Cohen & Steers Inc
NYSE:CNS
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Cohen & Steers Inc
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Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers Third Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Thursday, October 21, 2021.
I would now like to turn the conference over to Brian Heller, Senior Vice President and Corporate Counsel of Cohen & Steers. Please go ahead.
Thank you and welcome to the Cohen & Steers third quarter 2021 earnings conference call. Joining me are our Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler.
I want to remind you that some of our comments and answers to your questions may include forward-looking statements. We believe these statements are reasonable based on information currently available to us, but actual outcomes could differ materially due to a number of factors, including those described in our accompanying 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 statement. Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund.
Our presentation also contains non-GAAP financial measures referred to as as-adjusted financial measures that we believe are meaningful 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.cohenandsteers.com.
With that, I'll turn the call over to Matt.
Thank you, Brian. Good morning, everyone. Our remarks this morning will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found on Pages 18 and 19 of the earnings release, and on Slide 16 to 19 of the earnings presentation.
Yesterday, we reported record earnings of $1.06 a share compared with $0.67 in the prior year's quarter and $0.94 sequentially. Revenue was a record $154.3 million for the quarter compared with $111.4 million in the prior year's quarter and $144.4 million sequentially.
The increase in revenue from the second quarter was primarily attributable to higher average assets under management across all three investment vehicles, and one additional day in the quarter, partially offset by a sequential decline in performance fees from certain institutional accounts.
Our implied effective fee rate was 57.5 basis points in the third quarter, compared with 58 basis points in the second quarter. Excluding performance fees, our third quarter implied effective fee rate would have been 57.3 basis points compared with 57 basis points in the second quarter. Operating income was a record $70.4 million in the third quarter compared with $44.2 million in the prior year's quarter and $62.6 million sequentially and our operating margin increased to a record 45.6% from 43.4% last quarter. Expenses increased 2.6% compared with the second quarter, primarily due to higher compensation and benefits distribution and service fees and G&A.
The compensation to revenue ratio, which included a cumulative adjustment to lower the incentive compensation accrual was 33.19% for the third quarter and is now 34.5% for the trailing nine months. The increase in expenses related to distribution and service fees was primarily due to higher average assets under management in US open-end funds partially offset by a favorable change in share price mix. And the increase in G&A was primarily due to higher travel and entertainment expenses as well as costs attributable to preparation for a new closed end fund that combines public and private real estate with preferred and debt securities.
Our effective tax rate, which was 25.93% for the quarter included accumulative adjustment to bring the rate to 26.5% for the trailing nine months. The reduction in the effective tax rate from the second quarter was primarily due to the diminished effect of the non-deductible portion of executive compensation on a higher than previously forecasted pretax base.
Page 15 of the earnings presentation sets forth our cash, corporate investments in US treasury securities and seed investments for the current and trailing four quarters. Our firm liquidity totalled $241 million at quarter end compared with $185.6 million last quarter and we continued to be debt-free. Total assets under management were $97.3 billion at September 30, an increase of $1 billion or 1% from June 30. The increase due to net inflows of $1.3 billion and market appreciation of $469 million partially offset by distributions of $718 million. This marks our ninth straight quarter of net inflows.
Advisory accounts, which ended the quarter with $22.8 billion of assets under management had net outflows of $311 million during the quarter. We recorded $1.1 billion of inflows, the majority of which were from existing accounts. Offsetting these inflows were $1 billion of outflows from an unexpected account termination after a client decided to eliminate its allocation to multi-strat real assets, as well as $300 million of client rebalancing. This account termination is unrelated to the one noted on previous calls. Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan sub advisory had net outflows of $52 million during the quarter, compared with net outflows of $272 million during the second quarter. Distributions from these portfolios, total $295 million compared with $309 million last quarter. Sub advisory, excluding Japan had net outflows of $253 million, primarily from a client that decided to convert its global listed infrastructure portfolio to passive. Open-end funds, which ended the quarter with a record $45.6 billion of assets under management had net inflows of $2 billion during the quarter. Net inflows were primarily into US real estate and preferred funds. Distributions totalled $276 million, $225 million of which was reinvested.
