Q3 2022 Cohen & Steers Inc Earnings Call
Yeah.
Yeah.
Ladies and gentlemen, thank you for standing by welcome to the Cohen <unk> Steers third quarter 2022 earnings Conference call.
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 have a question. Please press the one followed by the four on your telephone.
Any time during the conference you need to reach an operator, Please press star zero.
I should remind you today's call is being recorded Thursday October 20th 2022.
I would now like to turn the conference over to Brian Heller Senior Vice President and corporate counsel for Qantas Pearce. Please go ahead Sir.
Thank you and welcome to the Cohen <unk> Steers third quarter 2022 earnings conference call.
Joining me are our Chief Executive Officer, Joe Harvey, Our Chief Financial Officer, Matt Stadler, and our Chief investment Officer, John check.
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 third 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 statements.
Further none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicles.
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.
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 Dot Cohen <unk> steers Dot com.
With that I'll turn the call over to Matt.
Thank you, Brian and good morning, everyone.
Consistent with previous quarters. My remarks, this morning will focus on our as adjusted results.
A reconciliation of GAAP to as adjusted results can be found on pages 18, and 19 of the earnings release.
And on slides 16 through 19 of the earnings presentation.
Yesterday, we reported earnings of 92 per share.
Paired with $1 six in the prior year's quarter and 96 cents sequentially.
Third quarter of 2022 included a cumulative adjustment to compensation and benefits that increased the compensation to revenue ratio.
Revenue was $140 2 million for the quarter compared with $154 3 million in the prior year's quarter and $147 7 million sequentially.
The decrease from the second quarter was primarily attributable to lower average assets under management across all three investment vehicles, partially offset by one additional day in the quarter.
Our effective fee rate was 58 basis points in the third quarter compared with 58 two basis points in the second quarter.
Operating income was $60 1 million in the third quarter compared with $70 4 million in the prior year's quarter and 64 million sequentially.
And our operating margin decreased to 42, 8% from 43.3% last quarter.
Expenses decreased four 3% when compared with the second quarter as lower compensation and benefits.
Distribution and service fees were partially offset by higher G&A.
The compensation to revenue ratio with accumulative adjustment referred to earlier increased to 35.14% for the third quarter and is now 34, 5% for the nine months ended 25 basis points higher than our previous guidance.
The decrease in distribution and service fee expense was primarily due to lower average assets under management in U S. Open end funds as well as the mix shift into lower cost share classes.
And the increase in G&A was primarily due to higher hosted conferences and an increase in travel and entertainment expenses.
Our effective tax rate remained at 20, 525% consistent with the guidance provided on our last call.
Page 15 of the earnings presentation sets forth, our cash and cash equivalents corporate investments in U S Treasury securities and liquid seed investments for the current and trailing four quarters.
Our firm liquidity totaled $269 9 million at quarter end compared with 227 7 million last quarter.
And we continue to be debt free.
Assets under management were $79 2 billion at September 30th a decrease of $8 7 billion or nine 9% from June 30th.
The decrease was due to market depreciation of 7.4 billion net outflows of $598 million and distributions of $680 million.
Advisory accounts had net outflows of $220 million during the quarter compared with net outflows of $408 million during the second quarter.
Joe Harvey will provide some color on our advisory flows as well as an update on our institutional pipeline of awarded unfunded mandates.
Japan sub advisory had net inflows of $132 million during the third quarter compared with net inflows of $23 million during the second quarter.
This marks the third straight quarter of net inflows disc.
Distributions from these portfolios totaled $235 million compared with $242 million last quarter.
Sub advisory, excluding Japan had net inflows of $211 million during the third quarter compared with net outflows of $90 million during the second quarter.
The third quarter included an inflow of $200 million from a new relationship into a U S real estate portfolio.
Open end funds had net outflows of $732 million during the third quarter compared with net outflows of $244 million during the second quarter.
The third quarter included $1 billion of outflows attributable to an intermediary who based on current market conditions decided to eliminate its model allocation to U S. Reits.
