Cohen & Steers, Inc. (NYSE:CNS) This autumn 2022 Earnings Name Transcript
Cohen & Steers, Inc. (NYSE:CNS) This autumn 2022 Earnings Name Transcript January 26, 2023
Operator: Women and gents, thanks for standing by. Welcome to the Cohen & Steers Fourth Quarter and Full 12 months 2022 Earnings Convention Name. Through the presentation, all contributors might be in a listen-only mode. Afterwards, we are going to conduct a question-and-answer session. As a reminder, this convention is being recorded, Thursday, January 26, 2023. I might now like to show the convention over to Brian Heller, Senior Vice President and Company Counsel of Cohen & Steers. Please go forward.
Brian Heller: Thanks. And welcome to the Cohen & Steers fourth quarter and full yr 2022 earnings convention name. Becoming a member of me are our Chief Government Officer, Joe Harvey; our Chief Monetary Officer, Matt Stadler; and our Chief Funding Officer, Jon Cheigh. I need to remind you that a few of our feedback and solutions to your questions might embrace forward-looking statements. We consider these statements are affordable based mostly on info at the moment accessible to us, however precise outcomes may differ materially because of various components, together with these described in our accompanying fourth quarter and full yr earnings launch and presentation, our most up-to-date annual report on Kind 10-Okay and our different SEC filings. We assume no responsibility to replace any forward-looking statements.
Additional, none of our statements represent a proposal to promote or the solicitation of a proposal to purchase the securities of any fund or different funding car. Our presentation additionally incorporates non-GAAP monetary measures known as, as adjusted monetary measures that we consider are significant in evaluating our efficiency. These non-GAAP monetary measures ought to be learn together with our GAAP outcomes. A reconciliation of those non-GAAP monetary measures is included within the earnings launch and presentation to the extent moderately accessible. The earnings launch and presentation, in addition to hyperlinks to our SEC filings can be found within the Investor Relations part of our web site at www.cohenandsteers.com. With that, I’ll flip the decision over to Matt.
Matt Stadler: Thanks, Brian. Good morning, everybody. In line with earlier quarters, my remarks this morning will give attention to our as adjusted outcomes. A reconciliation of GAAP to as adjusted outcomes might be discovered on pages 18 and 19 of the earnings launch and on slides 16 via 19 of the earnings presentation. Yesterday, we reported earnings of $0.79 per share, in contrast with $1.24 within the prior yr’s quarter and $0.96 sequentially. Income was $125.5 million for the quarter, in contrast with $159.7 million within the prior yr’s quarter and $140.2 million sequentially. The lower in income from the third quarter was primarily attributable to decrease common property underneath administration throughout all three varieties of funding autos.
Our efficient charge charge was 57.8 foundation factors within the fourth quarter, in contrast with 58 foundation factors within the third quarter. Working earnings was $50.9 million within the quarter, in contrast with $8.6 million within the prior yr’s quarter and $60.1 million sequentially. And our working margin decreased to 40.5% from 42.8% final quarter. Bills decreased 6.8% when put next with the third quarter, primarily because of decrease compensation and advantages bills, and decrease distribution and repair charges. Compensation and advantages bills have been decrease within the fourth quarter when put next with the third quarter, primarily because of a discount in incentive compensation to mirror the precise quantity anticipated to be paid. This discount was greater than offset by the sequential decline in income, and consequently, the compensation to income ratio was 36.4% for the fourth quarter.
For the yr, the compensation to income ratio was 34.9%, a rise of 40 foundation factors from final quarter’s steering of 34.5%. And the lower in distribution and repair charges was primarily because of decrease common property underneath administration in U.S. open-end funds. Our efficient tax charge, which was 25.95% for the quarter included a cumulative adjustment to convey the speed to 25.4% for the yr, a rise of 15 foundation factors from final quarter’s steering of 25.25%. The upper efficient tax charge was primarily because of the impact of the non-deductible portion of government compensation on decrease than forecasted pretax earnings. Web page 15 of the earnings presentation units forth our money, money equivalents, company investments in U.S. treasury securities and liquid seed investments for the present and trailing 4 quarters.
