Cohen & Steers, Inc. (CNS) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen and Steers Fourth Quarter and full year 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, January 25, 2018. I would now like to turn the conference over to Adam Johnson, Senior Vice President and Associate General Counsel of Cohen and Steers. Please go ahead, sir.

Thank you, and welcome to the Cohen and Steers Fourth Quarter and Full Year 2017 Earnings Conference Call. Joining me are Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler. Before I turn the call over to Matt, I want to point out that during the course of this conference call we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. We believe that some of these factors are described in the Risk Factors section of our 2016 Form 10-K, which is available on our website at cohenandsteers.com. I want to remind you that the Company assumes no duty to update any forward-looking statements. Also, the presentation we make today contains non-GAAP financial measures, which we believe are meaningful in evaluating the Company's performance. For disclosures on these non-GAAP financial measures and their GAAP reconciliations, you should refer to the financial data contained in the earnings release and presentation, which are available on our website. Finally, this presentation may contain information with respect to the investment performance of certain of our funds and strategies. I want to remind you that past performance is not a guarantee of future performance. This presentation may also contain information about funds that have filed registration statements with the SEC that have not yet become effective. This communication does not constitute an offer to sell or the solicitation of an offer to buy these securities. For more complete information about these funds, including charges, expenses and risks, please visit our website. And with that, I'll turn the call over to Matt.

