Q4 2023 Cohen & Steers Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Cohen <unk> Steers fourth quarter and full year 2023 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 have a question. Please press star followed by the number one on your telephone.
If at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Thursday January 25th 2024.
I would now like to turn the conference over to Brian Heller Senior Vice President and corporate Counsel of Cohen <unk> Steers. Please go ahead.
Brian Heller: Thank you and welcome to the Cohen, <unk> Steers fourth quarter and full year 2023 earnings conference call.
Brian Heller: Joining me are our Chief Executive Officer, Joe Harvey, Our Chief Financial Officer, Matt Stadler, and our Chief Investment Officer, John Chad.
Brian Heller: I want to remind you that some of our comments and answers to your questions may include forward looking statements.
Brian Heller: We believe these statements are reasonable based on information currently available to us.
John Dunn: But actual outcomes could differ materially due to a number of factors, including those described in our accompanying fourth quarter and full year earnings release and presentation.
John Dunn: Our most recent annual report on Form 10-K, and our other SEC filings.
John Dunn: We assume no duty to update any forward looking statement.
John Dunn: 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 vehicle.
John Dunn: Our presentation also contains non-GAAP financial measures referred to as.
John Dunn: As adjusted financial measures that we believe are meaningful in evaluating our performance.
John Dunn: 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.
John Dunn: The earnings release and presentation as well as links to our SEC filings are available on 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.
Matt: Thank you Brian Good morning, everyone. Thanks for joining us today.
Matt: As on previous calls my remarks. This morning will focus on our as adjusted results.
Matt: A reconciliation of GAAP to as adjusted results can be found on pages 19, and 20 of the earnings release and on slides 17 through 20 of the earnings presentation.
Matt: Yesterday, we reported earnings of 67 per share compared with 79 in the prior year's quarter and 70.
Matt: Sequentially.
John Dunn: Revenue was $119 million for the quarter compared with $125 5 million in the prior year's quarter.
Brian Heller: Third $23 6 million sequentially to.
Brian Heller: The decrease in revenue from the third quarter was primarily attributable to lower average assets under management.
Brian Heller: All three types of investment vehicles.
Brian Heller: Our effective fee rate was 57 seven basis points in the fourth quarter compared with 57 six basis points in the third quarter.
Brian Heller: Excluding fourth quarter performance fees of $1 3 million and third quarter performance fees of $1 2 million, our effective fee rate would have been 57 basis points for both quarters.
Brian Heller: Operating income was $41 3 million in the quarter compared with $50 9 million in the prior year's quarter and $43 9 million sequentially.
John Dunn: And our operating margin decreased to 34, 7% from 35, 5% last quarter.
John Dunn: Expenses decreased two 5% from the third quarter, primarily due to lower compensation and benefits and a decrease in distribution and service fees, partially offset by higher G&A and an increase in depreciation and amortization.
John Dunn: Driven by the year over year decline in operating results employee compensation and benefits was $3 5 million lower in the fourth quarter when compared with the third quarter. This.
Brian Heller: This was primarily due to a reduction in incentive compensation to reflect actual amounts expected to be paid.
We always take a deliberate approach to setting year end compensation in order to balance employee retention with results to shareholders.
John Dunn: For the year, our compensation to revenue ratio was 46, 5% 15 basis points higher than last quarter's guidance of 45%.
John Dunn: The decrease in distribution and service fees was primarily due to lower average assets under management in U S. Open end funds.
John Dunn: With respect to G&A, you will recall that the third quarter included a one time adjustment that reduced the estimated accrual for the costs associated with the completed implementation of our new trade order management system to reflect the actual amount paid.
Brian Heller: The sequential increase in G&A was primarily driven by this third quarter adjustment.
Brian Heller: For the year G&A was $55 million compared with $52 6 million in 2022.
Brian Heller: The four 6% year over year increase was lower than the 5% to 7% guidance, we provided last quarter.
Brian Heller: And finally as expected, we began depreciating and amortizing fixed assets and leasehold improvements in December when we moved into our new corporate headquarters.
John Dunn: This accounts for the majority of the sequential increase in depreciation and amortization expense.
John Dunn: Our effective tax rate, which was 25, 88% for the quarter included an adjustment to bring the full year rate to 25, 4% an increase of 15 basis points from last quarter's guidance of $25 two 5%.
John Dunn: Higher effective rate was primarily due to increases in certain non deductible items.
John Dunn: Page 15 of the earnings presentation sets forth, our cash and cash equivalents corporate investments in U S Treasury Securities.
John Dunn: Liquid seed investments.
John Dunn: For the current and trailing four quarters.
