmark on a 1 year basis, a decline from 81% last quarter. The biggest driver of the decline was the performance of our U. S.

Speaker 1

Real estate focused strategy, which is more concentrated and has had greater weightings in small cap real estate stocks, which lagged during the year and the 4th quarter bounced back. This strategy has a 25 plus year track record of 400 plus basis points of annual alpha. While underperformance has occasionally happened, rectifying our track record here is a key investment priority. On a 3 5 year basis, 99% of our AUM is outperforming, which is slightly down from 100% last quarter. From a competitive perspective, 98% of our open end fund AUM is rated 4 or 5 star by Morningstar, up from 97% last quarter.

Speaker 1

For the quarter, risk assets broadly recovered with global equities up 9.9% and the Barclays global aggregate up 4.6%. Our asset classes were led by natural resources up 17.1 percent, international real estate up 10.3% And Global Listed Infrastructure up 9%, followed by U. S. REITs up 4.1% and Core Preferred Infrastructure Core preferred securities up 3.4%. Digging into the detail, infrastructure continued to perform well, Beating U.

Speaker 1

S. Equities but modestly underperforming global equities. This performance narrowed year to date performance to only down 4.9% in the year, Handily beating very negative performing broader equity and fixed income indices. Subsector level performance dispersion during the quarter With cyclical subsectors such as railways and reopening plays such as airports and toll roads outperforming, Midstream Energy or pipelines reversed its earlier trend underperforming in the 4th quarter, but still ending the year as the best performing subsector. For preferreds, the November CPI report and subsequent inflation readings supported the Central Bank hike deceleration that occurred in December.

Speaker 1

Central banks remain positive, but markets priced in volume inflation. They likely also began to price in a better growth outlook based on falling energy prices, warm winter weather and the China reopening COVID policy change. Overall, the risk reward profile in fixed income markets improved. For Real Estate, international REITs led the way, up 10.3%, benefiting from those same dynamics, including a weakening U. S.

Speaker 1

Dollar, while U. S. REITs were up only 4.1%. The U. S.

Speaker 1

Saw significant sector dispersion Retail Real Estate up 17% to 33%, while sectors such as sub storage and residential were down 7% to 10% in the quarter. Global markets saw similar levels of performance dispersion, with markets in Europe up 20% to 25%, in Hong Kong and Australia up 12% 18%, respectively. Phase COVID re openings combined with more divergent economic trajectories I strengthened the investment case of Global Real Estate and the diversification it can provide. If we see this shift continue, I would expect investors to begin allocating more to global real estate either incrementally or at the expense of U. S.

Speaker 1

Only REITs. So while the quarter was generally positive, where does that position us for 2023? At a high level, we believe inflation will continue to come down, but that it will stabilize at around the 3% level by year end, which will prove to be the new norm. In order to get there, we think we will likely experience an average recession. Last, we think that over time, long term interest rates should be a bit higher than where they are today.

Speaker 1

With that as our backdrop, we see the economy transitioning to early cycle by the end of the year and positive returns for all of our asset classes in 2023. For preferreds, we see very good absolute value, Coupled with the fundamentals of our issuers remaining very strong, particularly balance sheets, banks non performing loans are moving up, but very gradually and from very low levels. Meanwhile, net interest margins have expanded with a higher rate environment. So from preferreds, we would expect potentially double digit total returns in 2023. For Infrastructure, we continue to expect the asset class to perform well, but in the early cycle phase, it typically performs more in line with global equities.

Speaker 1

Despite that, we don't pound the table on infrastructure because of just 2023. Our conviction in the Ask class is in its long term strategic role in the new regime where the criticality of infrastructure businesses Demand is less economically sensible, plus its pricing mechanisms tied to inflation will help even in a new normal In terms of how we see our biggest asset class real estate, in 2022, U. S. REITs were down roughly 25% as the listed asset class repriced quickly to the changed macro environment. In contrast, Reported private real estate values generally increased as they tend to be historically lagged as deal volume declines.

Speaker 1

For example, the Nacref Odyssey Index, a measure of private real estate had a positive total return of 7.5% versus listed REITs of minus 25%. In 2023, we expect this trend to reverse With listed outperforming private real estate consistent with what we normally see in a transition to early cycle, This performance shift of listed outperforming private has already started. In Q4, Nade Creek was actually down 5%, while listed REITs were up 4%. Historically, listed REITs have performed remarkably well after recessions. Since 1990, REITs have returned on average 10.8% 12 months after a recession and a notable 20.4% on average 12 months after early cycle recovery periods.

