Cohen & Steers Inc

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen and Steers fourth quarter and full year 2024 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 the star followed by the 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 23rd, 2025. I would now like to turn the conference over to Brian Heller, Senior Vice President and Deputy General Counsel of Cohen & Steers. Please go ahead.

Thank you, and welcome to the Cohen & Steers Fourth Quarter and Full Year 2024 Earnings Conference Call. Joining me are Joe Harvey, our Chief Executive Officer, Raja Dhikori, our Chief Financial Officer, and Jeff Palma, our head of multi-asset solutions. 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 fourth quarter and full-year 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 or other investment vehicle. Our presentation also contains non-GAAP financial measures, referred to as adjusted financial measures, that we believe are meaningful in evaluating our performance. These non-GAAP financial measures should be read in conjunction with our GAAP results. A reconciliation of these non-GAAP financial measures is included in the earnings release and presentation to the extent reasonably available. The earnings release and presentation, as well as links to our SEC filings, are available in the investor relations section of our website at www.cohenandsears.com. With that, I'll turn the call over to Rasha.

Thank you, Brian, and good morning, everyone. My remarks today will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found in the earnings release and presentation. Yesterday, we reported earnings of 78 cents per share compared to 77 cents sequentially. Earnings for full year 2024 were $2.93 per share compared to $2.84 in 2023. Revenue for Q4 increased 4.9% sequentially to $139.9 million. Revenue for full year 2024 increased 5.9% to $518 million. The increase in revenue from the prior quarter was driven by two items. The primary driver was higher average AUM during the quarter. The secondary driver was the recognition of $1.4 million in performance fees. These performance fees recognized in Q4 related to the full year results of certain institutional accounts. Our effective fee rate during the quarter, excluding performance fees, was 58 basis points, which was consistent with the prior quarter. Operating income was $49.7 million during the quarter, compared to $47.6 million sequentially. Our operating margin was 35.5%, which was generally in line with the prior quarter. As noted, we did experience higher average AUM during Q4 as compared to the prior quarter. We generated net inflows during Q4 primarily related to our open-end funds. This is the second quarter of net inflows after strong flow results in Q3. However, our AUM was impacted by market depreciation during the quarter. As a result, AUM was $85.8 billion as of year-end compared to $91.8 billion at the end of Q3. Joe Harvey will provide additional insights regarding our flows and our pipeline. Total expenses were higher compared to the prior quarter, primarily due to an increase in compensation and benefits. To a lesser extent, expenses were impacted by increases in both distribution and service fees, as well as G&A. During the quarter, the increase in compensation and benefits was generally in line with the sequential increase in revenue. The compensation ratio for the full year was just below 40.5%, which was within our expectations. The increase in distribution and service fees during the quarter was due to higher average AUM related to our open-end funds. In addition, we did experience higher G&A expenses during the quarter, primarily related to travel and other business development activities. The full year G&A was within our expectations, increasing by 6.7% versus 2023. Regarding taxes, our effective rate was 25.3% for the quarter. Our earnings material presents at the end of Q4 and prior quarters our liquidity. Our liquidity totaled $361 million at quarter end, which represents a slight increase versus the prior period. As a reminder, our liquidity normally decreases during Q1 of each year, due to our compensation cycle with bonuses paid in the quarter. Let me now touch on a few items for 2025. We continue to dedicate resources to new strategies, vehicles, and initiatives. In Q1 of 2025, we will be launching three new ETFs. These will be the first ETFs for Cohen and Steers. While we believe these ETFs will serve a variety of customers, We are particularly focused on opportunities within our wealth channel. With respect to the compensation and benefits, we would expect our compensation ratio to remain at 40.5%. Drivers of compensation are disciplined investment in our sales and distribution channels and resources applied towards new vehicles such as our ETF. We expect our G&A to increase in the range of 6% to 7% for the year as compared to 2024. We continue to invest in our infrastructure, including our international offices. In addition, we expect increases in business development activities as we meet the needs of clients across the range of markets in which we operate. Further driving G&A are technology and marketing spend related to the upcoming ETF launch. Lastly, regarding 2025 guidance, we expect our effective tax rate to remain consistent at 25.3%. I'll now turn it over to Joe Harvey, who will lead discussions of our investment activities and business performance.