Our full liquidity totaled $316.1 million at quarter finish, in contrast with $269.9 million final quarter. As talked about on earlier calls, our enterprise has turn into extra capital intensive, potential makes use of of capital vary from funding the upfront prices related to closed-end fund launches and rights choices, seeding new methods and autos, co-investing in non-public actual property autos and making numerous one-time investments to develop our agency infrastructure as our enterprise scales. Our new company headquarters in New York Metropolis and the related build-out and associated know-how infrastructure is an instance of that. As a way to present us with the monetary flexibility to pursue these alternatives, earlier this week, we introduced that we organized for $100 million three-year senior unsecured revolving credit score asset.
As , we’ve traditionally been debt-free, assembly our capital wants and commitments organically. In line with that long-term philosophy, it will be our intent to repay any quantities for underneath the credit score facility with money from operations as quickly as sensible. Belongings underneath administration have been $80.4 billion at December thirty first, up barely from $79.2 billion at September thirtieth. The rise was because of market appreciation of $3.5 billion, partially offset by web outflows of $1.1 billion and distributions of $1.2 billion. Belongings underneath administration declined to $26 — declined $26.2 billion from December 31, 2021. The lower was because of market depreciation of $20.9 million, web outflows of $1.6 billion and distributions of $3.6 billion. Joe Harvey might be offering an replace on our flows and institutional pipeline of awarded unfunded mandates.
Let me briefly talk about a couple of objects to contemplate for 2023. First, relating to our anticipated compensation to income ratio, we intend to steadiness the anticipated income decline that may happen from our year-end property underneath administration being about 12% beneath 2022’s common property underneath administration with a disciplined strategy in the direction of human capital. Along with the rise in compensation expense from increased inventory amortization, wage will increase and the complete yr affect of our 2022 new consumers. We plan on making managed investments in our enterprise with the intention to broaden our product packages, broaden our private and non-private distribution efforts, and most significantly, to take care of our robust funding efficiency. Consequently, we count on our compensation-to-revenue ratio to extend to 38.5% from the 34.9% reported in 2022.
Subsequent, we count on G&A to extend 12% to 14% from the $52.6 million reported in 2022. Nearly all of this improve pertains to prices related to our new company headquarters at 1166 Avenue of the Americas. Excluding these lease prices, we’d count on G&A to extend 4% to six%. By relocating to 1166, we’re in a position to broaden our footprint in making a next-generation state-of-the-art working surroundings at extra favorable financial phrases. As well as, we intend to make incremental investments throughout 2023 in our current know-how, together with the implementation of recent methods that may add efficiencies and broaden our capabilities, cloud migration and upgrades to our infrastructure and safety. And we count on that sponsored conferences in journey and leisure prices will improve in 2023 as enterprise journey resumes to extra regular ranges.
Lastly, we count on that our efficient tax charge will improve to 25.5%. Now I might like to show it over to our Chief Monetary — Chief Funding Officer, Jon Cheigh, to debate our funding efficiency.
Jon Cheigh: Thanks, Matt, and good morning. In the present day, I might prefer to briefly cowl three areas; first, our efficiency scorecard; second, how our main asset lessons carried out within the quarter; and at last, our 2023 funding outlook. Particularly, I need to give attention to actual property and matters equivalent to how we count on private and non-private actual property to carry out, our view on current non-traded REIT redemptions and our initiative to be a market chief offering analysis and recommendation to shoppers throughout each private and non-private actual property. Turning to efficiency. Within the fourth quarter, 4 of 9 core methods outperformed their benchmarks. Over the previous 12 months, eight of 9 methods outperformed. Whereas our batting common within the quarter was decrease than regular, the magnitude of underperformance by technique was usually modest and all associated to methods that finally outperformed within the yr.
Measured by AUM, 74% of our portfolios are outperforming their financial institution on a one-year foundation, a decline from 81% final quarter. The most important driver of the decline was the efficiency of our U.S. actual property centered technique, which is extra concentrated and has had higher weightings in small high actual property shares, which lagged in the course of the yr and the fourth quarter bounce again. This technique had a 25-plus yr monitor report, a 400-plus foundation factors of annual alpha. And whereas underperformance has sometimes occurs, rectifying our monitor report here’s a key funding precedence. On a three-year and five-year foundation, 99% of our AUM is outperforming, which is barely down from 100% final quarter. From a aggressive perspective, 98% of our open-end fund AUM is rated 4 or 5 stars by Morningstar, up from 97% final quarter.