Thank you, Adam, and good morning, everyone. Yesterday we reported earnings of $0.43 per share, which included a charge of $12.7 million, or $0.27 per share associated with the December 22 enactment of Tax Cuts and Jobs Act. The fourth quarter provision for income taxes included a onetime transition tax of $8.4 million on the deemed repatriation of our foreign source net income and a $4.3 million charge associated with the revaluation of our net deferred tax asset. The transition tax is payable in installments over eight years beginning in March of next year. The fourth quarter provision for income taxes also included a tax benefit of $5.6 million or $0.12 per share primarily due to the reversal of certain tax reserves. I will provide guidance on our 2018 tax rate in a moment. The remainder of my remarks this morning will focus on our as-adjusted results. A reconciliation of GAAP to as-adjusted results can be found on Pages 18 and 19 of the earnings release, or on Slides 16 and 17 of the earnings presentation. As adjusted earnings were $0.55 per share for the fourth quarter compared with $0.48 in the prior year’s quarter and $0.55 sequentially. For the year we reported record earnings of $2.07 per share, compared with $1.85 per share last year. Revenue was a record $99.4 million for the quarter, compared with $89.5 million in the prior year’s quarter and $96.5 million sequentially. The increase in revenue from the third quarter was primarily attributable to higher average assets under management and a more favorable fee mix. Average assets under management for the quarter were also a record at $62 billion, compared with $57.4 billion in the prior year’s quarter and $61.2 billion sequentially. Operating income was a record $41.2 billion for the fourth quarter, compared with $35.9 million in the prior year’s quarter and $40.4 million sequentially. For the year, operating income was also a record at $154.6 million, compared with $137.7 million in 2016. Our operating margin decreased to 41.5% from 41.9% last quarter. And for the full year our operating margin increased a 40.9% from 39.3% in 2016. Expenses increased 3.9% on a sequential basis primarily due to higher G&A, compensation and benefits, and distribution and service fees. The increase in G&A was primarily due to higher fund reimbursement costs and an increase in travel and entertainment. The compensation to revenue ratio for the full year came in at 32.65% slightly lower than the 32.75% guidance we provided. The fourth quarter included a cumulative adjustment to reflect the actual compensation paid. The increase in distribution and service fee expense was consistent with the increase in average assets under management in our U.S. open-end mutual funds. Our effective tax rate for the quarter was 37.75%, consistent with the guidance we provided on our last call. Page 15 of the earnings presentation displays our cash, cash equivalents and seed investments for the current and trailing four quarters. And indicates that portion of cash and cash equivalents held outside the United States. Now that we have a territorial tax system in place, we anticipate bringing back approximately $7 million of our non-U.S. cash. Bob Steers will provide some thoughts on our use of this additional cash in a moment. Our firm liquidity totaled $257 million, compared with $261 million last quarter. And stockholders' equity was $276 million, compared with $309 million at September 30. The balances for firm liquidity and stockholders equity reflect the payment of a special dividend of approximately $46 million or $1 per share made in December. Over the past eight years we have paid $8.50 per share in special dividends. We remain debt free. Assets under management totaled $62.1 billion at December 31, an increase of $585 million, or 1% as of September 30. Assets under management in institutional accounts totaled $29.4 billion of December 31, a decrease of $235 million or 1% from last quarter. Open end funds had record assets under management of $23.3 billion, an increase of $788 million or 3% from last quarter. And assets under management in closed end funds remained steady at $9.4 billion. For the year, assets under management increased $4.9 billion or 9%. We reported total net inflows of $227 million in the quarter and annualized organic growth rate of 1%.This marks the 13th consecutive quarter we have recorded net inflows. For the year, we recorded net inflows of $3.9 billion, a 7% organic growth rate. Page 9 of the earnings presentation reflects net flows by investment vehicle. Institutional accounts had net outflows of $588 million in the fourth quarter, an annualized organic decay rate of 8%. For the year, institutional accounts had net inflows of $696 million, a 2% organic growth rate. Subadvised portfolios in Japan had net outflows of $494 million in the quarter, compared with $275 million of net outflows last quarter. Net outflows are primarily from U.S. real estate portfolios. The increase in outflows can be attributed to a November distribution cut of 25% on the second of the two main U.S. Real Estate Funds that we subadvised. You will recall that the first U.S. Real Estate Fund announced a 30% cut this past July. Distributions totaled $627 million, a decrease of $104 million from last quarter. For the year, subadvised portfolios in Japan had net outflows of $134 million and distributions of $3 billion Subadvised accounts excluding Japan had net inflows of $63 million, most of which were into global real estate portfolios. For the year, subadvised accounts excluding Japan, had net outflows of $124 million. Advised accounts had net outflows of $157 million during the quarter, primarily from U.S. and global real estate portfolios. For the year advised recorded net inflows of $954 million. Bob will be providing some color on the level of activity in our institutional pipeline. Open end funds had net inflows of $815 million during the quarter, an annualized organic growth rate of 14%. Distributions, which included the payment of year end capital gains, totaled $575 million, $435 million of which were reinvested. For the year open end funds had inflows of $3.2 billion, a 16% organic growth rate. Let me briefly discuss a few items to consider for 2018. Please note that this guidance does not take into account the adjustments that will be made relative to the adoption of the new revenue recognition standard which is effective as of the beginning of this year. We expect that the revenue recognition standard will not affect our operating income. As previously noted, or largest distribution partner reduced the distribution rate on both of U.S. real estate funds that we subadvised. These cuts would imply the distributions for 2018 would be approximately $600 million to $700 million lower than the $3 billion recorded in 2017. Changes in flows, market performance and currency rates could affect the amount of the implied decline. With respect to compensation and benefits we expect the compensation to revenue ratio to be 33%, slightly higher than 2017. We project G&A to increase between 8% and 10% from 2017. The majority of the increase can be attributed to three distinct items, MiFID II, index redistribution fees and higher mutual fund reimbursement costs that are generally associated with asset growth. Excluding these three items, G&A would be approximately 3% higher than last year. And finally, as a result of the recently enacted Tax Cuts and Jobs Act, we expect our effective tax rate will be between 25.25% and 26.25% for 2018. Now I'd like to turn it over to Bob.