Speaker 1

Because of these lags, Private real estate has typically declined on average 11.8% in the 12 months following a recession. By understanding the leading and lagging behaviors of listed in private markets, real estate investors can assemble a much more efficient We've always been the REIT experts, But we believe investors need integrated advice and research around both listed and private. And this is why we've committed over the last 2 years to build out our solutions and advice business. We strongly believe that our vantage point at this intersection of public and private real estate positions us to provide frameworks, models and guidance for investors to help them be better real estate allocators. As an example, we've recently been sharing our thoughts and views on the non traded REIT redemptions, which have been in the news recently.

Speaker 1

First, these redemptions do not reflect broad economic or systemic risk. The redemption limits are designed Leverage in response to elevated redemption requests. We do not see a disorderly unwind or panic selling scenario for real estate funds to meet redemptions. NPRs also only represent 1% of the $21,000,000,000,000 commercial real estate market. The non traded REIT story is not one of systemic risks or commercial real estate crashing.

Speaker 1

It is simply that investors are rebalancing away from prices they believe are expensive and are seeking higher returns In other asset classes, including listed real estate, we believe the redemption activity underscores the With that, let me turn the call to Joe.

Speaker 3

Thank you, John, and good morning. I will first discuss our Q4 business fundamentals and then follow with a review of our 2023 corporate priorities. The Q4 was weak measured by the fundamentals that we focus on, yet hopefully represents the climax of what I have characterized The greatest macro regime change in my career. If the Q4 has mostly reflected investor reactions to regime change, And hopefully, the first half of twenty twenty three will be the start of the transition to the next phase where after the resetting of financial asset prices, A new return cycle can follow. Our investment performance continues to be strong overall.

Speaker 3

1 quarter does not change our strong long term record and we remain well positioned to win investor allocations. Notably, our market share as measured by active open end funds continues to expand in U. S. Real estate, global real estate and Global Listed Infrastructure with U. S.

Speaker 3

Real estate most notable at 37%. Our market share in preferreds has declined to 43%, which reflects more asset managers offering this strategy in response to Investor views that prefers as an attractive source of alternative income. We remain very competitive, thanks to our performance and what arguably is the broadest range of preferred strategies and vehicles in the market. Firm wide outflows in the 4th Quarter were $1,100,000,000 led primarily by preferreds at 873,000,000 But notably and for the first time ever, all of our core strategies experienced net outflows. Even though markets rallied in the quarter And all of our asset classes had positive returns.

Speaker 3

The outflows in the quarter had already been prompted by broader dynamics such as year end tax loss selling and reallocations to cash and treasuries. Open end funds dominated outflows with $1,000,000,000 out. Both our core preferred mutual fund, Cone and Sears preferred securities and income fund and our low duration preferred mutual fund had outflows totaling 819,000,000 In U. S. Refunds, our flagship Kona Steers Realty shares had outflows of 276,000,000 which included the completion of the redemption by a large allocator that we mentioned last quarter.

Speaker 3

Our real estate fund Kona Steers Real Estate Securities Bond, which has a broader opportunistic mandate had $210,000,000 of inflows. Closed and other segments of our open end fund category were small by comparison, but we had Inflows for the 10th straight quarter into our offshore CCAP vehicles and outflows from our UMA and SMA vehicles in the U. S. Institutional advisory had outflows of $392,000,000 while redemptions from COVID Driven opportunistic investments have subsided, asset owners have been trimming portfolios for various funding needs such as benefits, private investment commitments and overall rebalancing in light of market movements. Outflows from existing clients totaled $573,000,000 In the quarter, we had 4 new mandates fund a total of $242,000,000 across 4 strategies, The largest being a global real estate mandate for $182,000,000 from a European corporate pension fund.

Speaker 3

Sub advisory ex Japan was slightly positive at 27,000,000 Japan sub advisory continued its trend of inflows with $281,000,000 which netted to $44,000,000 after distributions. The rotation out of technology and growth and the strength in the U. S. Dollar contributed to Japan's sub advisory inflows. We expect to see increased marketing activity with our partners in Japan in 2023 as the country continues to reopen for business And we look forward to celebrating our 20 year anniversary with our key distribution partner, Daiwa Asset Management.