Let me briefly discuss a few items to consider for the fourth quarter. With respect to compensation, we continue to refine our estimates as we approach year-end. Given our double digit year over year growth in assets under management, revenue and operating income driven by our leading organic growth and strong investment performance, we reduced the compensation to revenue ratio from the previous quarter's guidance of 35.25% by 75 basis points to 34.5%. All things being equal, we expect our compensation to revenue ratio for the fourth quarter to remain at 34.5%. We now projected our G&A will increase by about 9% from the $42.6 million we recorded in 2020 and finally, we expect that our effective tax rate will remain at approximately 26.5%.
Now I'd like to turn it over to Joe Harvey, who will discuss our investment performance.
Thank you, Matt and good morning. Today, I will review our investment performance, discuss the macro environment and its impact on our asset classes and talk about certain key priorities for our investment department. The third quarter felt like a transitory phase in the markets with the S&P 500 up 0.6% and low dispersion across sub sector performance. The markets are evaluating several important macro shifts, including stabilization of virus trends after the various scares, deceleration in the economic recovery, potential for a transition from monetary easing to tightening and gridlock in Washington DC regarding stimulus and potential tax increases.
The one trend that continued to gain traction was the likelihood that inflation will be more persistent. Reflecting that, commodities reached a seven-year high and were up 7% in the quarter, one of the top performing asset classes. The commodities rally has been broad-based with spot prices, positive year to date for 80% of commodities.
Looking at our performance scorecard, in the third quarter and for the last 12 months, eight of nine core strategies outperformed their benchmarks. International real estate, which is Global ex US was the one strategy that underperformed for both time periods. Measured by AUM, 79% of our portfolios are outperforming benchmarks on a one-year basis compared with 99% last quarter. On a three and five-year basis, 100% of AUM is outperforming.
The one year figure declined primarily due to global real estate where our batting average declined from 99% last quarter to 25% in Q3. Our core global real estate accounts are outperforming year to date. So if we at least break even in the fourth quarter, our figures will improve next quarter. 88% of our open-end fund AUM is rated four or five star by Morningstar compared with 90% last quarter. We believe the macro environment is favorable for most of our strategies in terms of both fundamentals and investor demand.
We expect above trend economic expansion and more persistent inflation. If the pandemic continues to subside and the recovery broadens, some of the most negatively affected sub sectors in real estate and infrastructure should continue to recover and help sustain the fundamental recovery. In terms of investor demand, the need for income as acute as is the need for equity like returns with diversification. Adding inflation to the picture should increase demand for more of our strategies.
As we said last quarter, our reading of the factors contributing to inflation supports a phase of higher for longer inflation. US real estate returned 0.2% in the quarter and we outperformed in all of our sub strategies. Year to date US real estate is up 21.6% outperforming the S&P 500's 15.9%. The powerful recovery in real estate security prices has been driven by a return of overall demand and increased market need for effective inflation hedges and the ongoing search for income.
So far in 2021, $13 billion has floated into REIT mutual funds and ETFs the largest inflow since 2014. We continue to see increased adoption of listed REITs by institutional investors as a core component of their real estate allocations. Investors better understand and can tolerate short-term volatility, knowing that over the long-term REITs are highly correlated to the fundamentals of their underlying real estate and the long-term record of listed REITs compared with core private real estate is undeniably compelling. REITs have outperformed by nearly 400 basis points annually for over 40 years while providing liquidity. These dynamics are powerful in terms of potential flows as REIT allocations get right-sized higher based on merit.
Global real estate returned negative 0.7% in the quarter, while our core strategies outperformed slightly our international strategy underperformed primarily due to the Asia sleeve of our portfolios. Global listed infrastructure returned negative 0.25% in the quarter and we outperformed in all of our sub strategies. The downward trajectory of the virus spread and return of travel and global commerce has made marine ports and airports some of the best performing sectors in the quarter.
