Cohen & Steers Inc (CNS) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers Second Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded on Thursday, July 22, 2021.

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

Thank you, and welcome to the Cohen & Steers Second Quarter 2021 Earnings Conference Call. Joining me are our 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 accompanying second quarter earnings release and presentation, our most recent annual report on Form 10-K, and our other SEC filings. We assume no duty to update any forward-looking statement.

Further, 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, 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 at www.cohenandsteers.com.

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

Thanks, Brian. Good morning, everyone. Thanks for joining us today. My remarks this morning will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found on Pages 18 and 19 of the earnings release and on Slides 16 through 19 of the earnings presentation. Please note that Slide 19 of the earnings presentation, which was introduced last quarter, now also includes a reconciliation of the adjustments to operating income for the full year of 2020.

Yesterday, we reported record earnings of $0.94 per share compared with $0.54 in the prior year's quarter and $0.79 sequentially. Revenue was a record $144.4 million for the quarter compared with $94 million in the prior year's quarter and $125.8 million sequentially. The increase in revenue from the first quarter was primarily attributable to higher average assets under management across all 3 investment vehicles, the recognition of performance fees and 1 additional day in the quarter.

Our implied effective fee rate was 58 basis points in the second quarter compared with 57.3 basis points in the first quarter. Excluding performance fees, our second quarter implied effective fee rate would have been 57 basis points. No performance fees were recorded in the first quarter.

Operating income was a record $62.6 million in the quarter compared with $35.5 million in the prior year's quarter and $53.2 million sequentially. Our operating margin increased to 43.4% in from 42.3% last quarter. The second quarter included a cumulative adjustment to reduce the compensation to revenue ratio.

Expenses increased 12.6% compared with the first quarter, primarily due to higher compensation and benefits, distribution and service fees and G&A. The compensation to revenue ratio, which included the just-mentioned cumulative adjustment to lower the incentive compensation accrual, was 35.03% for the second quarter and is now 35.25% for the 6 months ended. The increase in distribution and service fee expense was primarily due to higher average assets under management in U.S. open-end funds, and the increase in G&A was primarily due to higher professional and recruitment fees as well as an increase in travel and entertainment expenses.

Our effective tax rate, which also included a cumulative adjustment, was 26.51% for the second quarter and is now 26.85% for the 6 months ended. The reduction in the effective tax rate from the first quarter was primarily due to the diminished effect of the nondeductible portion of executive compensation on a higher than previously forecasted pretax base.

Page 15 of the earnings presentation sets forth our cash, corporate investments in U.S. treasury securities and seed investments for the current and trailing 4 quarters. Our firm liquidity totaled $185.6 million at quarter end compared with $124.3 million last quarter. We remain debt-free.

Total assets under management was a record $96.2 billion at June 30, an increase of $9.2 billion or 11% from March 31. The increase was due to net inflows of $2.6 billion and market appreciation of $7.4 billion, partially offset by distributions of $769 million. Advisory accounts, which ended the quarter with a record $23.1 billion of assets under management, had net inflows of $1 billion during the quarter.

We recorded $300 million of inflows from 5 new mandates and a record $1.2 billion of inflows from existing accounts. Partially offsetting these inflows were $493 million of outflows resulting from client rebalancings. Net inflows were evenly apportioned between U.S. real estate, global real estate, preferred, and global listed infrastructure portfolios. Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates.

Japan subadvisory had net outflows of $272 million during the quarter compared with net outflows of $204 million during the first quarter. As mentioned on last quarter's call, in January of 2021, a distribution rate cut was made to one of the funds we sub-advise. Encouragingly, the rate of net outflows in this fund decelerated throughout the quarter, and we actually recorded net inflows for the month of June. Subadvisory, excluding Japan, had net outflows of $375 million, primarily from a single client who decided to bring the portfolio management for a portion of the assets we manage for them in-house.

Open-end funds, which ended the quarter with record assets under management of $43.5 billion, had net inflows of $2.1 billion during the quarter. This marks the 10th straight quarter of net inflows into open-end funds and the first time we have recorded net inflows into each of our 11 U.S. mutual funds. Net inflows were primarily into U.S. real estate and preferred funds. Distributions totaled $312 million, $260 million of which was reinvested.