Speaker 3

Our 1 unfunded pipeline was $885,000,000 at year end compared with $1,100,000,000 at the end of the 3rd quarter and the 3 year average of $1,300,000,000 72% of our pipeline AUM is in Global Real Estate Strategies led by recently won completion portfolio, which is a customized strategy designed to complement Existing private holdings by expressing allocations in the listed market that are cheaper or cannot be expressed in the private market. 50% of our pipeline is in Asia Pacific, which is consistent with our recent commentary about Emerging demand in the region for listed real assets. To set the table for our 2023 priorities, We are expecting that the macro environment over the next 12 to 18 months will include the following elements. The Fed will over tighten and will endure an average recession as foreshadowed by the seemingly daily pace of corporate layout announcements. The futures markets indicate that we should see the peak of monetary tightening at some point this year.

Speaker 3

So sometime in 2023 And it's unknowable exactly when we should see the emergence of a new return cycle as financial assets have already repriced and markets anticipate Fed easing as the economy stagnates. Inflation is expected to remain a wildcard with root causes embedded in the system itself. In terms of investment strategy priorities, We believe that global listed infrastructure and multi strategy real assets strategies are generally Underrepresented portfolios and will continue to gain share. Although infrastructure has been defending very well in the current volatile environment, Institutional allocations have averaged only 4.6% compared with their targets of 6.6%. Our research has demonstrated how listed infrastructure can complement private infrastructure allocations through similar to slightly better returns and low correlations.

Speaker 3

We'll continue to educate while broadening our investment offerings and universe to include energy transition and other secular opportunities. With respect to multi strategy real assets, Even though we expect inflation to come down, we believe investors are under allocated to inflation solutions. We therefore expect demand to grow as the continuing risk of inflation states the case for insurance. We are expanding our educational outreach through our Real Assets Institute and are focused on customization, which includes plans to launch a solution using CIT vehicles to customize allocations for retirement plans. In terms of REITs and preferreds, we believe these asset classes are poised to benefit from the next return cycle And we expect to see attractive entry points over the next year.

Speaker 3

As John mentioned, listed real estate return cycles historically proceed private. So investors who utilize both markets and more and more are, should be focused on allocated to the listed market now. We expect private real estate prices to correct and that listed REITs will see acquisition opportunities at values 10% to 20% lower than the peak in 2022 due to higher debt costs and slower growth. Our firm is now organized with deep expertise and resources to help advise investors on allocations between listed and private real estate and implement custom solutions. With respect to preferreds, John characterized our favorable outlook And accordingly, we're looking for ways to invest in the business.

Speaker 3

By example, we've seeded a new preferred strategy that is more global in composition with a focus on the large universe of foreign currency denominated preferreds outside of the U. S. Our other strategic priority is private real estate. With our expectation that prices should correct between 10% 20%, We believe that sometime in 2023, we'll see emerging opportunities to deploy capital. After several confidential filings, On Wednesday, we publicly filed the registration statement for our non traded REIT, Coney Spheres Income Opportunities REIT.

Speaker 3

Because we're in registration that is all I can say at this time. In addition, we continue to focus on other private Finally, we have integrated our private and listed real estate capabilities with our Real Estate Strategy Group led by Rich Hill. They will help identify the best property sectors, geographies and themes while identifying where real estate is the cheapest. Looking at distribution priorities, We recently filled a key position by hiring Kimberly Lapointe as Head of Wealth. Our core institutional and wealth teams are now fully staffed.

Speaker 3

Incrementally, we are adding resources to focus on distributing the non traded REIT and providing advice for Optimizing real estate portfolios in the wealth channel, specifically how much real estate to have in the portfolio and how to divide that between listed and private. And consistent with emerging demand for real assets in Asia, We are expanding our sales capabilities there. In closing, we are highly focused on our priorities and I believe well organized to pursue them. This year will be key in helping clients adapt to regime change in the next phase, which will include shifts in allocations between asset classes, including listed versus private. In each case, calibrating for how the return and risk profile has changed and anticipating the new return cycles.

Speaker 3

Our strategy with respect to resourcing is to ensure we have the talent to run the business, navigate regulation and execute the new initiatives right in front of us such as private real estate. But we have set a higher bar with success based triggers for any other roles. While some of our peers are announcing layoffs, we are in a phase of potential growth that requires resources And we are committed to helping our clients achieve their objectives. Change creates opportunity And we are committed to capitalizing on this for our clients and for our shareholders. Thank you for listening.