John Dunn: Our firm liquidity totaled $318 8 million at year end compared with $279 9 million at the end of last quarter and.
John Dunn: And we have not drawn on our $100 million revolving credit facility.
Assets under management were $83 1 billion at December 31, an increase of $8 billion or 10, 6% from September 30 the.
John Dunn: The increase was due to market appreciation of $9 6 billion, partially offset by net outflows of $935 million and distributions of $717 million for.
John Dunn: For the full year assets under management increased $2 7 billion or three 4% from December 2022.
Joseph Martin Harvey: The increase was due to market appreciation of $7 5 billion, partially offset by net outflows of 2 billion and distributions of $2 8 billion Joe.
Joseph Martin Harvey: Joe Harvey who will be providing an update on our flows in institutional pipeline of awarded unfunded mandates.
Joseph Martin Harvey: Let me briefly discuss a few items to consider for 2024.
Joseph Martin Harvey: As a result of the projected increase in revenue, resulting from year end assets under management being approximately 4% above 2020, Three's average assets under management combined with a disciplined approach towards managing both new and replacement hires all things being equal we expect that our compensation to read.
Joseph Martin Harvey: <unk> ratio in 2024 will decrease to 25% from the 40, 45% from the 46, 5% recorded in 2023.
Joseph Martin Harvey: We expect G&A to increase 5% to 7% from the $55 million recorded in 2023.
Joseph Martin Harvey: Part of the projected increase stems from the previously mentioned third quarter adjustment to reduce the estimated accrual for the costs associated with the implementation of our trade order management system.
Brian Heller: Excluding that adjustment, we would expect G&A to increase 3% to 5%.
Brian Heller: The majority of the increase is due to costs associated with the relocation of our London, and Tokyo offices, as well as higher technology costs and client related travel and entertainment expenses.
Brian Heller: As noted earlier the fourth quarter included one month of depreciation and amortization associated with the move into our new corporate headquarters this past December.
Brian Heller: For 2024, we expect depreciation and amortization expense to approximate $9 million.
Brian Heller: We expect that our effective tax rate will remain at 25, 4% and.
Brian Heller: And finally in late December.
Speaker Change: A large institutional client informed us that as part of a revision to the strategic asset allocation program. They will be exiting several asset classes listed Reits among them.
John Dunn: The clients $1 5 billion global real estate account was terminated on January 3rd.
John Dunn: Given its size the account had a lower than average base fee with a performance fee component.
John Dunn: Now I'd like to turn it over to our Chief investment Officer, John <unk>, who will discuss our investment performance.
John Dunn: Thank you, Matt and good morning.
John Dunn: Today I'd like first to cover our performance scorecard.
John Dunn: Summarize the fourth quarter market environment for our asset classes and last I'd like to provide our latest investment viewpoint on real estate, where are we in the correction phase that relationship between listed in private performance and what might surprise listed real estate investors in the future.
John Dunn: Turning to our performance scorecard for the fourth quarter, 35% of our AUM.
Matt: <unk> outperformed its benchmark a slight drop from last quarter's 39%.
Matt: When compared with 2023 as a whole however, 85% of our.
Brian Heller: Outperformed versus 74% in 2022.
Brian Heller: Which shows year over year improvement.
It is important to note that any short term quarterly fluctuations are just that short term and.
And we believe that longer term track records are the most important clients.
Core preferreds, notably has now outperformed for three straight quarters. After a pullback in the first quarter of last year.
Brian Heller: At our core nine strategies seven outperformed in 2023 with our core preferred strategy and international real estate being the exceptions.
Brian Heller: AUM outperformance over the past three and five years remains outstanding at 96% and 97% respectively.
Within our core strategies for the second quarter in a row relative performance was led by our low duration preferred strategy, which outperformed by 130 basis points, bringing 2023 full year outperformance to 190 basis points.
Brian Heller: This was followed by global listed infrastructure, which had outperformance of 110 basis points and 100 basis points over the same time periods.
Brian Heller: From a competitive perspective, 94% of our open end fund AUM is rated four or five star by Morningstar, which is up from 88% last quarter.
Brian Heller: Shifting to the current market environment. The fourth quarter represented a decided turning point for markets with global equities up 11, 4% and global bonds up eight 1%.
Brian Heller: Our expectation has been that very hot inflation would moderate and that we are nearing the end of the tightening cycle and the eventual pivot to an easing cycle.
Brian Heller: Given that our asset classes like listed real estate and preferreds were hurt by tightening we have been quite vocal that we expect strong recoveries as a pivot occurs.