Let me briefly discuss a few items to consider for the second half of the year. With respect to our outlook for compensation, the double-digit sequential growth in our assets under management and revenue, driven by our industry-leading organic growth rate and our strong investment performance, is tempered by the fact we still have 0.5 years to go. As a result, we reduced the compensation to revenue ratio by 25 basis points to 35.25% for the 6 months ended, and we expect that our compensation to revenue ratio will remain at 35.25%.

As we resume certain business activities that had been restricted during the worst of the pandemic, we expect G&A will increase by about 12% from the $42.6 million we recorded in 2020, but only by about 3% from the $46 million we recorded in 2019. As was the case last quarter, the increase is primarily attributable to incremental investments in technology and global marketing, as well as higher recruitment costs associated with the hiring of certain key investment and distribution personnel.

We expect that our effective tax rate will remain at 26.85%.

And finally, during the second quarter, in response to a client request, we converted the fee structure on 2 portfolios from a performance-based fee structure to a base fee only. This conversion resulted in the realization of the year-to-date outperformance. The increase in the base fee for these portfolios is not expected to have a meaningful impact on our overall effective fee rate.

And with that, I'd like to turn it over to Joe Harvey, who will discuss our investment performance.

Thank you, Matt, and good morning, everyone. Today, I will review our investment performance and discuss related key themes, such as our near-record -- or perfect record of outperformance, what we are doing to sustain and enhance performance, the impact of accelerating inflation on our asset classes, and how our major asset classes are performing versus expectations at the beginning of the year.

As we all know, in the second quarter, the U.S. economy reopened from the pandemic and surged powerfully, driving appreciation and positive returns in virtually all asset classes. A good portion of our AUM did better than the S&P 500, which was up 8.6%. And we continued to post stellar outperformance versus our benchmarks.

One surprising development was that treasury yields declined in the quarter against the backdrop of accelerating economic growth and rising inflation. In fact, inflation surprised on the upside, something that hasn't happened in a long time.

Looking at our performance scorecard. In the second quarter, 8 of 9 core strategies outperformed their benchmarks. For the last 12 months, all 9 core strategies outperformed. 99% of our AUM is outperforming benchmarks on a 1-year basis compared with 93% last quarter, driven by improvements in global listed infrastructure and certain global real estate portfolios. On a 3-year basis, 100% of AUM is outperforming; and for 5 years, 99% is outperforming, essentially the same as last quarter. 90% of our open-end fund AUM is rated 4 or 5 star by Morningstar compared with 88% last quarter.

U.S. REITs returned 12% in the quarter, lifting the year-to-date return to 21.3%. We outperformed our benchmark in the quarter and for the last 12 months. Going into this year, we believe 2021 would be a good so-called vintage year for real estate investing, starting first with listed and then followed by private, consistent with the long history of the listed market leading the way, particularly during turning points.

The reopening in the U.S. economy has created greater visibility into the turnarounds in demand for space, leasing activity and tenant credit and a sorting out of rent deferrals, all of which restrained REIT share prices last year, while investment sales activity resumed, including some major portfolio and company sales. While fundamentals and share prices for many property sectors have reached or eclipsed pre-pandemic levels, some of the most impacted sectors, such as hotels, office and health care, have long recovery runways.

We believe that inflation in prices for building materials, such as steel and copper, labor, housing and land, have contributed to rising real estate values and share prices. This is different than in past periods where the replacement cost dynamic has taken a development cycle to kick in.

Global real estate returned 9.2% in the quarter compared with global stocks at 7.7%, lifting the year-to-date return to 15.5%. For both the quarter and the last 12 months, we have outperformed in all 3 of our regional strategies as well as in our global and international strategies.

Global listed infrastructure returned 2.9% in the quarter, lifting the year-to-date return to 7%. We outperformed for the quarter and for the last 12 months. Similar to real estate, we believe that 2021 would be a good vintage year for infrastructure investing as infrastructure depreciated last year, in part due to the subsectors that were uniquely impacted by the pandemic.

This year, the sectors hardest hit by the pandemic, such as airports, ports and toll roads, are still wrestling with concerns about the spread of coronavirus variants and levels of cross-border travel. And utilities have been flat for the second year in a row, left back in a strong technology-led bull market. That infrastructure performance, while positive, has not been stronger, likely represents an opportunity in our view.