Thank you, Matt and good morning everyone. As you heard from Matt, who register our 13th consecutive quarter of positive organic growth, although total net inflows moderated to $227 million, the sequential slow down was mainly a function of timing issues in our advisory channel. With the exception of our Japanese sub advised flows, all other business segments experienced robust demand in the quarter and the fundamental trends that are key to sustaining our growth remained firmly intact. These factors include strong investment performance and asset flows into a wide and diverse array of strategies. Investment performance in the quarter was strong with eight of ten strategies beating their benchmarks and seven out of ten outperforming for the year, which equates to 95% of our total AUM. As of December 31, 88% of our open end fund assets were in four or five star funds. As I highlighted last quarter asset flows continue to broaden beyond our U.S. real estate and preferred securities portfolios. Global real estate, European real estate, global listed infrastructure and midstream energy all ended the quarter with positive sales momentum. Virtually every one of our U.S. open end funds experienced net inflows in the quarter with the exception of our multi-strat real-asset fund, which was essentially flat. As a result the wealth channel achieved net inflows of $815 million or a 14% annualized growth rate. As a point of clarification included in this number was $144 million of net inflows into our European REIT CCAP. This five star fund was selected by a large European financial intermediary for inclusion in their discretionary models, which accounted for a majority of the flows into this fund. These flows are a direct result of the inroads being made by our European business development team. Turning back to the U.S. well channel, there were several additional developments of note in the quarter. Three of our real estate funds, including our U.S., international and global funds were added to major retail recommended list. Our global real estate fund achieved record inflows of $65 million and our midstream energy fund finished the year as the top performing fund in its category and gained a four star rating from Morningstar. The institutional advisory channel had net outflows of $157 million in the quarter, however, the outflows were mainly a result of year end rebalancing one lost to passive and importantly, delays in funding of awarded mandates. As you know the fourth quarter began with a $555 million pipeline of one but unfunded mandates. Of that amount only $125 million was actually funded in the quarter. And during that time we added $669 million to the unfunded pipeline, taking the total to $1.1 billion across five investment strategies and five countries of investor domicile. To reiterate the outlook for our advisory business is positive as evidenced by the improving flows into our European CCAP products and the growing pipeline of unfunded mandates across our whole range of investment strategies and geographic regions. The subadvisory channel, excluding Japan, experienced modest net inflows of $63 million in the quarter, which were largely into our global real estate strategy. An important strategic win in the quarter was a real asset debt portfolio which represents an exciting new opportunity for our fixed income team through a Japanese open end fund that we’ll launch early this year. In Japan, as anticipated, and as Matt mentioned, following the U.S. REIT fund that reduced its distribution rate in July, the second U.S. REIT fund that we subadvised reduced its distribution in November, which resulted in net outflows for the quarter. Total net outflows from Japan in the fourth quarter were $494 million before distributions and $1.1 billion after. Although these are significant outflows they were lower than expected and are moderating sooner than anticipated. We are also encouraged that the largest distributors of these funds have initiated discussions regarding our interest in restarting their sales effort. Time will tell, but it's possible that the worst may be behind us. With respect to the newly enacted tax reform bill, CNS stands to benefit from the lower corporate tax rate, the transition to a territorial tax system, as well as the repatriation provisions. In addition, for some of our investment strategies a reduced tax rate on the earnings of past two entities, which include REITs and MLPs will enhance the economics of these income oriented strategies for taxable investors. The benefits of tax reform to our bottom line, which we expect are significant, do not change our priorities but will certainly make them more readily achievable. Investing wherever it makes sense to grow assets and revenues will remain our strategic focus. This could include launching and ceding new strategies, evaluating product extension acquisition opportunities and investing in data, research, technology and people to improve productivity, and most importantly investment performance. In any scenario we expect this legislation will create incremental value for shareholders today and in the future. With that we’ll open the floor to questions. Just before we move to questions, just a point of clarification, we plan on bringing back $70 million of our non-U.S. cash, okay, seven zero. Thank you.

[Operator Instructions] Our first question comes from the line of Ari Ghosh with Credit Suisse. You may proceed with your question.

Hey good morning everyone. So over the last couple years you missed some strategic investments both on the product side as well as across certain regions and channels. Can you may be talk a little bit more about some of the newer investments that are picking up momentum and scale and that could be additive to your flow profile in 2018?

Sure. As we've spoken about, we've launched some new strategies here, but importantly, some new vehicles, including CITs for the retirement channel. In addition, we've reworked and repositioned our product strategies in Europe very importantly. And Todd, why don't you expand on that a little bit.