Brian Heller: U S listed Reits, our largest asset class returned nearly 18% in the fourth quarter outperforming U S equities and significantly outperforming U S private real estate, which fell 5% as preliminarily measured by the decreased Odyssey appraisal based index.
Brian Heller: This Stark contrast, and performance is to be expected as listed real estate leads private in both downturns and recoveries due to its liquidity and real time pricing.
Brian Heller: We believe listed real estate prices have bottomed and the asset class has entered a new return cycle.
Brian Heller: Conversely, we believe the reported private real estate market will not bottom until the middle to end of 2024.
Brian Heller: I will speak more on this important topic later.
Brian Heller: Real assets moved higher during the period with interest rates and credit spreads continuing to play an outsized role.
John Dunn: Global real estate led the way for the reasons I mentioned earlier, the ECB joined the fed pausing rate hikes in October for the first time in 15 months commodities, which led real assets during the third quarter trail to end the year as the petroleum complex fell on the combination of higher OPEC.
John Dunn: Plus production strong non OPEC supply growth and softer global demand.
John Dunn: <unk> infrastructure surged by nearly 11% during the quarter with all Subsectors Ryzen tower companies posted the strongest gains buoyed by falling interest rates healthy earnings reports and shareholder activism.
John Dunn: Gains in midstream energy were more modest however, when concerns about weakness in global energy commodity prices.
John Dunn: Lastly, our core preferred security strategy returned seven 2% during the quarter, beating its benchmark by nearly 40 basis points.
John Dunn: Preferreds rallied as a combination of slowing inflation and economic optimism supported both rate and credit sensitive fixed income classes.
John Dunn: In addition, new issuance of preferreds picked up late in the year amid the improved environment.
John Dunn: Most of the activity was in Europe with contingent capital Securities issuance totaling about $10 billion in November alone, including the first new UBS contingent capital security since the banks merger with credit Suisse in March.
John Dunn: The new supply was easily absorbed by healthy demand for above average income in both the U S and Europe and demonstrated confidence in banks, the financial system and the so called Coco structure.
John Dunn: On an organizational level, we recently announced <unk> the head of our fixed income and preferred securities team will retire on August one after more than 20 years of leadership and dedicated service to Cohen <unk> steers.
John Dunn: Bill joined US in 2003 to launch our preferred securities business and he and the team have built a great long term investment track record that has made Cohen <unk> steers a market leader in preferred securities.
Bill Cohen: We want to thank bill for his investments and client success and as importantly, his legacy of building a great team that will take us forward into the future.
Bill Cohen: We also announced that we'll be promoting our lanes the Harrison oecus to head of fixed income and preferred securities on April one.
Bill Cohen: We believe there is no one better than the lane either at CNS or in the preferred securities industry to succeed Bill after more than 20 years of partnership and Mentorship.
Harrison oecus: After announcing our latest promotion last week.
John Dunn: The feedback from our client base has been extremely positive given the lanes experience tenure and reputation at Cohen <unk> steers.
John Dunn: Shifting gears today I wanted to provide our view on real estate.
John Dunn: First after a share price decline.
John Dunn: In U S rates of almost 40% since the end of 2021, we believe that listed real estate prices have bottomed and.
John Dunn: Inflation and interest rates have peaked.
John Dunn: Yes rental growth will likely be slower in 2024 and 2023.
John Dunn: But rents will reaccelerate once a slowing effects of tightening abate.
John Dunn: In our experienced asset markets put into low at moments of greatest uncertainty.
John Dunn: In our view the peak in interest rates has paved the way for sustainable bottom and listed real estate prices.
John Dunn: For example, our research has shown an average 12 month forward return of 18, 1% for U S rates. Following the end of a fed rate hiking cycle.
John Dunn: In contrast, thus far private real estate has fallen nearly 20% and we believe we will likely drop another five to 10 percentage points in 2024 and potentially into early 2025.
John Dunn: This magnitude of private CRE decline has only occurred twice in the past 40 years in the early 19 nineties after the savings and loan crisis and then the week of the 2008 2009 global financial crisis.
We believe this is a setup for strong vintage year of return potential for two types of buyer.
John Dunn: Private players with fresh capital.
John Dunn: <unk> legacy issues.
And the listed REIT market.
John Dunn: This disconnect between listed in private markets may seem counterintuitive.
John Dunn: To reiterate what we have published in our research and stated multiple times. This dynamic is the norm.
John Dunn: Listed markets typically bottom six to 12 months in advance of the private market.
John Dunn: This is critical because it means a compelling buying window should open for listed Reits, where both our cost of debt and equity capital should enable them to take advantage of acquisitions.