Speaker 3

Operator, please open the lines for questions.

Operator

Thank you. Our first question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open.

Speaker 4

Thank you very much. Maybe just to start off with kind of macro side, Fund wise, you talked about Realty Shares, App Loan and Real Estate Securities Inflow. What do you think in 2023 in the wealth management channel, what do you think is going to be inflowing versus outflow?

Speaker 3

Well, as I mentioned, John, toward The end of last year, we with REITs being down in the mid-twenty percent as you normally would expect, we saw a tax loss Selling. And I believe as you've identified looking at the mutual fund flow data, We've started to see improved flows this year, which kind of validates the shift from tax loss selling back to Investors capitalizing on the decline in prices and The potential positive entry point that I described, but I think both John and I complimented It's a little bit identified that we think that they're going to be really good entry points for REIT investors in 2023. And so we would expect those to improve for our open end mutual funds.

Speaker 4

Yes, the 1st 3 weeks definitely show that. On preferred, What do you think like the next okay demand rate environment is? Not necessarily like When you it's a leader, but rest of the drag.

Speaker 3

John, could you repeat that? There's some static, so I didn't hear the question.

Speaker 4

Sure. On preferred, what do you think the next step Like okay demand environment rate wise?

Speaker 3

Well, again, John laid this out. This was laying out a case for double digit returns from preferreds. And one of the things that we've always experienced with preferred and considering that they have some of the highest income levels of in the fixed income world is Investors are very attracted to them, particularly when you consider the tax benefits on top of that. So one of the things that's The change in the margin is with fixed income yields up across the yield curve and across different Sub segment price, there's more competition for income, but again preferred still have some of the highest income rates out there. So We're thinking that between that and with the capital appreciation opportunity, John mentioned the double digit return opportunity.

Speaker 3

I think once investors see kind of an all clear signal from the Fed that we will see Inflows into our preferred vehicles.

Speaker 4

Got you. So you talked a little bit about the private real estate effort. Can you give a little more kind of like state of the union, not just now, but over the next few years, What do you think it's going to delve into?

Speaker 3

Sure. So Really for the past 2 years, we've been building a private real estate team. And consistent with our philosophy, we didn't Trying to go out and acquire something that was up and running. And so we build it piece by piece. And I'd say we're gaining momentum on all fronts, including the capital raising front, And I outlined kind of 2 vehicles that we are working on.

Speaker 3

But most importantly, We with commercial our expectations that commercial real estate prices will correct 10% to 20% this year, I think there's going to be a really great entry point for us to commence our track record. And that's the thing that we are obsessed about Just making sure we get that timing right and considering the private real estate business is a new business that we That started with a really great track record. And so we're more focused on that Raising assets as fast as we can. So the next phase will be to get the non traded REIT up and running. And as I said, because we're in registration, we're not going to get into some of the Things are happening there, but our overall effort in private real estate is

Speaker 4

So this is a question I get. What do you think it takes to get U. S. Infrastructure flows really going? And Kind of the potential timeframe, is it in 2023 or is it more in the out years?

Speaker 3

Well, I would say for infrastructure overall on the institutional side, It's probably one of the most active areas that we have. Our pipelines and we characterize it in terms of Things that are specific active searches and then behind that there's shadow pipelines with investors that are thinking about it. I'd say it's one of the most active areas that we have. That's been enhanced recently by how Infrastructure has performed in this environment. On the wealth side, We've gotten a little bit of a pickup from all of the current administration Focus on infrastructure, infrastructure spending has been a great advertisement for infrastructure.

Speaker 3

So Our flows into our open end fund have improved, but I think that it's still early days in terms of A broader adoption of infrastructure in the wealth channel.

Speaker 1

John, I would only add. So we're seeing Certainly more interest in the wealth channel for infrastructure. And our fund there CSU was upgraded 5 stars a few months ago. And so we've seen with all of our other funds, obviously, when you go from 4 to 5 stars, we can see a pretty meaningful shift in investor interest.

Speaker 4

So you guys have a lot of growth engines, which Evan recognizes, but Maybe to distill it down a little bit, if you think about your regions as being U. S, Asia, Europe and now like sovereign wealth funds in the Middle East, What's the number one thing in each of those regions that you think is going to do best in 2023?