Sure hi, this is Todd Glickson. I appreciate the question. So I think as relates to Europe what we've spent time doing is: one, making sure we've got the best of Cohen & Steers’ products there that relates to where they are registered and how they're priced, number one. Number two, that also relates to a little bit of customization in terms of what work is best in those markets. So for instance we just launched a global preferred product over there that is very similar to the five star fund we have stateside, but has some tweaks because of global tax considerations. That's already got a lot of traction and Bob already alluded to the European REIT flows, as well. So I think those are two key investments separately. As it relates to Japan, one of the things that you've increasingly seen is traction on the institutional side of the business. We've made some investments there just to make sure that we can work with both our subadvisory partners and institutional entities to really bring out innovative strategies. And what's come back from that is a lot of good thought about things that might work not just in the institutional market there, but in the wealth market there and back in the U.S. And then lastly, getting back to retirement, one of the things that we've seen is although we've invested significant resources in DCIO, we're starting to see green shoots. The first step of that is really moving clients into the CITs or Collective Investment Trusts and also having a little bit more focus on the defined benefit channel. So that's really resulted in a growth rate over the last couple of years overall in retirement about 30% to 40%, which is significant.

And then just turning to infrastructure. We are seeing, particularly in the institutional market, extremely robust demand for infrastructure strategies across a wide array of segments. So you should expect to see some new product launches that are subsets of the broad global listed infrastructure asset class include logistics, public works, infrastructure debt, which would be a subset of our real asset debt new strategy. So we will continue to invest where our clients are indicating interest. And right now, infrastructure is a very interesting area.

Yes and the last thing I would add and it really relates to Bob's comments before about diversification. When you look at the number of finals that we've done for new business, it's really doubled from last year to this year, which speaks to the performance of our products and the diversity of a strong performing product line. So really, those green shoots extend to things like infrastructure and MLPs, where although our business is still formative, our performance is exceedingly good. And we're getting a level of interest across both channels that we just haven't seen before.

Got it guys. Really appreciate the color on that. And then maybe just as a quick follow-up on the $70 million that you're bringing back, how are you thinking about this in terms of applying that back into investing in the business versus maybe holding it and then paying it out in a special? And is it more a part of your capital deployment plan? More about expanding your product offering that you have? And then on the G&A comp that you – the G&A number that you mentioned, the growth rate in 2018 was this included, was the $70 million sort of factored into that growth rate? Or was it independent of it?

Well, bringing the $70 million back is really just an opportunistic strategy. It's not earmarked for any one or two specific things. We do – in conjunction with launching new products, we'll probably see a step-up in the need for seed capital, and that's that's probably the most certain of the uses of that capital. And we continue to evaluate product expansion acquisition opportunities. As I've always said, the odds of something actually happening are not extremely high, but it's – we're actively looking at product extensions as well.

Great, thank you very much.

Our next question comes from the line of Mike Carrier with Bank of America Merrill Lynch. Your may proceed with your question.

Hi, thanks a lot. Hi Matt just few things on the guidance that you mentioned, just on the G&A, the 8 to 10. MiFID, I get that. Just the other items that you mentioned in terms of the index and then I think it was something on the distribution, just what was driving that? And then on the $600 million to $700 million reduction in distributions, I know this is tough to gauge, but any outlook on the flows that are related to those distributions just given that you gave some guidance there?

Well let me address the flows. You're referring to the flows, the sub-advisory flows in Japan. Yes, so the good news is the reduction in distributions translates into a substantial reduction in outflows from that source. Obviously, it's tricky and problematic to project future flows. What I can tell you is that our primary competitor over there, Fidelity, cut their distribution a second time far below ours. And as a result, distributors are moving away from that product. The reality on the ground there is that we're benefiting from that, and some distributors are still cautious about promoting these funds, primarily the wire houses. On the other hand, the regional banks and other distributors are not reluctant. We don't control dividend policy, but we've been told that our partner does not intend to reduce their distribution again. So that would put us in a significant competitive advantage going forward. So time will tell, but relative to the competition, our investment performance is strong. And our distribution rate is likely to stay constant in contrast to Fidelity. So that bodes well. But until flows turn, you'll never know.

