Q2 2021 Cohen & Steers Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Cohen <unk> 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 at that time, if you of a question. Please.
The 1 fall by the for on your telephone.
If at any time during the conference you need to reach and operator. Please press Star Zero How's. The reminder of this conference is being recorded on Thursday July 22021.
I'd now like to turn the conference over to Brian Heller Senior Vice President and corporate Counsel of Cohen <unk> Steers. Please go ahead.
Thank you and welcome to the Cohen <unk> 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 as adjusted financial measures that we believe are meaningful and evaluating our performance.
These non-GAAP financial measures should be read in conjunction with our GAAP results a.
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 and the Investor Relations section of our website at Www Dot Cohen <unk> steers Dot com.
With that I'll turn the call over to Matt.
Thanks, Brian Good morning, everyone and thanks for joining us today.
And my remark 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 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 <unk> 94 per share compared with 54 cents and the prior year's quarter and 79% sequentially.
Revenue was a record $144.4 million for the quarter compared with $94 million and 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 and the recognition of performance fees and 1 additional day and the quarter.
Our implied effective fee rate was 58 basis points and the second quarter compared with 57.3 basis points and the first quarter exclude.
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 and in the quarter compared with $35.5 million and the prior years quarter and $53.2 million sequentially.
Our operating margin increased to 43, 4% 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 point of 3% for the second quarter and is now 35% to 5% for the 6 months and.
The increase in distribution and service fee expense was primarily due to higher average assets under management and U S. Open end funds and.
And the increase in G&A was primarily due to higher professional and recruitment fees as well as and the increase in travel and entertainment expenses.
Okay.
Our effective tax rate, which also included a cumulative adjustment was $26.5 1% for the second quarter and is now 26, 85% for the 6 months ended.
The reduction and the effective tax rate from the first quarter, which primarily due to the diminished the effect of the non deductible portion of executive compensation on a higher than previously forecasted pre tax base.
Page 15 of the earnings presentation sets forth, our cash corporate investments and U S Treasury Securities and seed investments for the current and trailing 4 quarters.
Our firm liquidity totaled $185.6 million, a quarter and compared with $124.3 million last quarter, we remain debt free.
Total assets under management was a record $96.2 billion at June 30, and increase of $9.2 billion or 11% for March 31 the.
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.
The 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 rebalancing.
Net inflows were evenly of portion 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 sub advisory 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, and distribution rate cut was made to 1 of the funds we sub advise.
Encouragingly the rate of net outflows and the sponge decelerated throughout the quarter and we actually recorded net inflows for the month of June.
Sub advisory 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 the 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 and the double digit sequential growth and 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 half a year ago.
As a result, we reduced the compensation to revenue ratio by 25 basis points to $35.2 5% for the 6 months ended and we expect that our compensation to revenue ratio will remain at 35, 5%.
Yes.
And 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 of last quarter. The increase was primarily attributable to incremental investments and technology and global marketing and 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 20, 685%.
And finally during the second quarter and response to our client request, we converted the fee structure on 2 portfolios from a performance based fee structure to a base the only.
This conversion resulted and the realization of the year to date outperformance.
The increase in the base fees 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 are perfect record of outperformance, what we are doing to sustain and enhance performance the impact of accelerating inflation on our asset classes.
And how are major asset classes are performing versus expectations at the beginning of the year.
As we all know and the second quarter. The U S economy reopened from the pandemic and surged powerfully driving appreciation and positive returns and virtually all asset classes.
A good portion of our AUM to better than the S&P 500, which was up 8.6%.
And we continued to post stellar outperformance versus our benchmarks.
1 surprising development was the treasury yields declined in the quarter against the backdrop of accelerating economic growth and rising inflation and.
In fact inflation surprises and the upside something that Hasnt happened and a long time.
Looking at our performance scorecard, and 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 and global listed infrastructure and certain global real estate portfolios.
On a 3 year basis, 100% of AUM is outperforming and.
And for 5 years, 99% is outperforming the essentially the same as last quarter and <unk>.
90% of our open and fund AUM is rated 4 or 5 star by Morningstar, compared with 88% last quarter.
U S Reits returns of 12% and the quarter lifting of the year to date return to 21, 3%.
We outperformed our benchmark and the quarter and for the last 12 months.
Going into this year, we believed 2021 would be of 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.
And the reopening and the U S economy has created greater visibility into the turnarounds and demand for space leasing activity and tenant credit and of 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 the health care have long recovery runways.