Thank you, Rajat, and good morning. As noted, we've adjusted the speaker lineup for today's call. John Che, our president and CIO, who usually joins these calls, is traveling. Jeff Palma, Head of our multi-asset solutions group will discuss the outlook for our asset classes. Following Jeff's remarks, I'll cover our investment performance and the market environment, key business metrics, and our 2025 outlook. But first, let's turn it over to Jeff.

Thank you, Joe. I would like to take a few minutes to discuss a topic that research shows is a dominant driver of aggregate portfolio returns, asset allocation. particularly during the current market and macro landscape. On this topic, we wrote a paper recently called FOMO, Reversals of Fortune and the Opportunity in Real Assets, which has generated positive feedback from our clients and is available on our website. I think it's resonating because market dynamics have truly been fascinating of late, but investors also need the occasional reminder that we've seen this movie before. To begin, consider the last decade. Through 2024, global equities delivered annual total returns of more than 10%. U.S. equities returned nearly 13.5% annually in those same 10 years. Private assets were likewise impressive, with double-digit returns in most categories amid extremely low reported volatility. Listed real assets were substantially lower by comparison over the last decade. Total returns on global real estate and commodities were less than 2% annualized, while global infrastructure and natural resource equities returned just under 5%. With a decade of near-zero interest rates, fixed income was challenged too, driven by the low starting point of interest rates following the global financial crisis and the sharp rise in rates since 2022. Now consider the 10 years that ended in 2010. It's a stark contrast. During that decade, equity markets were the worst performing asset class with barely positive total returns. U.S. Treasury returns were strong and well above equities. Private markets were also substantially weaker and registered higher volatility. Conversely, listed real assets were standout performers. In short, assets that performed well between 2000 and 2010 fared worse in the last decade and vice versa. It's easy to become enamored with what has worked best recently, and it's challenging to resist FOMO, or the fear of missing out, which is why many investors tend to stick with what's worked in the past, expecting it to work in the future. But it's common to see reversals of fortune. It should come as no surprise that returns are often unstable and mean reverting, with starting valuations being key to future performance. And that leads me to today's markets. Recent market leaders now face headwinds, and recent market laggards, notably for our firm, including real assets, have tailwinds. The S&P 500 returned over 25% in each of the last two years. For the fear of missing out, investors may be over-allocated to large-cap equities. But equity markets increasingly depend on the fate of a handful of stocks. Valuations are unappealing, and stock bond correlations are near 50-year highs. Consider the Shiller PE, a measure of valuations, is near an all-time high. History suggests that 10-year forward returns tend to be challenged when the starting point for valuations is this elevated. There are also reasons to believe private markets, the other leader over the past decade, will struggle to repeat recent trends. For one, we believe interest rates of around 4.5% represent fair value in U.S. Treasuries. Consequently, the opportunity for private equity investors to lever investments at ultra-low interest rates is gone. Higher rates also suggest that private valuations should fall, as has already happened in private real estate. Tight credit spreads and potentially difficult exits from investments may also create headwinds. In contrast, all core real assets categories are either neutrally or attractively valued. and we believe positioned for meaningfully better returns compared to the last decade and other asset classes. I'd like to make one final point. Diversification is a key aspect to portfolio construction. Beyond our favorable return outlook for real assets and in addition to their history of strong full cycle returns, real assets offer valuable diversification potential and inflation sensitivity which make them increasingly attractive in portfolios. Most people we've met with recently understand the issues at play. The challenge is that timing these moves is difficult. That's why FOMO plays such a strong role as it influences timing. We believe that demand for asset classes that are currently out of favor will be strong when the tide turns. We understand the pressures of FOMO, particularly when so many investors haven't experienced anything but a market environment in which rates were low, inflation was contained, and stock returns were so consistently strong. But we know from our experience that allocating by looking in the rearview mirror may be a recipe for poor future returns.