So Mike, with respect to the expenses on the fund distribution side, that's actually just kind of like math. I mean, the expenses going up it's for essentially the cap funds. And so the more success we have and the more revenue that we generate from asset gathering will require payments on the other side to keep the expense ratios where we're committed to keep them. So fund distribution or fund reimbursement cost would go up, but the revenue is going up higher. It's a very high-margin business for us. The irony and we have to think about this is that when you look at the revenue recognition standard that goes into effect that suggests that you net those costs against your fees. And we're in the process of considering how we're going to display that for the first quarter. So we'll let you know when we get to that. On the other fees, it's really just the providers of the indexes that we pay, we license for use. As we use them beyond just internally, so use them for attribution purposes and other white papers and things that they are starting to charge fees on that, which is really out of our control. And our understanding is that this is something that's not just unique to us, this is something that's being rolled out to all the asset managers and everybody who uses these indexes. So this is something we're going to have to deal with in 2018.

Okay, that’s helpful. And then sort of a follow-up, and maybe either Bob or Joe, just when I look at the current environment, it's a little unique just in terms of where we’re at, because you’ve got the raising rates and the REITs are under pressure a bit. But then there's some anticipation potentially of rising inflation, which seems like it should be good for a lot of the products. And it seems like on the institutional side, given the pipeline that you're mentioning, that's heading in the right direction. Obviously, you got Japan. And then on the retail side, we'll see how the flows kind of shape up. But you've seen these cycles before. So just given all those dynamics and the product set and that you have the strong performance, where do you see kind of the puts and takes in terms of allocations by either the retail or the institutional channels over the next maybe 12 or 18 months?

That's a great question. I'm going to address flows, and then I'm going to ask Joe to talk about how each of these strategies performs in the environment that you're referring to. Because we feel strongly that we are seeing a significant acceleration in growth. It appears likely that interest rates will continue to migrate higher, perhaps not insignificantly, and thus the potential impact on the strategies that you're alluding to. And it is an interesting time, probably a transition where a pure interest rate-sensitive strategies have been underperforming and seeing flows soften. And conversely, inflation hedges are starting to perform well such as MLPs. We anticipated this last summer, and so we implemented what we refer internally to as the pivot, which is to emphasize in our research, in our sales and everything we do the benefits of our more inflation-sensitive strategies. And I think that's what you're seeing in our flows. As I mentioned earlier, we had flows into virtually every one of our open-end U.S. funds. Now the flows in the preferred strategy are still larger than the others, but the new flows or the flows that are now positive that weren't previously were into our real asset portfolio into our MLP portfolio. Very importantly, into our low-duration preferred strategy. And what that reflects is – and we're seeing – and actually, discussing actively with our relationships, the pros and cons of switching out of our global preferred, which has a longer duration into a low-duration preferred fund. And that obviously wasn't an accident. And so we are seeing underperformance from an investment standpoint in our higher-yielding strategies, but we're also seeing growing flows into our more inflation-sensitive strategies. And if the economy continues to accelerate, or global economies, and if rates continue to migrate higher, we would expect these trends to accelerate. And we feel very good about that. One other beneficiary that I didn't mention is global real estate. The demand for global real estate is really, if not off the charts, really strong, both retail and institutional. And we think that that's going to be one of the additional go-to strategies as an inflation hedge for investors. Joe, why don't you talk about the fundamentals of these strategies?