Net inflows into multi strategy real assets global listed infrastructure and global real estate were more than offset by net outflows from U S real estate and preferred securities.
Distributions totaled $293 million 248 million of which was reinvested.
Let me briefly discuss a few items to consider for the fourth quarter.
Since the start of the year market depreciation has resulted in a meaningful decline in our assets under management and.
And we have ended each of the past two quarters with assets under management that were lower than average assets under management.
In response to the corresponding decline in revenue that this will present, we have reduced our incentive compensation accrual and increased our compensation to revenue ratio.
In addition, with respect to new hires.
<unk> has been raised significantly and we do not anticipate any meaningful head count additions through year end.
As a result, and all things being equal we expect our compensation to revenue ratio for the fourth quarter to remain at 34, 5%.
We expect G&A to increase 12% to 13% from the $47 2 million we reported in 2021.
Although we continue to review discretionary spending in order to identify areas, where we can reduce costs 2022 included certain investments in technology, including the ongoing implementation of a new trading and order management system that were necessary and are expected to result in future operational efficiencies.
In addition, although our Tueni has increased from last year. It is still below pre pandemic levels.
And finally, we expect our effective tax rate will remain at 25, 25%.
Now I'd like to turn it over to our Chief investment Officer, John Shay to discuss our investment performance.
Thank you, Matt and good morning today I'd like to briefly cover three areas first our performance scorecard.
Second the current environment and how our major asset classes are performing.
<unk> some of the high level takeaways from our recent white paper, which we view as the beginning of a very important education process entitled Private Unlisted infrastructure the case for a complete portfolio.
Turning to performance in the third quarter eight of nine core strategies outperformed their benchmarks.
The past 12 months again eight of nine strategies outperformed.
<unk> underperformed this quarter was our midstream energy strategy, which vary modestly underperformed by two basis points, but its still outperforming by 69 basis points year to date.
Measured by a U N, 81% of our portfolios are outperforming their benchmark on a one year basis.
Decline from 93% last quarter.
The biggest driver of the decline since last quarter was the performance of our U S real estate opportunity strategy, which tends to have greater weightings in value oriented small caps, which had been relatively more impacted by the environment on.
On a three and five year basis, 100% of our AUM is outperforming.
From a competitive perspective, 97% of our open end fund AUM is rated four or five star by Morningstar compared with 98% last quarter.
While Q2 absolute returns were challenging our excess returns continue to be broadly positive.
Because we are in a bear market. Our investment teams are acutely focused on risk management balance sheet quality earnings risk.
As we demonstrated in 2008 and 2020 bear markets are sometimes the best times to mine and deliver alpha for our investors.
While today, we are being cautious with the Swift and significant asset re pricing that has happened in public markets. We are increasingly bullish about the four investment opportunity across all of our asset classes.
During the quarter hopes for a fed pivot or dashed in forward curves now reflect very restrictive monetary policy.
Quarter Global equities were down six 7% and the Barclays Global aggregate was down six 9%.
In contrast to prior quarters real assets generally modestly underperformed equities.
<unk>, though meaningfully outperformed global bonds.
Turning to our three major asset classes of infrastructure real estate and preferreds.
Infrastructure lagged the broader equity markets in the third quarter down eight 9% as the market reacted to the roughly 80 basis point increase in the 10 year treasury yield during the period, while the more cyclical and inflation sensitive parts of infrastructure outperformed the more interest rate sensitive subsectors in the universe.
Utilities and telecom infrastructure lagged.
We expect infrastructure to outperform in today's macro environment.
Characterized by slowing economic growth persistently high inflation, albeit falling from today's high levels.
And higher market volatility.
Further private infrastructure capital continues to find its way into the listed markets. Typically is listed infrastructure companies sell assets to these private funds.
These transactions are coming at significant premiums compared to where the listed companies are trading supporting our view that the public infrastructure markets are attractively priced relative to private market valuations, creating a tactical opportunity.
Then what we think is a strategic allocation.