John Dunn: And the low interest rate world of the last decade.
John Dunn: Higher leverage buyer typically private equity was the marginal buyer.
John Dunn: In this higher cost of capital World. We believe listed companies will be able to take advantage of distress and repriced assets over the next 12 to 24 months, which can drive earnings and NAV growth.
John Dunn: The last point on the cycle that I believe is important to understand.
John Dunn: As the positive impact of higher interest rates on medium term real estate fundamentals.
John Dunn: Credit still remains tighter than it was and this has and will have the most acute impact on construction loans and smaller private developers the pullback will impact construction activity small business and local GDP, but over a full cycle. This means less.
John Dunn: Slide less overbuilding, and more discipline, which will be a positive for rental growth and asset values on a three to five year horizon.
We already see the benefits the benefits of this begin to play out in industrial apartments, and self storage in the second half of this year as we've now been in a title tighter capital environment for nearly two years.
John Dunn: We believed this REIT acquisition opportunity plus the benefits of much lower supply.
John Dunn: Alright potential underappreciated, but meaningful tailwind for the REIT market and investors.
Joe: With that let me turn the call over to Joe.
Joe: Thank you John and good morning today, I'll put a wrapper on 2023 review our business trends and then talk about priorities for 2024.
Joe: The fourth quarter was dynamic.
Geordie: Geordie a it steeped in the higher for longer interest rates psychology, which transitioned to anticipation of a peak in the interest rate cycle driving appreciation into year end. Our AUM ended 2023 at $83 1 billion compared with $75 2 billion in the prior quarter and 84.
Geordie: $4 billion to begin the year.
Geordie: Reflected in our year end AUM, both the listed real estate in listed infrastructure asset classes appreciated towards the end of the quarter.
Geordie: Performing the S&P 500.
Geordie: Preferreds performed in line with treasuries and high yield.
Geordie: Our relative investment performance remained strong and business activity continues to improve we feel good about the corporate infrastructure investments, we made last year and look forward to helping clients navigate the next phase of macro economic regime change in 2024.
Geordie: Looking at firm wide flows we had net outflows of $935 million in the fourth quarter, bringing total <unk>.
Geordie: 2023, net outflows to $2 billion and organic decay rate of two 5% for the year.
Geordie: For the quarter and year open end funds drove the outflows with 504 million out in the fourth quarter and $1 7 billion out for the year.
Geordie: Tax loss harvesting drove redemptions and several strategies.
Geordie: Preferred strategies were the largest driver of outflows totaling $340 million in the quarter and $1 9 billion for the year and were mostly from open end funds.
Geordie: The high interest rate environment throughout the year and the many banking crisis in the first half of the year help explain the preferred outflows, which have persisted for eight quarters.
Geordie: Another driver of Q4 outflows was global and international real estate with 384 million out.
Geordie: Recapping the client segment flows in Q4 and.
Geordie: In addition to open end fund net outflows of 504 million Advisory had 30 million out sub advisory ex Japan had $220 million out and.
Geordie: Sub advised in Japan sub advisory had $169 million out by.
Geordie: By strategy, the outflows were 41% attributable to global real estate, 36% attributable to preferreds and 19% attributable to U S real estate.
Geordie: Delving a bit deeper into the sources of these flows U S. Open end funds had 450 million out with our real estate Securities Fund CSI accounting for $213 million and our low duration preferred fund LPX accounting for $106 million.
John Dunn: While LPX is 2023 performance was strong it's flows continued to be challenged by the comparable yield of risk free treasury bills in the low 5% zone.
John Dunn: We also saw outflows from model based portfolios and defined contribution or Dci Oh.
John Dunn: Non U S funds had modest inflows of $26 million.
Advisory had two new accounts fund totaling $183 million offset by seven terminated accounts totaling $190 million.
John Dunn: All of the terminated accounts were due to strategic asset allocation eliminations by clients.
John Dunn: And sub advisory we had one large outflow of $273 million from our global real estate client in our multi strategy account.
John Dunn: We're a majority of the allocation will be maintained but a portion will be replaced by a tactical portfolio overlay.
John Dunn: Japan sub advisory broke its positive trend over the past couple of quarters with $169 million in outflows due to profit taking and the delayed implementation of Japans New retirement program called the new Nippon individual savings account or Nissan and.
Order to participate in the program our partner dialog has been adding baby fund vehicles attached to their existing funds we sub advise.
Our one unfunded pipeline increased to $1 2 billion at year end compared with $784 million at the end of the third quarter.
John Dunn: Tracking the changes from last quarter $283 million funded into three accounts.
$770 million was added to the pipeline from seven mandates.