The big news for infrastructure was what didn't happen. That being passage of infrastructure legislation in Washington, DC. The longer the process takes, the more it underscores the need for infrastructure capital investment and generates interest in the asset class. Institutionally, infrastructure as an asset class is understood and accepted and we see strong search activity. The dry powder amassed by private equity infrastructure managers reached a record $300 billion and provides fuel for our investment thesis that private equity capital will find its way into the listed markets to buy companies and assets with the latest example being the announced privatization of Sydney airport.
In terms of the wealth channel, we need to continue to educate on how infrastructure best fits into allocation strategies. Notwithstanding that, we've seen strong inflows into our open-end infrastructure fund in part based on the headlines related to significant infrastructure spending. Preferred securities returned 0.6% for our core strategy and 0.2% for our low duration strategy. We outperformed in both.
Preferred continue to look attractive in the fixed income world with the yields of 4.8% for investment grade preferreds in our core strategy and 4.2% for our low duration strategy. For context, corporate bonds yield two and a quarter percent, municipals yield one and three quarters percent and high yields, four and three quarters percent. Our portfolios are positioned defensively relative to interest rates and we continue to guide incremental allocations to our low duration strategy, which by design has a duration of less than three years and is the only one of its kind.
The benchmark for our multi-strategy real assets portfolio returned 1% in the quarter and we outperformed. As a reminder, this strategy combines real estate, infrastructure, commodities, resource equities, gold and short duration credit with an asset allocation overlay. Over the past year, the real assets portfolio returned 32.5% compared with the S&P 500 at 30%. This strategy is designed to provide protection from unexpected inflation and produce equity like returns with a low correlation to financial assets. Somewhat surprisingly, we haven't seen a significant increase in demand for this portfolio, but with a long history of head fakes on inflation it simply maybe early and the demand for this strategy may follow rather than lead inflation.
We continue to expand our investment department, including the addition of a portfolio manager and head of multi asset solutions who will join us next month to oversee asset allocation, strategy research and macroeconomic research. This is a strategic role that will expand our real assets and real estate solution investment capabilities, and enable us to engage with clients at a higher level.
We've made tremendous progress preparing strategies for our private real estate business, including a strategy with a capital appreciation objective. We have commenced the investment process and are evaluating acquisition opportunities. In addition, for our closed end real estate funds, we will pursue an income strategy to capitalize on mispriced property sectors. This will expand our investment universe for our closed-end funds and supplement these fund's primary focus on listed real estate with higher generate income generation and rifle shot opportunities in the private market.
These are examples of our broader vision to using both listed and private real estate to broaden our opportunities sets and provide investors with optimized allocations to real estate by tilting portfolios, to where the best values are. Looking into 2022, we will be developing other vehicles for the wealth channel, and we expect to add a real estate strategist to further enhance our asset allocation and advisory capabilities. Meantime, commercial real estate has a positive outlook with fundamentals strong or recovering compelling income generation and particularly in this environment, attractive inflation sensitivity.
Finally, we're looking forward to the next phase of our return to office plan whereby everyone will be in the office three days a week beginning next week. While we have performed well working remotely as our operations and investment performance attest we want to get back to in-person interaction, debate and decision making on the investment team and across the firm. The creativity, innovation and cross team collaboration our business requires is best done in person. Current indicators point to the general containment of the pandemic, thereby allowing us to return safely as we transitioned to being together once again as a team, while having the best of both worlds with some work model flexibility.
I'll turn the call over to Bob Steers.
Thanks Joe. Good morning, everyone. As you heard from Matt and Joe, we had a very strong quarter, continued excellent investment performance across the board, record AUM, revenues, earnings and profit margins. For the first time in several years, we benefited from strong, absolute and relative market returns. We believe this is significant because fundamentals indicate that this is the beginning of a new trend, not the end.