For the quarter, danger property broadly recovered with international equities up 9.9% and the Barclays World Mixture up 4.6%. Our asset lessons have been led by pure useful resource up 17.1%, worldwide actual property up 10.3% and international listed infrastructure up 9%. Then by U.S. REITs up 4.1% and core most popular curiosity, excuse me, core most popular securities up 3.4%. Digging into the main points, infrastructure continued to carry out nicely, beating U.S. equities however modestly underneath deploying international revenues. This efficiency narrowed year-to-date efficiency to solely down 4.9% within the yr, handily beating very detrimental performing broader fairness and glued earnings indices. Subsector stage efficiency began in the course of the quarter was excessive, with cyclical subsectors equivalent to railways and reopening performs equivalent to airports and toll roads outperforming.
Midstream vitality or pipelines reversed its earlier pattern, underperforming within the fourth quarter however nonetheless ending the yr as the perfect performing subsector. For preferreds, the November CPI report and subsequent inflation readings supported the Central Financial institution Hike Deceleration occurred in December. Central Banks stay pause when markets priced in quantity inflation. They seemingly additionally started to cost in a greater progress outlook based mostly on falling vitality costs, heat winter climate and the China reopening the COIVD coverage change. Total, the chance reward profile in fastened earnings markets included. For actual property, worldwide REITs led the best way of 10.3%, benefiting from their similar dynamics, together with a weakening U.S. greenback, whereas U.S. REITs have been up solely 4.1%.
The U.S. noticed important sector dispersion with retail actual property up 17% to 33%, whereas sectors equivalent to self-storage and residential have been down 7% to 10% within the quarter. World markets noticed related ranges of efficiency dispersion with markets in Europe of 20% to 25% and Hong Kong and Australia up 12% and 18%, respectively. Part COVID re-openings, mixed with extra divergent financial trajectories has strengthened the funding case for international actual property and the diversification it will possibly present. If we see this shift proceed, I might count on traders to be can allocate extra to international actual property, both incrementally or on the expense of U.S.-only REIT. So whereas the quarter was usually constructive, the place does that place us for 2023? At a excessive stage, we consider inflation will proceed to return down, however that it’s going to stabilize at across the 3% stage by year-end, which can show to be the brand new rule.
As a way to get there, we predict we are going to seemingly expertise a mean recession. Final, we predict that over time, long-term rates of interest ought to be a bit increased than the place they’re as we speak. With that as our backdrop, we see the economic system transitioning to early cycle by the top of the yr and constructive returns for all of our asset lessons in 2023. For preferreds, we see excellent asset worth, coupled with the basics of our issuers stay very robust, significantly steadiness sheets. Financial institution’s non-performing loans are transferring up, however very progressively and from very low ranges. In the meantime, web curiosity margins have expanded into the upper charge surroundings. So from preferreds, we’d count on doubtlessly double-digit whole returns in 2025. For infrastructure, we proceed to count on the asset class to carry out nicely, however within the early cycle section it sometimes performs extra according to international equities.
Regardless of that, we do not depend the desk on infrastructure due to simply 2023, our conviction within the asset class is in its long-term strategic function within the new regime the place the criticality of infrastructure companies means demand is much less economically wise, plus its pricing mechanisms tied to inflation will assist even in a brand new regular inflationary surroundings. These are multiyear advantages somewhat than for a single section. By way of how we see our largest asset class actual property, in 2022, U.S. REITs have been down roughly 25% because the listed asset class re-priced rapidly to the chain macro surroundings. In distinction, reported non-public actual property values usually elevated as they are typically traditionally lagged as deal quantity declines. For instance, the NCREIF Odyssey Index , a measure of personal actual property had a constructive whole return of seven.5% versus listed REITs of minus 25%.
In 2023, we count on this pattern to reverse with listed outperforming non-public actual property, in line with what we usually see in a transition to early cycle. This ahead shift of listed outperforming non-public has already began. In This autumn, NCREIF was truly down 5%, whereas listed REITs have been up 4%. Traditionally, listed REITs have carried out remarkably nicely after recessions. Since 1990, REITs have returned on common 10.8% 12 months after a recession and a notable 20.4% on common 12 months after early cycle restoration intervals. Due to these lags, non-public actual property particularly declined on common, 11.8% within the 12 months following a recession. By understanding the main and lagging behaviors of listed and personal markets, actual property traders can assemble a way more environment friendly portfolio and tactically allocate at completely different occasions throughout the 2 asset lessons.