John Dunn: And $60 million was removed from two mandates both in the EMEA region that had been on pause long enough for us to assume they will not fund.
John Dunn: The seven new mandates are dispersed across five strategies with the majority in global and international real estate.
Consistent with the trend in the back half of 2023 overall prospect activity continues to improve as expectations for a shift in fed policy provide more confidence in asset allocation decisions.
John Dunn: We continue to see adoption of listed real estate strategies listed infrastructure and multi strategy real asset portfolios.
John Dunn: At the same time certain clients are above their target allocations when looking at listed in private weightings combined and sometimes we will trim listed to get back to target.
John Dunn: Now I'd like to share some of the things we are focused on in 2024.
John Dunn: First and always our investment performance is number one in the list.
John Dunn: Our performance relative to our benchmarks remains strong and will enable us to compete well for mandates.
Brian Heller: Our percent of AUM outperforming it at 96% for three years and 97% for five years supports my optimism.
Brian Heller: We can always be better though.
Brian Heller: Our average excess returns over three years has softened to 173 basis points, but our alpha for five years continues to be quite strong at 266 basis points.
With John Shay, turning the leadership of listed real estate adjacent the Avalon John will be able to spend more time, focusing on strategies, where we need to bolster our excess returns.
John Dunn: And global portfolios, which includes real estate infrastructure and preferred strategies will continue to expand our investment universes. This is especially important as the global geopolitical order shifts.
John Dunn: And as companies seek equity from the public markets.
John Dunn: We look forward to Elaine's Harriss sneakers leadership of the preferred team and the teams continuation of our long term performance.
Elaine Harriss: We believe that positive new return cycles have commenced for both listed real estate and preferreds.
Elaine Harriss: As such we see alpha opportunities, particularly in REIT as rates begin to attract additional capital to acquire properties from sellers contending with tighter credit and refinancing conditions.
Elaine Harriss: And as potentially stiffer regulatory capital requirements could push banks to issue more preferreds.
Elaine Harriss: Another priority is to help our clients navigate the next phase of regime change with research and education.
Elaine Harriss: There was approximately seven six trillion sitting in money funds globally of which six trillion is in the U S.
Once the fed commences easing more of that money will be looking for a new home.
Elaine Harriss: We continue to optimize our distribution resources and prioritize relationships with investors, who are most inclined to allocate to our asset classes through active management.
In the wealth channel, we will continue to shift resources to the independent registered investment adviser and family office markets, which have the highest growth rate in AUM and are more predisposed to using active management.
Elaine Harriss: With private real estate, we have a broader lineup of real estate strategies, with which combined with our asset allocation and advisory capabilities. We believe will be interest of interest to the RIAA and family office markets.
Elaine Harriss: In Japan, we are cautiously optimistic on the government's desire to upgrade the asset management industry to provide better strategies vehicles and governance in order to increase the investment of cash sitting on the sidelines, especially in retirement accounts.
Elaine Harriss: Asia ex Japan is a priority, reflecting the emerging demand, we see for our asset classes and as reported last quarter.
Elaine Harriss: We have opened our Singapore office with institutional and wholesale sales professionals to capitalize on this opportunity.
Elaine Harriss: Our real estate franchise continues to get stronger on the listed side, we continue to expand our capabilities and universe of investments, including private companies.
Elaine Harriss: The MBS and use of derivatives, depending on our strategy.
Elaine Harriss: And private real estate, we recently announced our first investment for Cohen <unk> steers income opportunities.
Elaine Harriss: Also known as CNS REIT.
Elaine Harriss: The property is a Dallas shopping center named the marketplace at Highland village.
John Dunn: Highland village was identified through our program programmatic joint venture with the Sterling organization.
John Dunn: And was acquired based upon an investment thesis that a lack of new construction is driving strong fundamentals for certain shopping centers, which we believe are mispriced.
Elaine Harriss: Partnering with best in class operators like Sterling, a national shopping center operator.
Elaine Harriss: Or in other cases, a regional or local specialist is a key element of CNS rights portfolio construction strategy that we have seen worked well with listed Reits over the long term.
Elaine Harriss: We hope to announce more strategic partnerships for CNS REIT in the future.
Elaine Harriss: Another differentiating feature of CNS REIT is our focus on smaller to middle market properties.
Now the CNS REIT is operational we are transitioning from seed capital raising to engaging the RIAA market and the gatekeepers at regional broker dealers and wire houses.
Elaine Harriss: On prior calls we've said that we are waiting to deploy our seed capital for CNS REIT until private market prices correct to reflect the changes in the debt markets.