Preferreds returned 2.9% in the quarter, helped by the 10-year treasury yield falling 30 basis points to 1.4%. The year-to-date return is 2.4%. We outperformed in the quarter and for the last 12 months in both our core and low-duration preferred strategies. Going into this year, we believe that the flat yield curve, with the potential for a transition in the rate environment to higher long-term yields, suggested investors should pivot toward our low-duration strategy.

Notwithstanding the surprise in inflation this year, concerns about the coronavirus variants and global central bank yield management have resulted in a very orderly interest rate market. The risk of higher bond yields are on our watch list. The inflation surprise has helped some of our strategies performance-wise and has stimulated investor demand, particularly in our real estate strategies. Going into this year, we believe that inflation risks are rising and that our multi-strategy real assets portfolio would see greater investor interest.

While conversations have increased, they have yet to translate into flows. Our real assets multi-strategy benchmark returned 8.5% in the quarter, lifting the year-to-date return to 14.5%. We outperformed for both the quarter and the last 12 months, driven by excess returns in every strategy sleeve: Real estate infrastructure; commodities; resource equities; gold; and high-grade, low-duration credit; and through top-down asset allocation.

In the quarter, commodities returned 13.3%, with 25 of the 27 commodities in the index producing positive spot price returns. On the topic of whether higher inflation is temporary or not, we believe that many factors, including unprecedented fiscal and monetary stimulus, trade bottlenecks, labor markets, housing prices and consumer psychology, have come together to support a phase of higher and longer inflation. If so, the conversations about inflation solutions should turn into more allocations.

In terms of inflation beta, or the sensitivity to surprise inflation, the most sensitive of our strategies in descending order are: Commodities, resource equities, multi-strategy real assets, infrastructure and real estate. At the same time the macro environment for real assets is improving, real assets are the cheapest versus equities in nearly 20 years.

While we have a near-perfect record of outperformance, we are by no means complacent. Our goal is to sustain our current level of outperformance while continuing to innovate, identify alpha sources, put process in place to harvest that alpha, and widen our excess return margins versus benchmarks. The longer our outperformance persists, the better our ability to realize returns on the investments we've made in new vehicles and distribution.

We continue to devote resources to our investment department. We've talked previously about our initiatives to integrate quantitative techniques and IT efficiencies into our fundamental processes. Those initiatives are producing positive results and our investment teams are now asking for more. We've added analysts and are identifying our next group of emerging leaders through our annual talent review process.

We recently added a Head of ESG who will help our teams take our current ESG integration framework to the next level, contribute to the development of explicit strategies and help address the increasing demands of clients and consultants.

We see many opportunities for innovation in real estate investing. There is an acute need for next-generation real estate strategies to help investors reorganize and rebalance existing allocations, which are heavy in private, heavy in core property types, and are not set up to be nimble to pivot to where the best deal is. We have developed next-generation new economy property type strategies for the listed market.

In April, as we discussed on the last call, we announced the formation of our private real estate group. Our imperative is to innovate at the intersection of private and listed real estate investing to tilt to where the best returns are and harvest the alphas at those intersections. Meantime, the pandemic has created change in demographic and business trends which we believe creates opportunity by geographic market, property sector and business model.

Our private team is organized, our allocation and research processes between listed and private are established, and we are commencing efforts to raise capital in institutional vehicles and in closed-end fund strategies.

In closing, we are in a unique phase of the economic and market cycles from an investor's perspective for what we do. The setup that I've talked about before is how to achieve, in a risk-managed fashion, a return bogey of 7% from a 60-40 blend of stocks and bonds. For a long while now, the 40% in fixed income on a current basis has not been able to meet the return goal. Now introduce inflation and the exercise becomes more difficult. The fixed income dilemma is tougher, there is higher risk for equities and the need to fit real assets into portfolios is greater.

Our strategies offer attractive total returns; current yield; diversification; inflation protection; and for the taxable investor, tax advantages. We have organized our teams to engage with clients to help solve these portfolio challenges. We are excited about the opportunity.

Thank you for listening. I'll turn the call over to Bob Steers.