Sure, so and I think Bob gave a pretty good overview to set up the investment part of the discussion, but let me just fill in some blanks. We've got synchronized global growth. We haven't had that in a long time. That's really positive for the global economy. You add on top of that U.S. tax reform that makes it even better. One of the things we're seeing is rising signs of inflation, which would be consistent with the transitioning to the later stages of economic expansion. And so as we've been anticipating, there's a transition in the markets in asset class performance leadership. And so we think it's a really exciting and dynamic time. I'd say from an investment department perspective overall, we've been very well positioned for this. When you look at our investment performance, our batting average of outperformance across strategies is very high. And relative to our excess return targets for our larger AUM strategies, we've been exceeding them. So just to state generally how we're repositioned, we're more pro-cyclical in our strategies and underweight interest rate-sensitive securities. So that's the firm positioning overall, and that's showed very good results toward the end of last year and that has continued so far this year. In terms of some of the thoughts on specific strategies as it relates to real estate in the U.S., U.S. REITs are down year-to-date, and that is a reflexive response to their interest rate security – sensitivity in the short term. But one of the most important drivers of returns for real estate and for REITs is the economy. And I guess, our expectation would be in the U.S. that we're probably in a period where REITs are going to lag some of these more pro-cyclical or inflation-sensitive asset classes. But as the economy chugs along because we think we're still – have positive real estate fundamentals that REITs will see a catch-up over time as – and that's what we've experienced in the past, where you see an initial period of rising bond yields, and then people realize it's good for the economy and good for real estate fundamentals. Bob made a very good point about global real estate. The non-U.S. markets are doing very well. And with U.S. dollar depreciation, the returns so far this year are positive for global real estate. And there's a dynamic there, too, from emerging markets. So this is important because it aligns with some firm strategic goals as it relates to global real estate. That's where we have the most capacity for every dollar of U.S. investment capacity that we have. Our performance is outstanding. And as – because investors are looking for these global allocations, I think we're very well positioned to be successful in the mandates that we see. As it relates to preferreds, investors are still very hungry for income, and the tax reform didn't change that picture for preferreds relative to other fixed income segments. We are seeing more interest in our low-duration preferred strategy. Just to put that into perspective, our low-duration strategy yields about 4%, and the duration's 2.5, and that compares with our core strategy that has a yield above 5% and duration of about five. We’ve been talking about positioning for our clients with our more inflation-sensitive strategies, which gets to commodities; midstream energy and MLPs; and most importantly, our multi-strategy real assets portfolio. And these are some of our smaller AUM strategies. Last year, they were out of favor, but that's turning, and we think that's going to continue. And so we're anticipating more activity across that complex, in particular, the multi-strategy approach to it, which aligns with investor interest in a lot of different channels.

Okay, thanks for all the color.

Our next question comes from the line of Ann Dai with KBW. You may proceed with your questions.

Hi, good morning. Thanks for taking my questions. And I joined a little bit late. So sorry if something I’m asking was covered already. My first question was just on the Japan subadvisory business. So I think I heard you guys say that your partner does not intend to reduce the distribution again on those products. And so I guess, just from an overall performance and currency standpoint, what did the market conditions really have to look like in order to sustain yields in the high teens for those products? And do continued outflows from those products actually exacerbate the pressure on the sustainability of that yield over the next year or so?

Good question. Really can’t give you a lot of color on that. We really have no input to the distribution policy there. It's our clients' fund, not ours. And so certainly, U.S. REIT absolute returns and the strength or weakness of the U.S. dollar influences investment performance and flows. So those are factors that have always been in play. Where we – how we go forward from here, we're just going to have to wait and see. It will affect all funds equally.

Yes, okay. And I guess on the comp ratio, I think I heard you say 33% on that. And I guess I'm wondering how you think about leverage to that in net outflow or a down market situation. So if you're seeing a divergence in flow trends across channels, but you're still seeing good performance overall, how does that translate into comp? And how do you communicate that to your investment team?

Well, we have a very well-formed compensation framework here, which takes into account, certainly, first and foremost, investment performance. It also takes into account assets, and revenues, and so on. So all of those factors would influence compensation. We've had, over the years since we've been public, there have been years where we've had fantastic investment or fantastic corporate results and investment performance has been weak, and we reflect that in compensation and vice versa. So if there was a year where our financial results were weak but our investment results were extremely strong, you might see the compensation ratio go up. We're true to our compensation framework.

Okay, great. Thanks. One last question just, I think, I missed the pipeline earlier. Could you repeat that for me?

Yes. The awarded but unfunded pipeline is $1.1 billion, and that reflects in the fourth quarter the – of the $555 million that we began the quarter with only about $125 million was actually funded in the quarter, so the funding was light. And as we've talked about, we've had very strong institutional demand. So in contrast to the headline, which made the institutional or the advisory channel appear weak, it's just the opposite. The advisory channel is in terrific shape. So with the exception of Japan, virtually every segment of our business is very strong.

Okay, thanks so much.

[Operator Instructions] Our next question comes from the line of John Dunn with Evercore ISI. You may proceed with your question.