Thank you, Jeff. After a third quarter that looked like a turning point with the beginning of monetary easing and a positive inflection in our flows, the fourth quarter was decidedly mixed. Continued economic strength Persistent inflation and a recalibration in the macro for the Trump presidency caused the bond market to sell off and lifted the 10-year treasury yield 80 basis points to 4.6%. It's a reminder that regime change mostly happens over a period of time. Market depreciation in most of our asset classes and a lower batting average of outperformance tempered a second consecutive quarter of positive flows and a notable increase in business activity. Turning to our performance scorecard, 49% of our AUM outperformed its benchmark in the quarter. While our outperformance metrics softened, we focus on longer-term results, which remain strong. For one year, 95% of our AUM has outperformed its benchmark, while our three, five, and 10-year outperformance stands at 96, 97, and 99% respectively. Our one, three and five year excess returns are 288 basis points, 162 and 224 basis points respectively. 94% of our open end fund AUM is rated four or five star by Morningstar. In short, we are delivering alpha consistently for our clients. Transitioning to market conditions, the fourth quarter was modestly positive for stocks, with growth in tech generally outperforming value. Listed real assets pulled back following a strong absolute performance in the third quarter. For example, U.S. REITs declined 8.2% in the fourth quarter, while global listed infrastructure fell 5.7%. By comparison, U.S. equities rose 2.4%, and the MSCI world was flat. While the Federal Reserve cut interest rates in the quarter with two 25 basis point rate reductions, it projected more modest cuts in 2025. The resulting upward effect on real interest rates pressured REIT share prices, even as fundamentals remained mostly positive. Private real estate, meanwhile, had a total return of 1% as measured by the NACREF Odyssey Index preliminary results. This marked the second consecutive quarter of positive total returns. This underscores our view that private commercial real estate valuations have likely troughed, although we expect an uneven recovery across property types. Within listed infrastructure, the rise in bond yields weighs on certain rate-sensitive sectors, notably cell tower companies. Midstream energy companies, on the other hand, had a large gain continuing to benefit from an improving growth profile. Importantly, as Jeff discussed, our core real asset classes are either neutrally or attractively valued. And while markets have been enamored of stocks over the past two years, we believe macro conditions plus valuations should favor our asset classes. We see improvements in tax and regulatory conditions and underlying business confidence that should be positive for future earnings power and provide potential ballast to elevated bond yields. Turning to our key metrics and flows, we had firm-wide net inflows of 860 million in the fourth quarter, down from 1.3 billion in the third quarter. 1.2 billion in net inflows in our open-end funds drove the flows partially offset by 101 million of advisory outflows and 205 million in sub-advisory outflows. Over the full year, net inflows in the third and fourth quarters offset some large institutional redemptions in the beginning of the year with firm-wide net outflows improving to 171 million out overall for 2024. Open-end funds had positive flows in every subsegment, including U.S., offshore, model portfolios, SMA, and our non-traded REIT. The majority of flows were in U.S. REIT funds and in large part came from independent registered investment advisors. We also had positive but lesser flows in our global listed infrastructure, our multi-strategy real assets, and our future of energy funds. We had outflows from our global real estate and limited duration preferred funds. Advisory had net outflows of 101 million with 305 million of account terminations driven by clients funding private allocations or de-risking into fixed income, as well as 204 million of net inflows from existing clients. Sub-advisory ex-Japan had outflows of 172 million and Japan sub-advisory had 33 million of outflows. Our one unfunded pipeline was 530 million compared with 651 million last quarter and the average of 1 billion per quarter over the past three years. About 50% of the pipeline is in various real estate strategies. 