Speaker 3

Well, let me start with the U. S. Our wealth Business is one of our larger businesses and so when the conditions are right for wealth, That can really have the biggest impact on the business. I would say with Some of the private real estate things that we're doing and John mentioned it, I mentioned it in terms of our vision of being able to Help the wealth channel with real estate allocations, considering all of the mandates by the largest firms to increase Alternatives, weightings and portfolios, I think that's something that in time can really help our market share in the Wealth Channel. Just sticking with the There are when you look at our shadow pipeline, there's some very large Pension plans that are conducting searches for strategies like U.

Speaker 3

S. Real estate, global infrastructure and our multi strategy real assets portfolio, which is consistent with the comments around investors Looking backward, not needing inflation protection that obviously has changed. So the U. S. Is one of the biggest markets and considering our presence in both wealth and The institutional channel, I think, could have the biggest overall impact on the business.

Speaker 3

In Europe, we've talked about what's going on in the Middle East And that's most active in real estate and in the infrastructure. Elsewhere in Europe, I'd say one of the interesting things is that they've been allocating to our also to our multi strategy real assets portfolio. Asia is, as we've talked about in the past couple of calls, say on emerging demand front for listed real assets And that's going to focus on mostly on real estate, but infrastructure to a lesser extent. And because of some of the mandates that we've won and the mandates that are And competition still, we want to boost our sales presence in Asia Because if they've now begun to adopt, we want to make sure we establish our market position. These are mandates coming from sovereign wealth type funds from Thailand, Malaysia And Korea.

Speaker 3

But overall, just again based on size and based on our presence, Our rent order is U. S. The U. S. Is the largest and most influential on the overall business, But the Middle East and Asia are kind of emerging areas of demand.

Speaker 4

Right. Yes, on that last Can you frame for us what inning maybe we are in, in the shift from private real estate to public? And do you think is that just a rebalancing thing or a couple of quarter thing or a multiyear thing?

Speaker 3

Just in terms of the return cycle, I'm going to let John elaborate on that Just to start.

Speaker 1

Hey, John. Well, as we mentioned earlier, so again, last year, U. S. Reached about 25%, Private, I think was up 7% or 8%. So there's been a 30 plus percent gap from a performance standpoint.

Speaker 1

Of course, no one exactly knows how much of that gap from a performance standpoint we expect to close out. But We could see in relative terms probably 10% to 20% outperformance over the next 12 to 18 months between Again, how the private market has been valued and how the public market has been valued. So it's pretty significant. Of course, for different kinds of investors, their ability to take advantage of that from a tactical standpoint, For some of the large sovereigns and other institutional investors, they're in inflow mode. They have capital put to work.

Speaker 1

So I think for Institutions like that, they are able to rebalance where they are investing incremental capital, And we are certainly seeing that. A lot of these conversations with institutions, they've been going on for 12 months, 24 months. And this is similar to what we saw in 2020. You have those conversations, people feel like they missed something and then they get the opportunity. Sometimes they're a little bit nervous because things are going down, but then as things start to stabilize, they get in a position to Take advantage of opportunities.

Speaker 1

So, we think we're transitioning from this, everything is volatile, everything is correct, people don't want 5, Paul and I, 2 people are in a better position to take advantage of where they see relative value. So I think for institutions like that, they could certainly take advantage of it. And look, I talked about what's happening on the non traded REIT side. I think that the redemptions are a symptom of Investors recognizing that most things in their portfolio, including listed REITs went down 10%, 20%, 30% last year and something didn't, and that creates a really good rebalancing opportunity. So I think the redemption activity is an outcome of the relative value that's been created.

Speaker 1

And so I definitely think we're going to see some shifts at the margin in the upside, which we're already seeing.

Speaker 4

Right. Yes. And on that last point, beyond So right now, how would you kind of categorize the closed end fund window? And do you have A target for the number of launches per year?

Speaker 3

We don't have a target for The launches, we have ideas that we think are great ideas for the closed MFI market. As you know, right now, it is closed. It's been closed for Well over a year

Speaker 1

and the market

Speaker 3

volatility and interest rate Your cycle had the most effect on that. But one of the things that has been happening as Get further along the interest rate cycle is that the discounts on some of our closed end funds have been narrowing. Just by example, our listed infrastructure fund has been trading pretty close to NAV and I expect that once we get to the end of the tightening cycle and closer

Speaker 1

To the

Speaker 3

easing cycle, some of these discounts will have closed fully and perhaps going to premiums and then the conditions will set up For the new issue market to open up. So right now, it's not factored into our planning Other than we have investment ideas that we think are good, but it's going to take a while before the new issue market opens up.