Hi. With the higher level of G&A spend, can you talk about a little bit about some of the expense control stuff you guys are doing to maybe offset some of it? And then also, a few years into the real asset institute effort like – what do you think the next phase is going to look like? Is it more the same? Or have you learned why that might shift in any way.

Hi, this is Todd Glickson. Good question on real assets. I think we've learned a lot about what works and what we can improve on over the last few years. It's safe to say that our real assets institutes, particularly the flagship ones we have in New York, have had exceedingly good attendance across both distribution channels, and we continue to focus on that. But we've done a couple of different things to take it on the road and customize this. So particularly, in the wealth side of the business, we've done road shows in the major cities that we visit that really focus on both our real asset and our income-oriented exposures or products and working across both the RAA and wires channel, which has been successful separately. And on the institutional side, this year, we're going to do something that really leverages or mirrors that, kind of taking that discussion on the road to some of those major cities where we have assets or they’re centers of influences as it relates to institutional consultants. So I think that's been lesson learned for us, and we've got nice traction there as a thought leader in really educating our clients, potential clients. And lastly, and Bob alluded to this before, we're looking to really expand our footprint as it relates to multi-asset real assets. So we have a pending product launch in our offshore fund lineup, which will allow us to actually take our show over there as well.

Thanks for that. So John with respect to the expenses, I think, first of all, the three distinct items that we raised G&A is only going up 3%. And still, you have to deal with that. So we formed an expense task force a little over a year ago. Adam Derechin, our Chief Operating Officer, has been quite instrumental in helping us achieve $3 million plus worth of savings. Most of it, and I think we had mentioned this in previous calls, our market IT-related expenses and expenses related to our mutual fund administration and CIT administration areas. That said, I think, everyone is really pulling together on this, and so expenses are, first and foremost, in everyone's mind. I think we constantly review and just went through the process of approving the G&A for 2018. We have triggers on our controllable expenses, so we have periodic meetings throughout the year to track how the business is doing versus our expense commitments. And we'll be able to react to the markets. And so I think the items that I raised, everybody's dealing with. The 8% to 10% is distortive, but MiFID II is real. These redistribution fees are real, and the fund reimbursement costs are really a product of our success in the wealth management channel. And don't forget, that's a pretty high-margin business for us.

Got you. And then we talked about a bunch about Asia, and I think we all have a pretty good hand on what's happening in the U.S. Maybe you could just give us an update on demand trends and maybe some of the hits and misses you're – you've seen in your push – enhanced push into Europe.

Well, as we've talked about, we staffed up or at least we finished staffing up about 18 months ago. It's really coming on two years since we've had new leadership in place. Candidly, it's taken that time as well to reposition, register in the appropriate jurisdictions the various products and to launch several new ones, including the preferred fund as well as the pending launch of our multi-strat real asset portfolio. In the meantime, our team has been reengaging with their relationships. And so we reviewed yesterday, in fact, the pipeline and we look at the pipeline kind of in two buckets. One is financial intermediaries, and the other is the more traditional institutional accounts. And I can characterize that review as extremely encouraging. There's a lot in the hopper right now. It's difficult to handicap how much and when that will materialize, but I can tell you both from a product alignment and realignment standpoint and from the progress with respect to developing specific business opportunities in both of those buckets, we're right on plan. And we would fully expect 2018 to be the first year where we see material results from that. And so we're very pleased with that. In Asia, aside from the subadvisory flows, Japan continues to be a wonderful laboratory for us to develop new strategies. And as I mentioned, that's where our real asset debt opportunity is coming from. We have a client that is ceding that on our behalf, and us to develop a track record in a very exciting new area for us. And it's also the region where we're developing new infrastructure strategies, such as global logistics, potentially public works, digital infrastructure and so on. And so although, at least temporarily, we're seeing outflows from our U.S. subadvised portfolios. And again, I'll emphasize, I don't know when those outflows will turn into inflows. But I can tell you, of all of the managers in that space, I think we're them most competitively, most advantageously positioned for a resumption of growth. And then, as was mentioned earlier, our institutional business in Japan as well is relatively new like Europe. But now that we're in the second or third year of that effort, we are seeing some meaningful progress there as well. So we do expect the institutional and financial intermediary market in Europe to show results, and we expect to see positive results from the institutional market in Japan.