U S and global rates also lagged the equity market with declines in the quarter of 10, 9% and 11, 6% respectively.
Inflation is traditionally a tailwind for real estate performance.
But declining growth expectations and the historically sharp rise in real yields has instead dominated.
For perspective looking over the last 30 years U S. Reits have on average declined 29% in recessions versus their year to date performance of minus 27, 9% and.
In other words Reits have likely priced in a worse than average recession.
In contrast, the commonly cited private real estate Odyssey Index has produced year to date performance of plus 10%.
We strongly believe this is a timing difference and does not reflect some intrinsic difference between public and private real estate.
Given this lag in private market revaluations, we believe with high conviction that reach will provide materially better returns than core real estate as currently priced over the next three years.
Today rights are being used as a source of liquidity, but over time, we expect allocations out of private into listed for investors able to take advantage of this return enhancing portfolio shifts.
Shifting to preferred securities core preferred securities were down two 3% in the quarter outperforming the Bloomberg global aggregate return of minus six 9% in investment grade bond performance of minus five 1%.
We believe Theres, a great deal of tightening and slowing already in the system. We expect that inflation will be materially lower 12 months from now however, it may stabilize at higher than pre pandemic levels.
As a result, we believe we are near the end of the tightening cycle.
Long rates will likely fall as we get close to the terminal rate hike.
Although credit implications will be more nuanced.
We find yields very appealing now at 7% to 10% across our investment universe.
He holds our 6% now aside from the global financial crisis. The last time <unk> yields were 6% with 2006 to 2007, when the overnight rate was 5.25%.
So we believe a great deal of tightening and growth contraction has already been priced into credit and preferred markets.
<unk> also continued to offer materially higher income rates in investment grade corporate bonds.
<unk> advantages that makes after tax income attractive versus munis and.
And importantly, strong credit quality with well capitalized banks and insurance companies generally still seeing earnings improve as rates and net interest margins rise.
So in summary for our major asset classes. The short term may be challenged by tightening and economic slowing.
Strategically, we're particularly positive about the long term asset allocation need for infrastructure and real assets.
But tactically going into 2023.
As we get to the other side of tightening and slowdown.
We believe the best investment opportunity will likely come from areas. Most impacted this year real estate and preferred securities.
Before I pass the call to Joe I'd like to provide three important takeaways from our recently published a whitepaper private in listed infrastructure the case for a complete portfolio.
We believe this research is important because infrastructure investor demand is significant and in our view is too biased towards private allocations with the two most commonly cited reasons being that listed infrastructure, our guest equities and that private structures helped produce illiquidity.
<unk> return premiums.
When comparing the performance of private unlisted infrastructure from 2004 to 2021, we reached the following three conclusions.
First in the short run listed infrastructure may be more correlated with equities and infrastructure, but after only four quarters listed infrastructure is far more correlated with private infrastructure at greater than 80% and 90% correlated at holding periods greater than three years.
Second over that long term time period listed infrastructure.
Structured produce a superior arithmetic return of nine 8% versus private infrastructure at nine 4%.
Last the reported volatility of private infrastructure is roughly half that uplifted.
When adjusted for appraisal based smoothing private unlisted volatility are essentially the same.
We have high conviction that investors need more infrastructure in their portfolios. We believe the combination of education and great investment performance will allow investors to realize that listed infrastructure is a more efficient and often less expensive way to access the attributes of infrastructure.
With that let me turn the call over to Joe Harvey.
Thank you John and good morning.
It was a challenging quarter in terms of market volatility and share price depreciation.
Clothes were negative, reflecting the market environment, but we have elements of strength and business development.
And our relative performance remains strong.
While we while we still see attractive corporate investment opportunities, we intend to prioritize initiatives more stringently and defer some discretionary spending until the magnitude of the recession becomes more clear.
We are in the midst of one of the biggest regime shifts in the macroeconomic environment in my career.
In my view two notable features of this transition have emerge.
First the cycle is taking a long time to unfold, reflecting the significant momentum that our economy had.