42% is in global listed infrastructure, and 8% is in multi-strategy real assets. As we mentioned last quarter, we have indicated redemptions now around $800 million, which are expected to occur in the first half of the year, driven by reallocations to private investments, one restructuring of the investment lineup in a variable annuity vehicle, and client rebalancing. Our search activity has increased, driven by asset allocation normalization. Fixed income allocations are shoring up, private allocations are loosening somewhat, and there is more conviction around inflation and real asset allocations. Our continued strong performance and client engagement also contribute to this trend. We continue to see takeaway opportunities from underperforming managers, some conversion of passive to active mandates, and continued adoption of our asset classes around the world. We believe we are well positioned for growth in 2025 with the macro environment beginning to be more favorable for our core strategies. In addition, investment initiatives that we have been working on the past several years are coming to fruition. These include our launch of active ETFs, building the private real estate strategy and our non-traded REITs, growing our listed infrastructure business, and capitalizing on investor interest and utilizing both listed and private strategies side by side. Major trends in asset management, such as growth in the RIA segment, increased allocations to alternatives, and greater use of active ETFs will help guide our strategy. I also strongly believe that investors should focus more on the opportunity cost of illiquidity or the drag of shifting portfolios at opportune times, particularly in asset classes where private allocations haven't generated a return premium. This applies specifically to core private real estate And I believe this will also play out over the long term in infrastructure. Listed real estate is our most active area, particularly as we go through the bottoming of the real estate price cycle. And as investors increasingly recognize the consistent outperformance of listed over core private real estate. Listed infrastructure activity has picked up the most on a relative basis. We believe listed infrastructure complements private in terms of sector exposures, return cycle phasing, and access to some of the most powerful themes today, such as AI, power generation, and data centers. Finally, with respect to multi-strategy real assets, we're seeing increased activity from healthcare plans and smaller allocators, reinforced by market expectations that Trump policies will bolster investor interest in the inflation mitigation benefits of real assets. Preferred securities search activity has been slower than I would have expected, especially as our team delivered 11.3% for our core strategy in 2024 with 220 basis points of alpha. Competition from private credit and the normalization of the yield curve explains some of the slower pace, but I'd expect confidence and prefers to continue to strengthen as time passes from the bank sector volatility of early 2023. We expect to launch three active ETFs in the first quarter of this year, an active U.S. REIT strategy, a preferred stock strategy that is broader using more global securities, and our natural resources equity strategy. We have an excellent track record with resource equities as a core component of our multi-strategy real asset portfolio, yet the ETF will be our first standalone vehicle. We intend to seed these ETFs with firm capital, and our initial distribution focus will be with RIAs and the model builders at those firms. we have a significant market share of actively managed open-end funds in U.S. and in preferreds. We believe, given our track record in those asset classes, we can take our share of the growing ETF pie, where passive strategies alone in REITs, for example, total $119 billion. We've also put renewed focus into distribution for our offshore CCAVs, which now total $1 billion across five vehicles. Our offshore CCAVs have had a positive flows in 18 of the past 20 quarters. We expect to launch a short duration preferred CCAV next month. On the private real estate front, we are very focused on raising AUM and our non-traded REIT, Cohen & Steers Income Opportunities REIT, and deploying capital in private real estate markets that we believe have bottomed. So far, this has included a portfolio of five open-air shopping centers. CNS REIT's total return in 2024 since its inception last January was 11.6% for Class I shares. That return put us in the number two spot for performance among our peers for 2024, positioning the non-traded REIT and its property portfolio as an important component of the expansion in our real estate franchise to span listed and private strategies, along with investment strategy and asset allocation advice. I'll close by noting that we have a goal this year of enhancing focus on generating distribution alpha. At the margin, we'll be adding professionals for the wealth channel and the RIA segment, as well as other sales and distribution resources globally. At this point, I'll turn this call back to the operator, Julianne, to facilitate a Q&A.

Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open.

Hi. Thank you. Maybe could you just give us a little more color on the temperature of the sales conversation you guys are having in the Wealth Manager Channel for REITs and preferreds, just given the rate cross-currents we could see in 2025, and then also your expectations for the appetite for redemptions?

Well, in the Wealth Channel, as our statistics support, we've had very strong interest in U.S. REITs. mostly, and preferreds have been less strong. And I outlined some of the reasons why in my comments on the U.S. REIT front. First, our performance has been very strong, both absolute as REITs have bottomed and led the recovery in real estate generally, and our excess returns are alpha. In preferreds, I just think there's a lot more competition for fixed income now that the yield curve has normalized, particularly with private credit now becoming more widely available in the wealth channel. Most of our flows have come over the past two quarters from the RIA channel, which is a place where AUM is growing the fastest. And we can talk about some of those reasons. But as I mentioned, we're focusing more of our resources on those types of investors because their models, which tend to be more like a university endowment model, tend to align better with how we do things in our active management. So I guess big picture, as you've seen, For the past several years, our flows have tended to be more correlated to interest rates than they've been in the long term. I think a large part of that relates to the very long period of monetary policy post-GFC, where rates have been pegged to zero, and then the normalization of rates. But now that things have stabilized, so to speak, or normalized, I think my belief, my view is that flows should be a little less sensitive to changes in rates as time marches on.

Got it. And then, you know, we've seen that active VTS can really take off. So it's great you guys are getting into that, but it is new to you guys. So maybe could you just talk a little bit more about the plan for rolling it out? You mentioned to RIAs, but Is it different from selling or marketing than the vehicles you have now? Any early indicators on interest and any concern on the potential cannibalization?

Well, we're leading with our core asset classes, and the way that we have gained market share in the wealth channel And it's significant, as I mentioned earlier, but just to put some statistics on that, in preferred securities, in the open-end fund, you know, vehicles, our market share is 38%. In U.S. REITs, it's in the mid 40%. So the reason why we've been able to garner that is, A, our performance, but, B, educational efforts and explain to advisors why those asset classes make sense in a diversified portfolio and how they should allocate over an economic cycle. So we will bring that knowledge and that education to the targeted investors for ETFs. We will initially start with the RIA market. We need to gain some critical mass before we can get onboarded at the wire houses. So it's going to be an aggressive campaign of introducing our vehicles, but also educating those advisors on our asset classes and how the nuances and the strategies that we're we're bringing to market will add value in their portfolios. Thank you.

Our next question comes from Ben Rubin from UBS. Please go ahead. Your line is open.

Hi, thanks for taking my questions. My first question is for Raja. Last year you guys saw some solid growth in your open-end vehicles and also firm-wide flows inflected positively later into the year as you touched on in your prepared remarks. Despite that, we still saw operating expenses outpace management fee growth. So obviously appreciating that operating leverage tends to lag inflows and general AUM build, do you think you can grow operating margins off the 35% clip in 2025? And if so, Do you require another year of positive market beta or appreciation to unlock that? Thank you.

Yeah, let me just maybe kick it off and I'll turn it over to Joe to go deeper on this. So I think as we've talked about with the initiatives and the investments that we have in process that we've been undertaking this most recent year and also that we're looking forward to 2025 in the future years, there's a level of operating expense that's associated with those But obviously those initiatives will have revenue attached to them in the medium and the long term, and that's going to create positive operating leverage. And so that's how we think about the context of the investments, the initiatives, and the approach that we take towards balancing operating leverage in the near term, as well as investing in the firm

Thank you. Just appreciate that, Raj, and that color. I believe in the last fall, you guys got into $1 billion of known redemptions from a combination of both advisory and sub-advisory clients. That would be split or was expected to be split evenly between the fourth quarter and then this quarter. So just want to clarify, did the $500 million that you expected to come out did come out of the last quarter? Escorters numbers and does your updated guidance of the 800Million of expected redemptions in the 1st half of this year reflect some portion of that previous amount? Just want to clarify the updated redemption guidance. Thank you.

Ladies and gentlemen, this is the operator. We are experiencing technical technical difficulties. Please stay on the line. The call will resume shortly. The speaker line is now reconnected.