Elaine Harriss: Last quarter, we said we were about halfway through the process.
Elaine Harriss: With inflation declining bond yields likely having peaked and with a bottoming signal from the REIT market. We believe this is an opportune time to initiate the investment phase for CNS read.
Elaine Harriss: It remains to be seen how long the repricing and debt refinancing process will take base.
Elaine Harriss: Based on the magnitude of dollars and properties involved it likely won't be on a short timeline.
Elaine Harriss: And a longer process may extend the window for our private strategies as well as the listed Reits in our portfolios to make investments priced in the new regime.
Elaine Harriss: We also recently announced an asset allocation advisory capability for real assets.
Elaine Harriss: Around an interactive allocation tool, we call the real estate compass and supported by research and insights from our strategist, Jeff Palmer and multi strategy investing and rich Hill and private real estate.
Elaine Harriss: We believe these capabilities will support wealth firms as they seek to increase allocations to alternatives, including real estate in client portfolios.
Elaine Harriss: Finally, we continue to work on strategies in research and development, which starts with a compelling investment idea, but overlays the governance of commercialization within a reasonable timeframe.
Jeffrey Drezner: We decided to liquidate a multi strategy income fund with $35 million in AUM after concluding that the target market would rather allocate directly to each of the underlying strategies.
Jeffrey Drezner: We continue to develop other strategies and explore what markets and vehicles would be attractive to investors.
Jeffrey Drezner: Favorites include the future of energy.
Jeffrey Drezner: Global Preferreds.
Jeffrey Drezner: And opportunistic infrastructure strategy natural resource equities and next generation real estate among others. We believe innovation is a critical element to maintaining and enhancing our listed real.
Jeffrey Drezner: Our real asset market position and brand.
Jeffrey Drezner: Some of these initiatives will require incremental head count on the whole incremental head count will be modest.
Jeffrey Drezner: And any more would be driven by an improving organic growth environment.
I will close by congratulating dose kapell, the head of our preferred team on his retirement later this year Bill is a great investor and we've delivered strong results for clients over the years.
Dose Kapell: We have high confidence in our lane and the team and carrying his legacy forward.
Dose Kapell: Thank you for listening.
Dose Kapell: <unk> could you please open the lines for questions.
Dose Kapell: As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Dose Kapell: Our first question will come from John Dunn from Evercore ISI. Please go ahead. Your line is open.
John Dunn: Thank you could.
John Dunn: Could you just maybe talk a little more about your kind of instincts on gross sales and redemptions.
John Dunn: <unk> 24 for U S Reits and preferreds in the wealth channel, given where we are with great expectations.
John Dunn: What have you seen in past cycles, how people react.
John Dunn: Well, we have both John and I have articulated with the.
John Dunn: Nir pivot in the fed policy is an important.
John Dunn: Catalyst for changing sentiments.
John Dunn: Around.
John: The recent preferreds, we've seen that in prior cycles.
John: And as we noted we expect.
John: New return cycles to continue for both of those asset classes.
John: Towards the end of the year last year, we saw some in the wealth channel some.
John: <unk> lost selling which.
John: As to be expected.
John: We've seen a couple of those investors already already come back and I would say, we're not going to talk about our.
John: Flows so far this year until we report our first month.
John: Early in February the tone has changed and.
John: <unk> is positive.
John: Got you.
Speaker Change: Maybe on Japan.
Speaker Change: It was kind of a.
Speaker Change: Delayed response diode July distribution cut then we had a big pop in recent.
Speaker Change: For Q, presumably generating some gains do you think this time around if the typical cycle is six to nine months of outflows do you think this time around could be shorter than that.
Speaker Change: I think it's really really difficult to predict flows anywhere, but particularly in Japan.
Speaker Change: Relative to your comment around the distribution cut last year.
Speaker Change: We had a very very slow.
Short period of redemptions and then the.
Speaker Change: Inflows.
Speaker Change: Zoomed in.
Speaker Change: What happened going into to the end of the year as I mentioned was more around.
Speaker Change: Tax planning and positioning.
Speaker Change: Positioning around the Nissan program so.
Speaker Change: Again, it's really hard to predict.
Speaker Change: Flows in Japan.
Speaker Change: As I've said on the past couple of quarters, we really like the activity.
Speaker Change: From our partner dialogue in terms of doing marketing campaigns and education, and we're fully supporting them on that front.
Speaker Change: And longer term.
Speaker Change: This program around rejuvenating the asset management industry to try to get more capital that is sitting in cash invested and its a lot of money in Japan is a big market that's something that.
Speaker Change: I am very cautiously optimistic about.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Adam Beatty from UBS. Please go ahead. Your line is open.