Just one other thing to expand on that, and it's in the comment Bob made, I think it was last quarter and there was a push-pull or overlap between the two markets. And the example I would throw out there is with our offshore fund platform, once we got those products out there, some of the initial interest we're seeding came from clients we already had in Asia. A good example would be with our global preferred product, where it was seeded by some Japanese clients of ours. And that interest continues and spreads throughout that region there. And then I think the last thing is one of the items that we focused on when we looked to reboot that lineup of funds is what do we need to have three years out? So infrastructure is a good example. We seeded it several years ago. We did what we would call a soft launch with the knowledge that two, three years into it, as we had the bodies on the ground, there would be a track record. And there's also some green shoots in terms of just where we are in the market cycle and level of interest. So hopefully, all of those things start to kick in this year in earnest.

Great, thank you.

Our next question comes from the line of Mac Sykes with Gabelli. You may proceed with your question.

Good morning gentlemen. Can you provide some more context around the tax reform and REIT structures as well as some of the implications for vesting? So just trying to dig into some of the tax. I think Bob has alluded to it, but maybe you could just give us little more granularity on that?

Sure. So REITs, as a pass-through entity, will benefit from the 20% deduction that investors directly and REITs will be able to take. So effectively, the tax rate on REIT dividends will go from – for the highest tax rate investor, from 39.6% down to 29% and change. So that's a nice benefit. More broadly in the market, because REITs are not – don't pay corporate taxes, on a relative basis, they aren't seeing as much earnings growth compared with most corporations. One nuance with the tax reform is that mutual funds investors won't see the benefit of that 20% deduction. Now we think that's an unintended consequence of a reform that got lost in the shuffled we know that both the ICI and NAREIT, which is the trade organization for REITs, are working with Congress. And they think they can get that changed without legislation, they can get it done with regulatory channels. So that's the kind of the high points for REITs in tax reform.

Then my follow-up is in terms of solutions providing for institutions away from the multi-strat vehicle, is there an ability for institutions to get a more customized basket of real asset strategies? And is it – are you reacting to this necessarily? Or are you sort of trying to create that demand?

We’re not reacting to it, this is a big area of opportunity for us to work with all types of clients to provide asset allocation overlays on real asset portfolios. And we’re seeing more and more examples of that. I think we talked last quarter about one existing client who was transitioning three different real estate that we have across the capital structure for REITs into one comprehensive portfolio. We're adding an asset allocation overlay. In terms of our multi strategy real asset portfolios we've got two varieties of it that have different return and volatility characteristics. We're adding a third and expanding that to infrastructure we think there's a good opportunity in multi-strat infrastructure. So there are going to be specific portfolios that we create. But then if an institution comes to us and says hey I've got this one specific real asset allocation but I'd like to add these others we’ll work with them to customize an approach and either provide just the management for the sleeves or provide an asset allocation overlay for all of their real asset sub-sleeves.

Thank you.

And just to finish up on the tax reform. For MLPs, they also will benefit from the 20% deduction for their – the taxable income that they generate. It's a little bit less of a benefit than it would be for REITs because MLPs allocate the underlying income which is sheltered through depreciation. So relative to the distributions that they provide, the tax effect is less than it would be for REITs by comparison.

Our next question is a follow-up question from the line of Ari Ghosh with Crédit Suisse. You may proceed with your questions.

Hey thanks for taking up my follow-up. I appreciate it. Just a quick one on the macro side. So if I look at the overall outlook for Japanese equities in the Japanese equity market, it looks to be a little more favorable than it has been over the last couple years. So I'm just wondering if you view this as a headwind for the Japan subadvised business as more money potentially gets allocated towards domestic equities versus other classes, including U.S. real estate.

I really couldn't say obviously our products are sold almost exclusively on a high distribution yield. So look, I think that the bigger headwind is flatter negative returns from U.S. REITs and a weak U.S. dollar. I’m less concerned about how Japanese equities are performing.

I appreciate that. Thanks guys.

Mr. Johnson there are no further questions at this time. I will now turn the call back to you.

Great. Well thank you all for joining us this morning. And we look forward to speaking again next quarter. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.