We’ve at all times been the REIT specialists, however we consider traders want built-in recommendation and analysis round each listed and personal. And that is why we’ve dedicated during the last two years to construct out our options and recommendation enterprise. We strongly consider that our vantage level at this intersection of private and non-private actual property positions us to offer frameworks, fashions and steering for traders to assist them be higher actual property allocators. For instance, we’ve just lately been sharing our ideas and views on the non-traded REIT redemptions, which have been within the information just lately. First, these redemptions don’t mirror broad financial or systemic danger. The redemption limits are designed to guard the funds from having to liquidate important actual property holdings and discounted costs or materially boosting leverage in response to elevated redemption requests.
We don’t see a disorderly unwind or panic promoting state of affairs for actual property funds to satisfy retentions. MTRs additionally solely symbolize 1% of the $21 trillion industrial actual property market. The non-traded REIT story just isn’t considered one of systemic danger or industrial actual property crashing. It’s merely that the traders are rebalancing away from costs they consider are costly and are looking for increased returns in different asset lessons, together with listed actual property. We consider the redemption exercise underscores the potential rebalancing alternative that exists for traders to pivot out of personal and into listed actual property. With that, let me flip the decision to Joe.
Joe Harvey: Thanks, Jon, and good morning. I’ll first talk about our fourth quarter enterprise fundamentals after which observe with a overview of our 2023 company priorities. The fourth quarter was weak, measured by the basics that we give attention to, but hopefully represents the climax of what I’ve characterised as the best macro regime change in my profession. If the fourth quarter has principally mirrored investor reactions to regime change, then hopefully, the primary half of 2023 would be the begin of the transition to the following section the place after the resetting of economic asset costs, a brand new return cycle can observe. Our funding efficiency continues to be robust total. One quarter doesn’t change our robust long-term report and we stay nicely positioned to win investor allocations.
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Notably, our market share, as measured by energetic open-end funds continues to broaden in U.S. actual property, international actual property and international listed infrastructure, with U.S. actual property most notable at 37%. Our market share in preferreds has declined to 43%, which displays extra asset managers providing the technique in response to investor views of preferreds as a gorgeous supply of different earnings. We stay very aggressive, because of our efficiency and what arguably is the broadest vary of most popular methods and autos available in the market. Agency-wide outflows within the fourth quarter have been $1.1 billion, led primarily by preferreds at $873 million, however notably, and for the primary time ever, all of our core methods skilled web outflows. Though markets rallied within the quarter and all of our asset lessons had constructive returns, the outflows within the quarter had already been prompted by broader dynamics equivalent to year-end tax loss promoting and reallocations to money and treasuries.
Open-end funds dominated outflows with $1 billion out. Each our core most popular mutual fund, Cohen & Steers Most well-liked Securities and Earnings Fund and our low-duration most popular mutual fund had outflows totaling $819 million. And U.S. REIT fund, our flagship Cohen & Steers Realty Shares had outflows of $276 million, which included the completion of the redemption by a big allocator that we talked about final quarter. Our actual property fund, Cohen & Steers Actual Property Securities Fund, which has a broader opportunistic mandate had $210 million of inflows. Flows and different segments of our open-end fund class have been small by comparability, however we had inflows for the tenth straight quarter into our offshore SICAV autos and outflows from our UMA and SMA autos within the U.S. Institutional advisory had outflows of $392 million.
Whereas redemptions from COVID-driven opportunistic investments has subsided, asset house owners have been trimming portfolios for numerous funding wants equivalent to advantages, non-public funding commitments and total rebalancing and light-weight of market actions. Outflows from current shoppers totaled $573 million. Within the quarter, we had 4 new mandates fund a complete of $242 million throughout 4 methods, the most important being a world actual property mandate for $182 million from a European company pension fund. Sub-advisory ex-Japan was barely constructive at $27 million. Japan sub-advisory continues its pattern of inflows with $281 million, which netted to $44 million after distributions. The rotation out of know-how and progress and the energy within the U.S. greenback contributed to Japan sub-advisory inflows.
We count on to see elevated advertising and marketing exercise with our companions in Japan in 2023 because the nation continues to reopen for enterprise and we sit up for celebrating our 20-year anniversary with our key distribution associate, Daiwa Asset Administration. Our one unfunded pipeline was $885 million at year-end, in contrast with $1.1 billion on the finish of the third quarter and the three-year common of $1.3 billion. 72% of our pipeline AUM is in international actual property methods, led by a just lately gained completion portfolio, which is a personalized technique designed to enrich current non-public holdings by expressing allocations within the listed market which are cheaper or can’t be expressed within the non-public market. 50% of our pipeline is in Asia-Pacific, which is in line with our current commentary about rising demand within the area for listed actual property.