And that cheap capital has been available for many years.
Routinely now the fed has been criticized for being behind the curve.
The latest being the speed of tightening without allowing for the economy to respond.
Second the adjustments to financial asset prices could continue to be challenging as interest rates move from zero to more normal levels at the same time as investors require higher risk premiums.
In other words multiples are compressing while inflation is flowing through earnings power.
Several factors make me think about higher required risk premiums, including the globalization.
We ended the fed put.
In the end of the fiscal Cliff.
As recently evidenced by the bond vigilantes showing up in the U K.
The globalization together with the fed jumping from one side of the monetary policy boat to the other.
Could create more volatility in the economy and earnings power and growth rates.
Meantime, asset allocations are being reevaluated as fixed income re prices.
One year Treasury bills, yielding four 6% as of note worthy benchmark.
While this sounds like a child challenging investment environment and it is it will ultimately create opportunity.
Our relative performance as John reviewed remains strong.
Last quarter, we called our performance unique due to the rapid market regime changes over the past few years.
The same qualifier holds true and bear markets, which are torturous confounding and emotionally taxing.
Rallies are typical and powerful due to short covering providing another challenge for our portfolio managers.
The important ingredients to navigating bear markets include.
Patients and awareness that they take time to fully play out.
Investment frameworks that guide discovery of the unknowable and tail risks and of course strong leadership and focus.
Fortunately, our firms financial strength and positioning within asset management allow our investment teams to continue to focus on investing.
In the third quarter, we had net outflows of $598 million firm wide.
Bringing year to date outflows to $559 million.
Outflows in the quarter were driven primarily by U S rights and to a lesser extent by preferreds.
In the U S rights the outflows were attributable to one allocator and our flagship fund Cohen <unk> Steers Realty shares.
In addition, three advisory separate account clients trimmed portfolios to fund private real estate commitments or to take profits.
Offsetting the outflows in U S rates, we had inflows into global real estate global listed infrastructure and multi strategy real assets.
Open end funds had net outflows of $732 million.
Gross inflows were 18% below the trend line.
<unk> the volatility has been investors in well more hesitant to allocate to risk assets.
Redemptions were the second highest ever after the record set in the second quarter.
Bright spots in the wealth channel were the 17th straight quarter of inflows from defined contribution.
And the ninth straight quarter of inflows into our offshore see caf funds.
Led by our multi strategy real assets C cab.
The one allocator to U S. Res just mentioned accounted for $1 billion of outflows in open end funds in the quarter.
They follow and economic cycle based approach and have been positioning for a recession.
They're remaining allocation of 200 million was liquidated after the quarter.
Completing their program.
The other major story in the open end funds was preferreds.
Two months of inflows into Cohen, <unk> Steers preferred securities and income fund precipitated by market expectations of a fed pause in July and August were offset by redemptions of September when the pause was not realized.
Our multi strategy real assets fund was a bright spot with inflows of $174 million in the quarter and $647 million year to date.
Advisory had outflows of $220 million.
Most inflows included 400 million from four new mandates yet were offset by the three client rebalancing previously mentioned.
Before new accounts were in global listed infrastructure problems.
Prevalent African sovereign wealth plan.
In the U S rates for our corporate pension.
And multi strategy real assets for corporate pension and a global list global real estate, which was a takeaway from an underperforming peer manager for a state pension fund.
Advisory has had five straight quarters of outflows driven by various reasons, including harvesting profits from opportunistic fundings during the pandemic drawdowns.
Rebalancing for planned funding needs.
And navigating this year's volatility.
The most important takeaways for me are.
Demand for our strategies continues to grow.
Our sales team is well organized and has a good strategic plan.
And we're enjoying more success with asset consultants.
Bottom line, we need to bring more new accounts and to offset the inevitable churn that occurs during market environment such as this.
Sub advisory ex Japan was driven by a new variable annuity mandate of $200 million.
Where the client hired us to replace an affiliated manager and U S rights.
As Matt reviewed <unk>.