Speaker 4

Got you. And then maybe turning to the institutional side, Like 10 years ago, your guys' pipeline was on average about $500,000,000 and then it kind of leveled up to $1,500,000,000 often plus that.

Speaker 1

Do you

Speaker 4

think over the next maybe few years, is there ability But to level up again at some point to get consistently above maybe $2,000,000,000 and is that even in aspiration?

Speaker 3

That's not something that we can predict. I'd say In my comments that it's averaged $1,100,000,000 for the last 3 years, which includes A favorable environment for investing in our asset classes. So I would expect This adoption of real assets to continue and as the environment gets better We should revert back to that level. And when you think about what we've invested in our Distribution capabilities and the fact that we've expanded those markets, I would expect something to A multiple to be added on to that. So I don't know what that number ends up being, but I would be disappointed if we didn't get into the 1.5 Plus $1,000,000,000 range as we get back into work normal environments.

Speaker 4

Makes sense. Okay. I got this question recently. What's kind of like the profile of your REIT competitors? Are people exiting the space?

Speaker 4

Are they shrinking? Are the larger Players getting larger, what's going on with reinvesting competition?

Speaker 1

Well, the first thing is, Joe mentioned how much our market share in Active REITs have grown. The first thing is, I'm not going to say all of our competitors have shrunk significantly, but over the last 10 years, there have been some comparatives that have Gone away. And there are some that have shrunken considerably. And over the last 10 years or so, there have certainly been other competitors or players in the space that have In favor and then I would say to be honest, because they had good performance. And then there have been and then sometimes they've gone out of favor.

Speaker 1

I think we've been consistently in the mix because we've been consistently top quartile even though who has been in that top quartile As waxed and waned over time. So, we continue to take market share because We're putting up consistent performance. We have a consistent team and our platform is very healthy. So we are able to continue Invest in our people, invest in the resources that we need, and the resources we needed 20 years ago, they're very different today. And that's I think our clients and prospective clients see that we're investing on the macro side, on the risk side, On the data side, on the quantitative side, and all those things have allowed us to evolve and Keep getting better.

Speaker 3

I would just add a perspective on that, John, from the wealth channel, which is that with the adoption of private Strategies in the wealth channel, we have new competitors. So while we have Done extraordinarily well versus our active peers and open end funds in the wealth channel. And we've also had to compete against passive strategies, which are being shared versus Active, as you know, we're now competing with the private equity firms who are offering private our semi private Real Estate Solutions and Wealth Channel. So that is A big part of our impetus for us to create a vehicle In private real estate for the wealth channel and a vehicle that is a little differentiated, But it's to help take advantage of the opportunity that we see to Health advisers optimize their portfolios and the private equity firms aren't going to do that, right? They're going to Try to optimize their private allocations.

Speaker 3

They're not going to help health advisors add listed allocations to that. For us, it's on one hand, a competitive challenge on the other hand, it's a great Business opportunity, investment opportunity for the wealth channel.

Speaker 4

So it's there. So just last one, maybe more big picture. When I think about company sales over the last phase, I think of You guys broadening in the strategy you want to be in, getting deeper in the wealth management channel, revamping U. S. Advisory and adding Private Real Estate.

Speaker 4

Now that you're driving, Joe, what's your vision for the next few years?

Speaker 3

Starts with creating great investment performance and then Maximizing all of the investments that we have made in distribution and Capitalizing on just the overall position of us as a real assets provider And looking backward, we've mentioned our multi strategy real assets portfolio a couple of times Because inflation hasn't been a thing, that hadn't met its full potential. But when I look at how we're positioned today, we've Invested in distribution, in vehicles, and I think balance Our time to maximize our market share of the potential Real assets in the investor portfolio as well, adding private real estate with nets.

Speaker 4

Great. Thank you very much. Much appreciated.

Operator

We have no further questions in queue. I would like to turn the call over to Joe Harvey, Chief Executive Officer of Cohen and Sears for closing remarks.

Speaker 3

Great. Well, thank you everyone for your time this morning. We look forward to speaking with you next in April when we Release our Q1 results. Have a great day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Cohen & Steers Q4 2022
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