To set the desk for our 2023 priorities, we predict that the macro surroundings over the following 12 months to 18 months will embrace the next parts. The Fed will over tighten and can endure a mean recession as foreshadowed by the seemingly every day tempo of company structure bulletins. The futures markets point out that we should always see the height of financial tightening sooner or later this yr. So someday in 2023 and it is unknowable precisely after we ought to see the emergence of a brand new return cycle as monetary property have already re-priced and markets anticipate Fed easing because the economic system stagnates. Inflation is predicted to stay a wildcard with root causes embedded within the system itself. By way of funding technique priorities, we consider that international listed infrastructure and multi-strategy actual asset methods are usually underrepresented in portfolios and can proceed to achieve share.
Though infrastructure has been defending very nicely within the present risky surroundings, institutional allocations have averaged solely 4.6%, in contrast with our targets of 6.6%. Our analysis has demonstrated how listed infrastructure can complement non-public infrastructure allocations via much like barely higher returns and low correlations. We are going to proceed to coach whereas broadening our funding choices and universe to incorporate vitality transition and different secular alternatives. With respect to multi-strategy actual property, though we count on inflation to return down, we consider traders are under-allocated to inflation options. We, due to this fact, count on demand to develop because the persevering with danger of inflation states the case for insurance coverage.
We’re increasing our academic outreach via our actual asset institute and our give attention to customization, which incorporates plans to launch an answer utilizing CIT autos to customise allocations for retirement plans. By way of REITs and preferreds, we consider these asset lessons are poised to profit from the following return cycle and we count on to see enticing entry factors over the following yr. As Jon talked about, listed actual property return cycles traditionally proceed non-public, so traders who make the most of each markets and increasingly are ought to be centered on allotted to the listed market now. We count on non-public actual property costs to right and that listed REITs will see acquisition alternatives at values 10% to twenty% decrease than the height in 2022 because of increased debt prices and slower progress.
Our agency is now organized with deep experience and sources to assist advise traders on allocations between listed and personal actual property and implement buyer options. With respect to preferreds, Jon characterised our favorable outlook and accordingly, we’re searching for methods to put money into the enterprise. By instance, we’ve seen in a brand new most popular technique that’s extra international in composition with a give attention to the big universe of international currency-denominated preferreds outdoors of the U.S. Our different strategic precedence is non-public actual property. With our expectation that costs ought to right between 10% and 20%, we consider that someday in 2023, we are going to see rising alternatives to deploy capital. After a number of confidential filings on Wednesday, we publicly filed the registration assertion for our non-traded REIT, Cohen & Steers Earnings Alternatives REIT.
As a result of we’re in registration, that’s all I can say at the moment. As well as, we proceed to give attention to different non-public actual property funding methods for institutional traders. Lastly, we’ve built-in our non-public and listed actual property capabilities with our actual property technique group led by Wealthy Hill. They may assist determine the perfect property sectors, geographies and themes, whereas figuring out the place actual property is the most cost effective. Taking a look at distribution priorities, we just lately constructed a key place by hiring Kimberly LaPointe as Head of Wealth. Our core institutional and wealth groups are actually absolutely staffed. Incrementally, we’re including sources to give attention to distributing the non-traded REIT and offering recommendation for optimizing actual property portfolios within the wealth channel, particularly, how a lot actual property to have within the portfolio and the best way to divide that between listed and personal.
And in line with rising demand for actual property in Asia, we’re increasing our gross sales capabilities there. In closing, we’re extremely centered on our priorities and I consider nicely organized to pursue them. This yr might be key in serving to shoppers adapt to regime change within the subsequent section, which can embrace shifts in allocations between asset lessons, together with listed versus non-public. In every case, calibrating for the way the return and danger profile has modified and anticipating the brand new return cycles. Our technique with respect to resourcing is to make sure we’ve the expertise to run the enterprise, navigate regulation and execute the brand new initiatives proper in entrance of us, equivalent to non-public actual property, however we’ve set a better bar with success based mostly triggers for every other roles.
Whereas a few of our friends are asserting layoffs, we’re in a section of potential progress that requires sources, and we’re dedicated to serving to our shoppers obtain their aims. Change creates alternative and we’re dedicated to capitalizing on this for our shoppers and for our shareholders. Thanks for listening. Operator, please open the strains for questions.
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