Japan sub advisory had net inflows, which were supported by strength in the U S dollar versus the yen.
One of the U S. REIT funds that we sub advised for diode asset management is among the best selling funds.
Our one in unfunded pipeline is $1 1 billion compared with one 5 billion last quarter.
$820 million of last quarter's pipeline was funded and we won $562 million of new unfunded mandates.
Measured by AUM, our pipeline is 65% global real estate.
13% U S real estate.
And 13% global listed infrastructure.
Looking forward, we have shaped our corporate priorities for 2023 from our investment views.
Allocation trends and client demand.
First area of priority.
We see accelerating demand for global listed infrastructure and multi strategy real asset allocations.
We are mobilized to educate on asset allocations and offer both core and customized solutions.
And each of these asset classes, our relative performance is strong.
So our goal is to gain market share in those growing asset classes.
The backlog of opportunities in the institutional advisory for global listed infrastructure is significant and is broadening by investor type and geography.
Factors driving the interest in infrastructure include.
Recognition of general Underinvestment in infrastructure, which can set up good investment opportunity.
Awareness of the difficulty in fulfilling allocations with private infrastructure alone.
And the view that the.
Investment characteristics of infrastructure can be attractive in a volatile environment.
For multi strategy real assets, the persistence of high inflation, plus the risk of inflation surprises is helping to generate demand.
Our second area of focus we believe the corrections in REIT and preferred security prices will present, a compelling entry point over the next year.
Re prices are down 30% this year compared with 21% for stocks.
Our valuation metrics show that reached our chief versus stocks and versus U S private real estate.
But less so compared with bonds.
Private real estate values need to adjust lower to reflect both economic slowing and changes in the debt markets.
That is higher borrowing costs, lower ltvs and contracting loan availability.
We believe that our good to great buying opportunity is emerging and preferred securities as.
As the yield curve adjust to the new regime.
And anticipating the fed will overshoot the.
The pathway of higher yields and higher than average credit spreads will present, a great income opportunity currently in the 7% to 10% zone.
With potential for capital appreciation should the fed turned neutral.
Further for preferreds, we are planning to see two.
Two new strategies, which have broader mandates.
Prompted by the improvement in the fixed income cycle.
We continue to advance our initiatives in private real estate.
Right now we believe the best opportunities are available in the illicit market considering share price declines for Reits. However, the price discovery process has commenced and the private market as well.
We expect that an attractive buying period is emerging in private real estate and therefore, we are continuing our capital raising efforts and focusing on investment strategies Accordingly.
In terms of distribution priorities, we are seeing more interest in listed real assets in Asia. So we expect to allocate more resources there.
Another priority is organizing our wealth team to distribute private real estate in the broker dealer.
Registered investment adviser and family office segments.
As the wealth channel continues to allocate more to alternatives, we will supplement our existing sales teams with specialists and private real estate.
In closing one of the biggest questions for asset managers will be how asset owners shift allocations in response to higher fixed income yields and lower plant assets.
Some plans may have less flexibility due to funding needs, which could favor listed strategies.
Many still need strong returns to achieve their investment goals.
We believe fixed income now provide solid return potential with diversification, which didn't occur last this year, but we expect will ultimately return what's the rate cycle matures. This.
This should result in portfolio tilts back to fixed income.
For real assets I believe that demand will continue for the total return inflation sensitivity and diversification characteristics that they provide.
Operator at this point, let's open the call to questions.
Thank you.
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One moment please for our first question.
Okay.
We do have a question from the line of John Dunn with Evercore ISI. Please go ahead.
Hi, good morning.
You touched on the private real estate effort you guys.
We are engaging in.
Give more update like are you.
Gathering assets as asset gathering going are you, making investments and then you know this.
This newer relative value, which you talked about between public and private you talked about being a tactical opportunity maybe how big of an opportunity do you think it could be for you guys.
Okay.
Sure, let me start and I'll ask.
Jon say that.
Add on after I answered the question, but.
First in terms of our private initiative we are.