We believe that inflation and 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 of development cycle to kick in.
Global real estate returned 9.2% and 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've outperformed and all 3 of our regional strategies as well as and our global and international strategies.
Global listed infrastructure returned 2.9% and the quarter lifting and the year to date return to 7%.
We outperformed for the quarter and for the last 12 months.
Similar to real estate, we believed that 2021 would be of good vintage year for infrastructure investing as infrastructure depreciated last year and part due to the sub sectors that were uniquely impacted by the pandemic.
This year, the sector's hardest hit by the pandemic such as airports ports and toll roads are still wrestling with concerns about the spread of coronavirus variance and levels of cross border travel.
And utilities have been flat for the second year in a row left back and a strong technology lead bull market.
That infrastructure performance, while positive has not been stronger likely represents an opportunity and our view.
Preferreds returned to 2.9% of the quarter helped by the 10 year Treasury yield falling 30 basis points to 1.4% per year.
Date return is 2.4%.
And we outperformed in the quarter and for the last 12 months and both of our core and low duration preferred strategies.
Going into this year, we believe that the flat yield curve with the potential for a transition and the rate environment to higher long term yields suggested investors should pivot towards our low duration strategy.
Notwithstanding the surprise and inflation this year concerns about the core of our.
Corona virus fire variance 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 and our real estate strategies going into this year, we believe that inflation risks for 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% and the quarter lifting of the year to date return to 14, 5%.
We outperformed for both the quarter and the last 12 months driven by excess returns and every strategy sleeve real estate infrastructure commodities resource equities gold and high grade low duration credit and.
And through top down asset allocation and.
And the quarter commodities returned 13, 3% with 25 of the 27 commodities and the index producing positive spot price.
Price returns.
On the topic of weather 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.
And I have come together to support a phase of higher and longer inflation.
And 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 and descending order our commodities resource equities multi strategy real assets infrastructure and real estate.
At the same time and the macro environment for real assets is improving real assets are the cheapest versus equities and 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 and identify alpha sources put process in place to harvest that alpha and widen our excess return margins versus the benchmarks.
The longer our outperformance persists the better our ability to realize returns on the investments, we've made and 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.
Efficiencies into our fundamental processes.
And those initiatives are producing positive results and our investment teams are now asking for more.
And we've added analyst and are identifying our next group of emerging leaders through our annual talent 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.
To the development of explicit strategies.
And help address the increasing demands of clients and consultants.
We see many opportunities for innovation and real estate investing there.
And there is an acute need for next generation real estate strategies to help investors reorganized and rebalanced existing allocations, which are heavy and private heavy and 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.
And April as we discussed and the last call, we announced the formation of a private real estate group.
Our imperative is to innovate at the intersection of private and listed real estate investing.
And to tilt to where the best returns are and harvest the alphas at those intersections.
Meantime, the pandemic has created change and 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 and institutional vehicles, and then closed end fund strategies.
In closing, we are and 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 and the risk managed fashion a return bogey of 7% from of $60.40 blend of stocks and bonds.
And for a long while now the 40% and 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 and the portfolio is greater our.
Our strategies offer and.
Attractive total returns and 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 and the offer.
And then 100% healthy.
Also I'd like to recognize Joe Harvey and our entire Executive Committee, who stepped up seamlessly and my absence, which underscores the quality and depth of our leadership team.
As I look back on the quarter of and the year to date it's of.
Parent 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.
And as fostered a dramatic rebound and fundamentals for real assets, ranging from real estate and infrastructure resource equities and commodities.
The rebound and prospects for real assets versus 2020 is stark.
As Joe just pointed out, whereas the performance of virtually all real assets 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 the unique point in time for real assets and CNS.
1 that will not be transient in nature and is supported by secular trends.
First the cyclical recovery is historic and underpinned by unprecedented fiscal and monetary stimuli, which are supportive of real assets fundamentals.
Second investor psychology of shifting towards the real assets.
The force behind the shift are both fundamental and.
Including growing demand for hedges against the unexpected inflation.
And the technical.
Also including expectations of mass of capital flows and the public and private infrastructure.
We believe our strong brand and investment performance has 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 and this latest quarter.
That said, we're working hard to expand our breadth and depth of capabilities and the real asset space by developing unique and valuable new fab.
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 and 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 and this our largest channel was 22%.
Importantly, the strong growth and assets was well diversified by channel and product.
We saw strong flows for each of the broker dealer.
<unk> and independent channels.