Speaker Change: Alright, Thank you and good morning.
John Dunn: John's comments on the dynamics in the real estate market and the outlook wondering as a follow up if maybe you could try and parse out a little bit.
John Dunn: The trajectory and maybe historical experience around fundamentals versus valuation, we've obviously seen some recovery in valuations. So far but you mentioned that there might be some lag effects in fundamentals in terms of rent growth or what have you. So just wondering you know at this point, how you see those playing out and kind of.
John: The timing that you would expect and also assuming we've got peak rates at this point, which seems pretty reasonable how important.
John Dunn: Our rate cuts versus a plateau from here. Thank you.
John Dunn: Okay.
This is John that's a good question. So first what drives real estate values of course, it's a combination of <unk>.
John: Cost of capital supply and demand.
John: Because for supply and demand to your point they drive the fundamental side of the equation.
John: We had a big peak to trough decline in rates of 40% and to your point I think that was primarily.
John: About a shock if you will.
John: Our cost of capital expectations.
John: And so what we've seen in terms of the fed pivoting from either concerns about over tightening or just.
John: Staying much higher for much longer.
John: To more of a normalization.
John: That really in the short run that as a solution for.
John: The cost of capital side.
John: We just had the GDP print. This morning, we see that GDP as reported was something like three 3% and but that being said, we're definitely seeing slowing in fundamentals some of thats on the demand side and some of thats been on the supply side.
John: The former high fliers, where places like industrial and apartments, where rents were growing a lot 12 to 24 months ago and now they are just starting to normalize so.
John: So I think in terms of the equation.
John: In terms of the Fed's actions, it's a big huge relief on cost of capital and eventually availability of capital, which will be a big driver.
John: And there'll be a slowing of fundamentalists from what I would call.
John: 18 months ago, the best fundamentals in my career.
John: To be more like average fundamentals over the next 12 months, and then probably improving fundamentals to better than average fundamentals 24, 36 months or so.
John: But look this is where the public market of course, we are discounting mechanism. We are that quote unquote voting machine.
John: And so.
John: I think the market is going to get.
John: Got ahead.
John: Of both of those ideas that.
John: Interest rates are lower discount rates are lower.
John: And eventually a reacceleration fundamentals will be it will be around the corner.
John: Yes, Okay very helpful. I appreciate the distinction between sort of decelerating normalizing versus versus really slowing below below long term trend or what have you. So so thats excellent.
John: And then just on geography, like many who follow CNS are more familiar with U S markets, but just wondering how you would compare the situation in U S with Europe right now.
John: Well so.
John: Okay.
John: Generally globally. There is about one interest rate cycle going on I mean, Japan is a little bit different China's a little bit different but I would say besides that for the most part.
John: Developed developed developed central banks, they were tightening and now they are pausing and somewhere along the way there'll probably be cutting so I think.
John: Whether it's Europe or Australia.
John: A bit of a global rate cycle, I would say from the fundamental side.
John: Fundamentals in other parts of the globe, we're never as hot and as strong as the U S. So again U S fundamentals were the strongest <unk> seen in 20, some odd years and now they are decelerating.
John: Europe.
John: In Asia, we're never quite that strong.
John: So I think they are still getting the relief.
John: From lower interest rates.
But they never had that upside beta on fundamentals and frankly, they are not they're not having the same kind of deceleration.
John: <unk>.
Jeffrey Drezner: Again every market is going to be a bit different but I think the dynamics in Europe are similar as the U S, but maybe even more so.
Jeffrey Drezner: European markets.
Jeffrey Drezner: Ralph <unk>.
Ralph <unk>: <unk> because they are up more than U S rates in the fourth quarter.
Ralph <unk>: <unk> of this idea of a.
Ralph <unk>: Peak in the rate hiking cycle.
Ralph <unk>: So we're very optimistic on both international markets.
As well as U S markets.
Ralph <unk>: That makes sense I appreciate it and then if I could just maybe one more for maybe for Joe, but thinking about CNS, REIT and going into kind of a wealth channel, whether it's <unk> or wire houses or whatever.
Ralph <unk>: It's likely a compelling product, obviously youre a long term track record is very good but it's also a crowded market right in wealth. So just wondering how you're pitching the differentiation of the product maybe to some of those gatekeepers things.
Ralph <unk>: It's a great question.
Ralph <unk>: Okay.
It is getting more crowded.
Ralph <unk>: But the aspirations as I'm sure you know of the wealth firms or to drive allocations to alternatives and private strategies to much higher levels. There in the 3% range today. Some of the targets are in the 20% to 25% range I think those are very optimistic but that's the way.