In the market.
Sure.
A couple of strategies to begin to raise assets and one of those strategies is that income slash total return strategy and the other is a more opportunistic capital appreciation strategy.
We are in terms of deploying capital we've bought several assets, but at this point in light of our view of the macroeconomic environment, we are going.
Slow in order to let this.
Price adjustment that both.
Both John and I described.
Place in the private markets.
No.
We're being are being patient.
Importantly.
For the vehicles that we have in mind.
We would have an element of listed in them that would complement the private and afford us the ability to take advantage of what's happening right now so as you can imagine.
Sure.
And certain.
Property sectors.
Using the capital that we have raised.
Take advantage of some opportunities in the listed market.
John anything to add.
Well the only had said look there's been a 40% spread year to date between how private as reported it's up 10% and.
And how public has done so there's a 40% spread as I said.
There are some differences between public and private but theres not a 40% difference.
In terms of what's happening from a fundamental and valuation perspective.
We've all seen this before we know that there is.
A delay.
A delay in.
And how private values need to go through a cutting cycle.
And usually our research and we saw this in 2009, usually the listed markets are going up when sometimes the private markets are still moving down. So we think there is a very big return gap there.
The problem is that today and you only need to look at what happened with.
In the U K with LTI and things like that.
A lack of liquidity.
And you see investors frankly.
Some can optimize returns today, but some are also just focused on their liquidity situation. So.
So they are tending to redeem that which is liquid.
As opposed to that which is not yet marked down but they are unable to.
Redeem for so we think we're going to get to that point, where investors will be able to take advantage of that big.
Spread and where values have gone.
But of course, we need to get a bit deeper into the cycle.
Look.
We would say that.
Clearly.
No.
A lot of money.
Has gone into the private real estate market, both institutionally and actually the wealth channels.
It wouldn't be surprising.
It's not just institutions that will start to do this rebalanced, but individuals will start to do this rebalancing and the gatekeepers themselves meet start to change their advice on how much in individual investor should have.
And that's something that's private as opposed to something Thats public given this big valuation shift.
Got you and then you guys talked touched on two big moves into your sugar historical growth engines, <unk>, Philadelphia, a bunch in preferred yields coming up.
Are you starting to see investors and pans looking more opportunistically.
And could lead to influence I think you've talked about over the course of the next year, but could you could you know flows come back sooner than those two areas.
Let me start again this is Joe.
As John again to complement what I have to say.
In my talking points.
We reviewed how.
And our preferred fund had inflows into the first couple of months of the quarter and then.
As investors anticipated the fed pausing. So I think that's an indication that investors are waiting.
For this.
Fed tightening process to play out.
I believe particularly with.
What we described in terms of the investment opportunity the yield opportunity and I think theres a capital appreciation opportunity on the back of that process.
So investors are waiting to go into preferreds, So I'd say, that's probably a little bit more near term.
<unk>.
In terms of real estate.
Whereas we're not seeing the interest yet.
I mentioned that we've had a couple of clients trim their portfolios to fund private commitments that actually feels a little bit.
Opposite of what.
As Jon laid out what we would recommend investors to do at this point because.
The cycle over our history is.
Laid out.
The same many many times and that's listed goes down first.
Private market correct.
But then listed recovers first and we see.
Some pretty good value in the listed market and so.
Again, I still think theres a little bit of.
Hesitation by investors to kind of see.
The fed tightening process begin to play out, but but also.
Get a little bit more visibility on what the recession will look like and how that will affect real estate fundamentals I mean real estate fundamentals right now are holding pretty steady.
So that's a good thing, but we would expect that.
Investors are going to start to.
Nibble at real estate because the.
They see how the cycle is evolving.
<unk> them on that and.
Once once the once the fed process.
Get gets gets to the next phase then then the stocks are going to start anticipating the other side of it.
Got you.
Maybe another quick one on the REIT piece, you mentioned reach being down I think you said, 27%.
Do you expect some potential potential recap so like you know.
What we saw in <unk>.