Great. Thanks, Joe, and good morning, everyone. First off, it's great to be back at work in the office and 100% healthy. Also, I'd like to recognize Joe Harvey and our entire executive committee who stepped up seamlessly in my absence, which underscores the quality and depth of our leadership team.

As I look back on the quarter and the year-to-date, it's apparent that we're in an environment that's very favorable for real assets. The historically strong cyclical recovery that we've experienced this year has fostered a dramatic rebound in fundamentals for real assets, ranging from real estate and infrastructure to resource equities and commodities. The rebound in prospects for real assets versus 2020 is stark. As Joe just pointed out, whereas the performance of virtually all real asset strategies badly lagged the broader equity markets last year, the reverse has been the case so far this year, especially for our real estate and diversified real asset strategies.

We believe this is a unique point in time for real assets in CNS, one that will not be transient in nature and is supported by secular trends. First, this cyclical recovery is historic and underpinned by unprecedented fiscal and monetary stimuli which are supportive of real asset fundamentals.

Second, investor psychology is shifting towards real assets. The forces behind this shift are both fundamental, including growing demand for hedges against unexpected inflation; and technical, also including expectations of massive capital flows into public and private infrastructure.

We believe our strong brand and investment performance have put us in a unique position to capitalize on these trends as evidenced by our $2.6 billion in net inflows and the 12% organic growth in this latest quarter. That said, we're working hard to expand our breadth and depth of capabilities in the real asset space by developing unique and valuable [new strategies]. In addition, we're continuing our work to enhance and improve the results in all distribution channels, especially our U.S. Advisory segment.

Last quarter's net flows in the wealth channel were a near-record $2.1 billion and just shy of the first quarter record of $2.2 billion. The organic growth rate in this, our largest channel, was 22%. Importantly, this strong growth in assets was well diversified by channel and product. We saw strong flows for each of the broker/dealer, RIA and independent channels. DCIO also delivered $163 million of net inflows, which marks the 12th consecutive quarter of positive net flows for this vertical.

Flows by strategy were diverse as well. The preferred securities fund led the way with $665 million of net inflows and our low-duration preferred securities fund also generated $205 million of net inflows. Consistent with the growing interest in real estate, our global real estate securities fund achieved a record $370 million of net inflows in the quarter and year-to-date has generated a 62% organic growth rate.

Net flows into our 3 U.S. real estate funds were strong as well at $390 million. Our non-U.S. funds experienced $61 million of net inflows, which marks the fourth consecutive quarter of positive inflows. These flows, which have been accelerating, are the result of our expanding network of platforms and relationships throughout the EMEA region. We expect these results will continue to improve over time.

The advisory channel delivered a solid $1 billion of net inflows in the quarter, also with strong demand across a range of strategies. U.S. real estate led the way with $443 million of net inflows, followed by preferred securities at $314 million. Global real estate and global infrastructure also experienced net inflows of $227 million and $162 million, respectively.

$860 million of the $1.4 billion beginning institutional pipeline was funded during the quarter. In addition, $479 million of new mandates was both won and funded in the quarter and thus never even made it into the pipeline. Our end-of-quarter pipeline stands at $925 million.

As you may remember, less than 1 year ago, the advisory group, under the leadership of Jeff Sharon, was reorganized into a regional team approach, and we are very encouraged by these early results. The subadvisory channel had net outflows of $375 million, which was attributable to 1 client who took $381 million of U.S. and global real estate mandates in house as a cost-saving measure. Similarly, Japan subadvisory saw $272 million of net outflows and $309 million of distributions, which reflect the continuing effects of a distribution cut in a large U.S. REIT fund.

Looking ahead, the economy and equity markets appear to be at a tipping point. Either economic activity slows materially and inflation pressures turn out to be transitory or not. As Joe alluded, the indicators that we follow strongly suggest that economic activity and inflation will remain higher for longer than expected.

In this environment, real assets will be highly sought after for their return and diversification characteristics. Current fundamentals and stock market momentum appear to confirm this view. We believe that this is a time to step up new product initiatives to capitalize on what we expect will be strong vintage years ahead of us.

The launch of our first private real estate fund will be an important milestone for us. Related to this, we are also growing our multi-strat asset allocation team. And this, together with our listed and unlisted capabilities, will position us at the intersection of what is now for us a $16 trillion real estate universe.