An inside joke here Cohen & Steers is how often I use the metaphor of how important it is to skate to where the puck will be and not stare at where it is now. Where the puck is now is only useful in helping to see where it's going. Broad-based demand-driven inflation will persist and is most definitely not transient, but the bond market like most investor portfolios is where the puck was.
The latest inflation measures have all moved broadly higher. September CPI increased 5.4% year over year and the core CPI was also up 4%. In a surprise announcement, the Social Security Administration last week disclosed that future payments will be increased by 5.9%; the largest such increase in over 40 years. Consumer spending surged 11.9% in the second quarter and 13.9% in the month of September, but the real story beyond these surging spot indicators is the steady increase of the more persistent and heavily weighted components of these inflation measures.
Rent is a key category as it makes up over 30% of CPI. Tenant rent jumped 0.5% in September, which was the biggest monthly increase in 20 years. Owner's equivalent rent, which is the accepted measure of what homeowners would pay if they had to rent their homes, rose 0.4% the most since 2006.
Lastly, as these persistent measures of inflation continue to rise, it can cause expectations to become self-fulfilling. According to the New York fed, consumer's median inflation expectations for the next three years is 4.2%. So where the puck is today, isn't bad as we saw this quarter, but to get to where the puck is going, will require investors to reposition their portfolios to hedge against, or even benefit from the shift to a more enduring inflationary environment.
All real asset classes and especially infrastructure and real estate have historically provided investors with the solutions that they will be looking for. At the risk of being repetitive and with the benefit of strong, absolute and relative returns from our real asset strategies, we achieved record AUM of $97.3 billion and over a $100 billion intra quarter, record open-end fund AUM of $45.6 billion and $1.3 billion of net inflows in the quarter.
As has been the case recently, the wealth channel led the way with $2 billion of net inflows representing an 18% organic -- representing 18% organic growth and our third best quarter on record. Both the BD and RIA verticals were strong and DCIO fund flows were positive for the 13th straight quarter.
From a product standpoint, we saw strength in preferred security strategies, which generated net inflows of $1.1 billion and in real estate, which had net inflows of $755 million. Looking forward as inflation and interest rates move higher, we anticipate that flows into our low duration infrastructure and multi-strategy strategy real asset portfolios will all benefit. In addition, we have filed with the SEC to launch a closed end fund offering in the first quarter of next year, that will combine public and private real estate in one actively managed listed portfolio.
In the advisory channel due to a plan design change, we had an unexpected $1 billion termination of a high performing multi-strategy real asset portfolio, which resulted in $311 million of net outflows in the quarter. Gross inflows remained strong totaling $1.1 billion with US real estate accounting for over two thirds of that amount. The pipeline of awarded, but unfunded mandates is at $900 million and we recorded $550 million of mandates, which were both one and funded in the quarter, our second best result on record.
Japan sub advisory net outflows were $52 million pre distributions and totalled $347 million, including distributions. All things being equal, we are optimistic that flows, especially for our US real estate portfolios may shortly begin to improve. First, the portfolios are performing extremely well, especially after currency adjustments. Second, we are approaching the 12 month mark for the last distribution cut, which typically coincides with flows, turning positive.
Lastly, the end of COVID restrictions -- with the end of COVID restrictions in Japan, our teams have been asked to resume a significant number of in-person sales seminars. Sub advisory extra pan had net outflows of $253 million as well, primarily driven by the termination of an offshore global listed infrastructure portfolio and modest outflows elsewhere. We did bring on a new $83 million global real estate mandate in the quarter.
We believe that the next several years we'll witness a generational shift in the economy and capital markets. Higher growth rates sustained by unprecedented monetary and fiscal stimuli have produced demand-driven supply demand imbalances, resulting in asset price inflation, which is becoming self-fulfilling. Real estate values and rents, labor costs and commodity prices are rising with no current end in sight. Many investors have never experienced this set of economic variables.