Pay offs and stuff like that or get some offensive capital.
Yes, so I mean.
That's a good question.
We're not generally at that kind of.
Extreme yet the first thing I'd say is you know balance sheets of real estate companies, whether measured by things like debt to EBITDA or weighted average maturity I'd say for the most part they are all meaningfully improved since the financial crisis, mainly because we all lived through it learned some lessons.
That being said.
We've been in a zero interest rate environment and the tide has gone out. So we would expect that there's going to be some opportunities in different places now opportunities. It can mean recaps.
But it can also mean, we haven't had a lot of ipos because frankly.
There's been a lot more money on the private side and there has been on the public side.
We could see Ipos too.
Help.
We capitalized companies, which is what happened after the SNL crisis, that's really how the modern readout got started we could be cornerstone those ipos, we could be doing pre ipos for companies that had growth plans.
Thought that they were early cycle and then all of a sudden it was the end of the cycle and so on.
For all of these can be really good opportunities like we saw in 2009.
It could be a great beta opportunity because it helps to unlock value, but theres just a lot of alpha.
We think some of these opportunities are in the U S.
Probably by percentage a little bit more are in Europe , where our leverage has run a bit higher than here in the U S or.
Or we're going to see situations of <unk>.
Developers and Theres been a lot of development on whether it be on the residential side the industrial side the data center side.
Anything like that that assumes things are going to continue the way they are.
Youre going to see some opportunities there so we.
We definitely think we'll see some of those but it doesn't just have to be recaps.
Sounds good.
Maybe.
One on the institutional advisory side.
My sense is you've been investing more on the non U S. Advisory side recently can you talk about what that business looks like now and maybe the outlook and then in the U S side to a couple of years. After the Org and then third you mentioned Asia.
As a priority.
Kind.
What does your Asia ex Japan business look like now at this point.
So let me start in terms of where we've made the biggest investment that it actually has been in our U S advisory and that goes back to two and a half three years ago. When we brought in.
Dan Charles to head up and unify all of our distribution and then he along with our head of advisory Jeff Sharon.
<unk> changed our model to be more of a regional model that that would unify within those regions.
Sales consultant relations and client relationship.
Coverage and we've also changed.
Compensation structure to be more success based and we're really pleased with all of those developments.
No.
On the on this on the scale of what we're doing in advisory that's where the biggest changes in investment.
Have been made and as I said in my talking points.
Pleased with with the with our team and what we're doing.
We've just been in a period where.
Between the pandemic and.
And now the the macroeconomic shifts this has been a more challenging environment for.
For the advisory business, but when we look at the.
The pipeline in the backlog and the interest in our strategies and where it's coming from.
Along with how we're doing on the on the consultant relations front, which is heavily supported by our investment performance.
We're.
We're feeling pretty good about about about that segment.
When you look at outside of the U S with.
We've had success in the middle East and when you look at our again, our pipeline and our backlog there is a lot of activity there and it's <unk>.
Demonstrating whats been happening, which is broader adoption of listed real assets spin.
Specifically real estate and infrastructure.
By other types of investors around the world.
We've just been seeing some.
So called Green shoot interest.
From.
Asia Pacific and.
So we've.
Got some some new mandates in our and in our.
Recent fundings and in our in our pipeline.
But we think that's going to continue and so we're going to allocate some more sales.
Resources.
In Asia Pacific and this is very consistent with the long term.
Trend of investors.
Raising allocations to real assets and portfolios and then within that.
Complementing pre.
Private allocations with with listed which is our view on how these allocations could be made and you've kind of gotten a flavor for that and as John and I have talked about where we're at in the cycle and how.
Each of those mediums can complement one another.
Got you.
Maybe one on the cost side, we can talk about 'twenty three G&A in January but can you remind us where like the bulk of your investment dollars are going and what in particular.
The money Youre spending now can translate the quickest into organic growth.
Well I'd say there are two.
Two buckets for asset managers one is.
Our talent and we.
We've been <unk>.