The opportunity, as we see it, is to advise investors on how to tilt their real estate portfolios between listed and unlisted investments continuously to generate alpha and maximize returns. This will open a range of opportunities for us from open and closed-end funds in separate accounts to nontraded vehicles.

Separately, we expect to recognize improved results from our EMEA, wholesale and U.S. institutional teams, both of which are benefiting from new leadership and additional resources.

Only time will tell, but our excellent track record, strong cyclical tailwinds, and proven distribution make us as excited about our growth prospects as ever.

Thank you again for joining us this morning. And Frank, I'd like to now open the floor to questions.

(Operator Instructions) Our first question comes from John Dunn with Evercore ISI.

Great to have you back on the call, Bob. Maybe just looking a little more on the advisory channel regionally. You mentioned the revamp of the team. And maybe just some other things that you have done over the past couple of years to get that U.S. business -- and possibly then it could flip to positive. And then just also maybe to check in on where the momentum is on the non-U.S. side of advisory.

Sure. Well, starting from the top down, over the last 2 years, we've brought on new leadership. That would be Dan Charles in charge of all distribution, but his background is mainly institutional. And then Jeff Sharon, who came in about a year ago, to head up U.S. institutional. And we did reorganize our teams -- or our talent into regional teams, which includes sales, consultant relations, relationship management people by region and shifted our focus on the 600 largest funds in the U.S.

And so we're -- I would say we're about halfway down that path. We still have some seats that we need to fill. But what's encouraging us is a significant uptick in our team's activity levels; the search activity; and more recently, some of the wins.

And so I think from soup to nuts, it will be a 2-year process. We're about halfway through that. And as you heard from Matt, still, the bulk of our new assets coming from U.S. institutional from existing clients, which is great, and I think those existing clients, we expect, will be very supportive of many of our newer endeavors, including private. But we want to get the asset flows from new clients at a higher level, and that's really what our focus is.

Got you. And then maybe what's the temperature of the closed-end market -- fund market these days? I think in the past, you talked about kind of a pile-up with launches at the distributors. Could we see that possibly ease somewhat in the back half of the year?

I think the calendar is pretty full at this point, but I will say there are 2 strategies that we've been working with our partners on the distribution side with, both of which, there's a high degree of interest in. One's in real estate, which would include public and private real estate, and the other is in infrastructure. As we all know, infrastructure is a topic du jour. And so I have a very high degree of confidence that will be on the calendar, if not before the end of this year, early next year, for at least 1 of those strategies. And we're tremendously excited still about the closed-end fund market. But bear in mind, best case scenario would be to get 1 or 2 transactions done per year.

(Operator Instructions) Our next question comes from Marla Backer with Sidoti.

So in terms of the recent wins, the recent mandates, and you talked about existing clients, can you provide any color on how that shakes out in terms of new clients and where you want to see that? Obviously, you want to expand the new client portion significantly. Can you give us color, at least directionally?

Matt, you went over those numbers in your remarks. What's the breakdown between new and existing?

Yes. So we had $1.2 billion of inflows from existing accounts and $300 million from new mandates. So as Bob had mentioned, we're seeing an increase in new mandates, but the revamp of the area is relatively new, and they're starting to find their stride. And part of what I said with the G&A was that we're going to be expanding capabilities in investment and distribution. And so we've got a couple of key people that we're looking to hire into that channel, which should result in increased new mandates as well. So we've not yet hit our stride there.

Okay. And then other question. In terms of ideally 1 to 2 transactions per year, can you give us a sense of what the -- how much lead time we should be expecting before a transaction actually is [implemented?]

Well, the first step is you'll see a filing from us, which will start the clock ticking and will define the strategy. And as I said, because of the interest in at least 1, if not 2 of our new strategies, we'll be filing something fairly soon. And after that, it will be simply a matter of working with the various underwriters to identify a spot on the calendar which -- it could happen between now and year-end, most likely happen in the first quarter. And obviously, the potential size of the raise is unknowable until we get into the marketplace.

Mr. Steers, there are no further questions at this time. Please continue with your presentation or closing remarks.

Great. Well, thank you all for joining us again this morning. And have a great day. Be safe. And we look forward to speaking to you next quarter. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.