Okay, this is Joe Harvey. We got disconnected, but I was responding to the question on operating leverage. And just to recap, the drivers of operating leverage, number one, are market levels or appreciation or depreciation. Second is organic growth. And the third is what we're doing from a new investment perspective. The first one, depreciation and depreciation, we can't control. The second one, we can, organic growth. And then the third is it relates to the investments and specifically to where we're situated today. We've made a lot of the investments for our private real estate business. You know, what we're doing on our active ETFs is factored into our, you know, comp ratio guidance for and GNA guidance for 2025. So and as you'll note, the comp ratio guidance is similar to what it was in 2024. So I would say the progression will be a function of what the markets do and how we do on generating organic growth.

Got it. Thanks for the responses. Sounds more like a longer-term theme as opposed to a near-term phenomenon. So I believe in the last call, you guys guided to $1 billion of known redemptions from a combination of both advisory and sub-advisory clients. And it was expected that that $1 billion would be split evenly between the fourth quarter and this quarter. So I just wanted to confirm, did the $500 million come out in the fourth quarter? And does your updated guidance for $800 million of redemptions in the first half of this year includes some portion of that previous amount. Just want to clarify the updated guidance. Thanks.

The 800 million would be on the same basis as the billion. So about 200 of it already occurred before year end.

200 million came, sorry, 200 million came out in the fourth quarter? Correct. Got it. Thanks. And then just squeeze the last one in. We see a number of deals announced in the space in terms of active managers acquiring private managers or buying differentiated capabilities. Is that something you too would be open to pursuing? And if so, which asset classes would be most appealing? And would you be open to putting debt on the balance sheet to finance such a transaction? Thank you.

Yeah, I mean, we've Robert Marlayson, Historically, been very focused on organic growth and i've had a lot of success with that and, as you can surmise from these comments today, whether it's our private real estate business or active ETFs or. Robert Marlayson, International see calves we've got a lot of opportunities and growth initiatives. Robert Marlayson, underway and so we're going to stay very focused on that you know some some of those activities require capital because it's receding. all of those vehicles, and so our very strong balance sheet puts us in a very good position to pursue these types of opportunities. In our history, we made one small acquisition, and that enabled us to expand our, what was one strategy at the time, U.S. REITs into a global strategy, and it began the process of us going global as it relates to distribution. And so there are circumstances where an acquisition can really be a strategic change for the company. Right now, it's not what we're focused on, but if we could find a investment strategy that would make sense to enhance our lineup, something that we would have the interest in doing and have the resources to do. But acquisitions M&A is not part of our day-to-day business. Delivering excess returns and generating organic growth is. Great. Thank you for taking my questions.

Our next question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open.

Thanks. So you mentioned that you're investing in your international offices. So maybe could you talk about what are the best and most important markets outside the U.S. for flow demand? And are there any different preferences or behavioral differences to point to for those markets?

Well, I believe Raja's comment on GNA reflected the fact that we have expanded some of our international offices uh london and um uh tokyo and and hong kong and in uh and most cases where we've expanded our our footprint because we need more more space uh but uh to to the uh essence of your question um you know we think there are opportunities in in uh in many parts of the world uh We opened an office in Singapore, I don't know, a year and a half or so ago. And that was driven by two factors. One is that we wanted to have another office in case our employees in Hong Kong wanted to relocate to another domicile. But also there are many clients in Singapore and the region that want to see you have an office in Singapore. I've been talking about for several quarters now how we're starting to see adoption of our asset classes, real estate infrastructure primarily in Asia, ex-Japan, and that is continuing. It's a slow process in some cases, but it's certainly justifies having a bigger commitment personnel-wise in the region. So we have confidence to do that. In Japan, I've talked about the investment renaissance. It hasn't played out in terms of our flows yet, but we continue to add some sales resources to support our partner Daiwa Asset Management there, and that'll be subject to market conditions, but still confident in the very positive trajectory and the investment and asset management industry in Japan. So those are just some color, but we think we have a lot of opportunities in markets outside of the U.S.

Thanks again.

have no we have no further questions i will now turn the call back over to joe harvey for closing remarks okay well uh thank you for listening uh this this quarter and and i look forward to talking about the progress on our strategic plan as uh we progress uh throughout 2025 and we'll talk to you next in april so thank you ladies and gentlemen this concludes today's conference call thank you for your participation you may now disconnect