<unk> also delivered of $163 million of net inflows, which marks the 12th consecutive quarter of positive net flows for this vertical.
Close by strategy, we're 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 and real estate, our global real estate Securities Fund achieved a record $370 million of net inflows and 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.
And 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 and the quarter of.
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 of $314 million.
Global real estate and global infrastructure also experienced net inflows of $227 million and $162 million respectively.
$860 million of the.
The 1.4 billion beginning institutional pipeline was funded during the quarter.
In addition for $179 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 our regional team approach and we are very encouraged by these early results.
The sub advisory 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 the cost saving measure.
Similarly, Japan sub advisory saw a $272 million of net outflows and $309 million of distributions, which reflect the continuing effects of of distribution cut and a large U S. REIT funds.
Looking ahead of 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 the 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're 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 dollar 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 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 tailwind 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.
Thank you.
If you would like to register a question. Please press the 1 for on your telephone and you will hear of 3 Tom prompt technology of request.
Thanks for your question has been answered and you would like to withdraw your registration. Please press. The 1 followed by the 3 for 1 moment. Please for the first question.
Our first question comes from John Dunn with Evercore ISI. Please proceed.
And.
Hi, good morning, and.
Great to have you back on the call that.
And maybe just looking a little more on the advisory channel regionally.
You mentioned the Rio.
Revamp of the team and maybe just some other things.
And <unk>.
We've done over the past couple years to get that U S business.
And possibly when it could flip the pathogen and then just also and maybe of checking on where and then anthem is on the non U S. Non.
And non U S side of the advisory.
Sure well.
Starting from the top down over the last 2 years, we've brought on new leadership that would be Dan Charles.
And charge of all distributions for the background is mainly institutional and.
And then Jeff Sharon who came in about a year ago to.
The head of.
The U S and too much at all.
And we did reorganize our teams or our talent and to regional teams which includes sales.
Consultant relations relationship management people by region and shifted our focus.
On the 600 largest.
Funds and the U S and.
So we're I would say, we're about halfway down that path we see.
Still have some seats that we need to fill but.
And what's encouraging us.
As a significant uptick and and our team's activity levels.
The search activity and more recently some of the wins and so.
I think from soup to nuts, and it'll 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 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.
Got you and then maybe.
Whats the temperature of the of closed end fund.
The market these days.
I think he and the past you've talked about kind of of pileup with launches of the distributors and could we see that possibly eased somewhat in the back half of the year.
I think the calendar was pretty full at this point, but I will say they are.
2 strategies.
And we've been working with.
And our partners on the distribution side with.
Both of which.
There's a high degree of of interest and ones and real estate.
Which would include public and private real estate and the other infrastructure and as we all know infrastructure is the topic Du jour.
And so I have a very high degree of confidence.
That will be on the calendar.
And if not the.
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.
No.
The best case scenario would be to get 1 or 2.
<unk> transactions done per year.
How's The reminder to register a question. Please press the 1 for on your telephone.
Our next question comes from Marla Backer with Sidoti. Please proceed.
Thank you.
So in terms of the recent wins the recent mandates and you talked about.
Existing clients can you provide any color.
And how that.
Shakes out in terms of new clients, and where you want to see that obviously.
And to expand the new client portion.
Significantly can you give us color at least directionally.
Yeah.
Matt you went over those numbers in your remarks, what's the breakdown between new and existing.
Yes, so we had $1.2 of inflows from existing accounts.
And 300 million.
From.
New mandates.
So that is.
As Bob had mentioned.
We're seeing an increase and new mandates, but the.
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. We said, we're going to be expanding capabilities and investment and distribution and so we've got a couple of key people that were looking to hire into that channel which should.
The result in increased new mandates as well so we have not yet hit our stride there.
Okay. Thanks, and then the.
The other question.
In terms of <unk>.
Daily wanted 2 transactions per year can you give us the sense of what the how much lead time.
And we should be expecting.
Before I transaction of actually.
And is.
It is.
Net.
Yes.
Well the first step is youll see a filing from us.
And which will.
Start the clock ticking and will define the strategy.
And.
As I said.
Because of the interest and at.
And at least 1 if not 2 of our new strategies.
We will be filing something fairly soon and.
And.
After that it'll be simply a matter of working with the various underwriters too.
Identify a.
Spot on the calendar, which.
It could happen between now and year and most likely happen and the first quarter.
And obviously.
Of the potential size of the raises unknowable until we.
And we get into the marketplace.
Mr. Steers there are no further questions at this time. Please continue with your presentation for 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.
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