We believe that as investors begin to extrapolate these trends, allocations to real assets, especially infrastructure and real estate will substantially increase. Our traditional range of products is well positioned to capture this shift. In addition, we recently commenced the marketing process for our private real estate strategies that we discussed last quarter and as I said, we hope to launch our first public private real estate closed end fund this February. Given the favorable outlook for real assets, we are committed to adding new capabilities and products that will provide the solutions that investors need when they ultimately see where the puck is going.
With that, I'm going to ask Tina to open the floor to questions.
[Operator instructions] Our first question comes from John Dunn, Evercore ISI. Please go ahead.
Hey guys. Just maybe if you could talk a little more on the progress of the private real estate group, what they're doing just with private strategies and then on the closed end fund, is there anything different about selling the advantages of toggling between the public and private strategies? And is there any like some appetite in front of the launch in Q1?
Well, all we can talk about with our private strategy is that we've spent over a year building the team and refining the various strategies that we're employing and we are employing a broad range of strategies already. We are currently in the market for a pure private fund where we've already begun to look at adding investments private investments to our existing real estate closed end funds and as I mentioned the closed end fund that we have filed for February, intentionally is combining public and private.
For the closed end funds, the private investments we're looking at are primarily designed to deliver higher yield than we can obtain in the listed market and that opportunity is quite wide and quite deep. Our other strategies we'll have more of a maximum total return strategy associated with them. But, the idea is that this will substantially broaden both the universe of real estate investments available to us and substantially broaden the range of products that we can deliver both institutionally and in the wealth market and again, it would be total return strategies, maximum return strategies, yield strategies in a variety of different structures.
I'd just add that in the closed end fund market, what the market is looking for today is strategies that are unique, that are differentiated and not generic and available in many other vehicles. So having a private capability in real estate makes us better positioned to offer what that market has been accepting in the wealth channel.
And then back over to the institutional channel, the dynamic that we're seeing is that -- institutions are just much more agile in terms of going to where the best opportunities are. So even if we don't have a vehicle per se that goes back and forth from the private to the public market, just simply being able to engage with our clients and to help them make their portfolios better, whether it's to add next generation real estate to a portfolio of core property types or help them with a private strategy, it just puts us in a better place with institutions. That said we do, as we've been, we've talked about, expect to add vehicles that will enable us to tilt the portfolio between both markets.
And then maybe on expenses, can you kind of ballpark how much of 21 G&A may have been depressed by the pandemic? And also as we get further out, maybe what kind of natural growth rate might be for that, considering, you've been, you want to invest for growth, but you've also done a bunch over the last few years.
Well, next call, we'll give you a forecast or projection on where we think G&A is going to be, but sufficient to say that with people coming back to the office and things seemingly under control with the pandemic that our expenses should increase next year.
We also have all these new strategies and we want to market them and so we're going through that process right now. So be a little premature for me to say other than expect that it would go up. With respect to this year, it's up 9% from last year, which was depressed. We saw an increase in T&E in the third quarter. When you compare the 2021 forecast with the pre-pandemic 2019, it's about flat. So, for more than the first half of this year, we continue to have a suppression in a lot of the categories that we thought would increase. It just got pushed back a little bit. So I hope that answers your question, John.
No, it does. Yeah. Thanks you, guys.
Thank you. The next question comes from Robert Lee, KBW. Please go ahead.
Yes. Hi. Good morning. Thanks for taking my questions. I guess well, my first question would be kind of on the, maybe on the capital tends to be of the business to some degree you talked about, you mentioned potentially having a closed end fund coming up in the first quarter and clearly that it's great business and clearly does require more upfront capital than it used to expanding into the private more into private real estate business, getting those up and running can take more capital commitments.
So how do you, how is that impacting how we should maybe think about your usual kind of special dividend at the end of the year and maybe going forward, how you're thinking about the types of excess cash capital, you feel like you want to keep around to fund these growth initiatives.