Fortunate situation, where we've had a lot of organic growth looking historically and part of that is just more accounts.
More customized portfolios and that requires more.
More team members.
As we've added new strategies, new capabilities, such as private real estate debt.
That's another.
Driver of.
Our need for talent as both Matt and I talked about obviously with the change in our asset levels, we need to be.
More disciplined about.
Matching resources and the team size with our opportunity set.
We we we think we still have an as is illustrated by.
John's setup on the investment.
You know opportunity set.
We were going to have opportunities.
We're we're balancing the near term.
The challenges that the markets, providing with the longer term investments.
<unk>.
<unk> represented by the market share opportunities that we have the other the other big bucket is.
Using balance sheet capital to seed strategies and.
Referred to.
Seeding a couple of preferred.
New preferred strategies.
And of course, we've got the private real estate strategies, which.
Represent.
Very attractive.
<unk> of our balance sheet capital.
Great just one more and thank you again can you talk a little more about the construction of your U S. Real estate portfolio, you talked about some countervailing factors.
I think of positivity on rents less building.
It's more of a logistical secular gross stuff, but there's caution to pull in real estate prices.
Just what's your outlook for the area.
I'll, let I'll, let John take that question in terms of how we're thinking about our portfolio construction right now.
Well, if I think I understand the question.
So far I mean.
You know the economy slowed a little bit.
And so we've seen a little bit of a downshift in fundamentals, but certainly not a material downshift in fundamentals. So I think most of the repricing. This year has been about expectations about higher cost of capital. So a shift in multiples and it's really been about.
Bigger earnings downgrades.
And so you know where <unk> seen the biggest impact from that so far is in the kind of lower cap rate a higher multiple things so things like industrial apartments cell towers, while all attractive sectors.
We're in a.
They looked good in a low rate low rate world. They don't look quite as good if the one year Treasury I think Joe said was four 7%.
That's where we've seen the biggest repricing.
Now in terms of how we are positioned.
Our portfolio is very balanced so we have very little exposure to office on the REIT side.
But we do like areas such as residential.
As well as retail.
And as well as self storage because.
We think it gives us a balance where we're not as vulnerable to rising rates.
But we also feel like there is good pricing power, particularly on the self storage and on the residential side.
Yeah, and maybe just one kind of like under the Hood business. Aside a corollary to that question is how those insights how do you how do you communicate those to clients during the sales process.
Well.
It depends upon the client, but I mean, we're.
We're always talking with our existing clients and prospective clients.
About our people our process.
Use on where we are in the cycle.
And kind of related to that that active management is really important in all of our asset classes. I mean these are at least one of the important ingredients for why we chose these asset classes.
And so expressing those views. So for example, a five or six years ago, we might have owned zero retail.
When at least at that time retail was viewed favorably.
Or when I tell people that we own.
In our U S REIT portfolios basically about 1% of our U S. REIT portfolio is office.
That's very surprising to them.
And so.
It's certainly part of the process and talking about the outlook and how we can create alpha and how we're going to create alpha in the future.
Yes, I would just add John this maybe.
To close out here.
We have a substantial commitment to.
Producing thought capital for our clients and that's delivered in many many ways.
Ranging from our relationship managers, knowing exactly what the client or prospect.
Prospect is interested in and.
Engaging with them directly to <unk>.
<unk>.
That research on our website, we just rolled out a new version of our website.
We also couple of weeks ago had our annual Investor Conference, which is a.
A great Forum, where our teams can share our thinking with clients and then one on one with them and of course.
Our investment teams.
Have always been because they are dedicated to a single asset class always interested to work with investors to help educate on our asset classes. So we've got.
A lot of people and a lot of ways that we deliver.
Our thinking.
Great. Thank you very much I appreciate it.
Thanks for your questions John .
And we have no further questions on the phone lines I would now like to turn the call over back to Joe Harvey for closing remarks.
Great well simply we appreciate.
Your time today, and we look forward to our next earnings call in January of 2023. So thank you.
That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.
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