Ralph <unk>: <unk>.
Ralph <unk>: Talk about it.
Ralph <unk>: In terms of differentiating it.
Ralph <unk>: Fall, along kind of our history of of educating and delivering investment performance.
Ralph <unk>: I talked about how we've been waiting to start to deploy capital. We've had seed capital arranged for some time, but we've been sitting on it because we are waiting for the cycle to come to US and we think is critical for us, particularly as a first timer in the private market too.
To nail it invest investment wise, so we're solely focused on that and that.
Ralph <unk>: That.
Ralph <unk>: One of the requirements to.
Ralph <unk>: On the the wire house platforms as you need to be able to show a portfolio. So.
Ralph <unk>: Until this week, we haven't been able to do that but now.
Ralph <unk>: It's one acquisition and hopefully we'll begin to supplement that with other properties.
Ralph <unk>: We'll be able to show the gatekeepers.
Ralph <unk>: Our strategy is unique and different.
Ralph <unk>: So.
Ralph <unk>: To that.
Ralph <unk>: We've tried to identify some some property types that we believe are mispriced and are different than what other non traded Reits have.
Ralph <unk>: We also are going to use the listed markets in a different way.
Ralph <unk>: Make it a more about an alpha source rather than a liquidity source.
Ralph <unk>: And then we're going to package it with this asset allocation advice.
Ralph <unk>: Through our portfolio optimization tool and our real estate strategy. So.
When when you when you line that up with what the wealth firms are trying to do we think it's really important to.
Ralph <unk>: To be able to help their advisors.
Ralph <unk>: Build better portfolios and our view of that.
Ralph <unk>: <unk> using both listed and private.
Ralph <unk>: Capabilities.
Ralph <unk>: Not all of the private.
Ralph <unk>: Private equity firms that are trying to build wealth businesses are going to do that they're going to talk about private alone.
Ralph <unk>: So.
Ralph <unk>: We're.
Ralph <unk>: Kind of go to the playbook, that's worked well for us over over 35 years.
Ralph <unk>: Got it sounds good that's all for me. Thank you very much.
Ralph <unk>: As a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Ralph <unk>: Our next question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open.
Ralph <unk>: Hi, Thanks again.
John Dunn: Just given where it seem to be in a more constructive market is it is it is there any chance that over maybe the next couple of years there could be some loosening of the closed end fund window.
John Dunn: If you follow the <unk>.
John Dunn: Interest rate cycle through to.
John Dunn: Historical conclusions there should be our view has been that rates will be higher than what we experienced for the past 10 years, so that will make things a little more difficult in the closed end fund market, because you need to be able to generate.
John Dunn: A positive spread on your cost of debt capital.
John Dunn: But.
Not something that we think is going to happen anytime soon.
John Dunn: Before that window closed.
John Dunn: No.
John Dunn: The past couple of years, we had some ideas in the in the R&D front, but it's not something that we're planning for for the next couple of years.
Okay, Great and then maybe just one more from me.
For the institutional advisory channel can you maybe do a quick.
John Dunn: Wraparound of.
John Dunn: Have demand levels are for by.
John Dunn: By client type and by geography.
John Dunn: Well, maybe I'll start with our one unfunded pipeline, which is really interesting I didn't mention this but.
John Dunn: We have $1 2 billion in that pipeline.
John Dunn: <unk> articulated what strategies.
John Dunn: Are represented.
John Dunn: We have eight countries of domicile representing.
John Dunn: That pipeline includes Australia, Germany, Taiwan, Philippines Korea.
Country in the Middle East and Canada, I think Thats, the most international pipeline that we've ever had and it goes back to.
John Dunn: The comments to make on.
John Dunn: On calls for the past year of how we see.
John Dunn: Interest in listed real assets.
John Dunn: Spanning.
John Dunn: Around the world several years ago that had happened in the Middle East now we're seeing it in Asia.
John Dunn: And so.
John Dunn: These processes can take a long time, but.
John Dunn: That's why we continue to add some resources on the institutional.
John Dunn: Relationship management front and.
John Dunn: Our other offices.
John Dunn: Thanks very much.
John Dunn: We have no further questions in queue I would like to turn the call back over to Joe Harvey for closing remarks.
John Dunn: Great Julianne and thank you for moderating and everyone. Thanks for listening and we look forward to talking to you in April on our progress in the first quarter.
Joseph Martin Harvey: This concludes today's conference call. Thank you for your participation you may now disconnect.
Joseph Martin Harvey: Yes.
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Joseph Martin Harvey: Yes.