Cohen & Steers, Inc.
Q2 2021 Earnings Call Transcript

Published: 22 Jul 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers Second Quarter 2021 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 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.

[Brian Heller:]

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.

[Matt Stadler:]

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 Slide 16 to 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 three investment vehicles, the recognition of performance fees and one 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.

[Joe Harvey:]

Thank you, Matt, and good morning, everyone. Today, I will review our investment performance and discuss related key themes such as our near record, our 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.

[Bob Steers:]

Great. Thanks, Joe, and good morning, everyone. First of all, it's great to be back at work in my office and I'm 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 as foster to dramatic rebound in fundamentals for real assets ranging from real estate and infrastructure to resource equities and commodities. The rebound and prospects for real assets versus 2020 is starts. 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 and 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 fundamentals, 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 and 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 spent. 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, the 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 three 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 one 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 one 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 the 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 and 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 and separate accounts to non-traded 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:]

Our first question comes from John Dunn with Evercore ISI. Please proceed.

[John Dunn:]

Good morning and great to have you back on the call Bob. Maybe just looking at a little more on the advisory channel regionally, you mentioned the revamp of the team, and maybe just some other things that you've done over the past couple years to get that U.S. business and possibly when it could slip deposits, and then just also maybe a check-in on where the momentum is on the non-U.S. side of advisory?

[BobSteers:]

Sure. Well, starting from the top down over the last two years, we brought on new leadership. That would be Dan Charles, in-charge of all distribution, but 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 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 two-year process. We're about halfway through that. And as you've heard from Matt, still the bulk of our new assets coming from U.S. institutional are 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.

[John Dunn:]

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

[BobSteers:]

I think the calendar is pretty full at this point, but I will say there are two strategies that we've been working with our partners on the distribution side with, both of which - there is a high degree of interest in ones in real estate, which would include public and private real estate and the others in infrastructure. As we all know infrastructure is a topic du jour. And so I have a very high degree of confidence that we'll be on the calendar if not before the end of this year, early next year, for at least one 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 one or two transactions done per year.

[Operator:]

Our next question comes from Marla Backer with Sidoti. Please proceed.

[Marla Backer:]

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?

[BobSteers:]

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

[Matt Stadler:]

Yes. So we had a $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.

[Marla Backer:]

And then other question. In terms of ideally one to two 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 limited?

[Matt Stadler:]

Well, the first step is you'll see a filing from us, which will start the clock ticking and we'll define the strategy. And as I said, because of the interest and at least one if not two 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.

[Operator:]

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

[Bob Steers:]

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.

[Operator:]

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.