Yeah, that's a great question. Very timely. Yeah, next year we anticipate we're hoping to launch a number of new vehicles perhaps up to two closed end funds and several private or non-traded real estate vehicles, all of which will consume significant capital either in the case of the closed end funds, related to distribution costs but the other vehicles will require a very significant co-investment capital that we are committed to. And so, I envision next year will be the most capital intensive year ever for us by a lot if we're successful.
I'll just add that when you look at the economics of us fronting the front end costs of a closed end fund, it's a very attractive financial proposition. So I think it's important to keep that in mind. We believe that the capital that we'll be laying out know we'll have a good financial return on it.
Rob also, we're coming in and a couple of weeks, we're having another corporate board meeting, and it's at that meeting that we've at least for the last several years, we've done a special in each of the last 11 years. As Bob pointed out, we do have more to consider for 2022, which will influence our ability to do a special, not saying we will not saying we won't, but right after that meeting, we typically go out with a press release. And so we're assessing that right now. The good news is, walk with the highest AUM and average AUM base and as you know, this is a very cash generating business and our fee rates have maintained themselves or increased themselves as we've created more customized solutions. So, we're factoring that into.
And maybe the follow-up, sticking with kind of build that of the private part of the business, there's obviously been a lot of M&A activity in the industry, people acquiring the types of smallish real estate businesses of different stripes. And obviously they're fairly pricey, but how do you think about the trade-off between obviously you're building organically, but is there a potential that you would look to accelerate that growth maybe into different market segments, through M&A or is that just not a path you would think of that.
Well, we're very pleased with the team we have and the opportunity set that's in front of us for our private equity real estate opportunities really don't see any opportunity to through M&A to accelerate the growth there. Again, we expect very significant growth next year.
If there were niche areas, whether it's real estate credit or debt, things like that along the way, we've said in the past, we look at things like that. We've also looked at potential strategic add-ons in the infrastructure on the infrastructure side. But as you can see from our track record of M&A, we have a very light bar particularly for cultural integration of these opportunities. So we would most definitely would look at them but, the bar is high.
[Operator instructions] Our next question comes from Marla Backer of Sidoti. Please go ahead.
So you've done, you've added to the team over the past several quarters and even addressed that in your prepared remarks. Do you think where you are now, the team there's obviously a lot of initiatives planned for next year? Do you think the current team that you have in place can fully support your growth initiatives or should we expect to see further additions to the team?
Well, as it relates to the investment team, I'd say we're in a really great spot to take advantage of the opportunities we have in front of us. I mentioned a couple of incremental additions in my talking points, and one of them would be a real estate strategist that can help us on the asset allocation front between listed and private real estate and help us engage with clients to help them optimize portfolios. But apart from that, there's not a significant need, but it will be in part dependent on our success in raising assets. So, for example, in the private real estate business, it's less scalable than the listed securities business.
And so as we raise assets and acquire properties, we'll need to add acquisitions officers and asset management folks to continue to put money to work. I just note for the firm overall, when you look over the past year, we've had such tremendous success with our business and increased that account activity. We've had meaningful headcount growth. So going into next year, I think we're really well positioned, and we're going to be mindful, considering that the markets have been very strong and they can go the other way. So we're going to be very disciplined on headcount looking into next year.
Thank you. We have a follow-up from John Dunn, Evercore ISI. Please go ahead.
Can you give us kind of a lay of the land of the wirehouse channel? Are distributors still cutting lists and shelf space and are you guys taking share and maybe with strategies and generally what your main competitors are doing?
I think they still are selectively paring back offerings and they're also developing their own models and creating their own model based programs. We continue to gain market share in every one of our core strategies especially our preferred and US and global and real estate strategies and infrastructure more recently. So, we're not seeing any headwinds ourselves, but, I think for generic strategies, the market continues to be tough.
Great. Thank you.
Thank you. We have no further questions. At this time, I'll turn the call back over to Bob Steers for our closing remarks.
Great. Thank you, Tina. Thank you all for joining us this morning, and we'll be speaking right after year end. Thank you.
Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.