Cohen & Steers, Inc. (CNS) Q1 2023 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers First Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, April 20, 2023. 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 First Quarter 2023 Earnings Conference Call. Joining me are our Chief Executive Officer, Joe Harvey; our Chief Financial Officer, Matt Stadler; and our Chief Investment Officer, Jon Cheigh. 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 first quarter earnings release and presentation, our most recent annual report on Form 10-K, and our other SEC filings. We assume no duty to update any forward-looking statements. Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund or other investment vehicle. 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 Web site at www.cohenandsteers.com. With that, I'll turn the call over to Matt.

Thank you, Brian, and good morning. Consistent with previous quarters, my remarks this morning will focus on our as adjusted results. Note that, effective January 1, such results included interest and dividends earned on our corporate seed investments. A reconciliation of GAAP to as adjusted results can be found on pages 13 through 15 of the earnings release, and on slide 16 through 20 of the earnings presentation. Yesterday, we reported earnings of $0.76 per share, compared with $1.04 in the prior year's quarter, and $0.79 sequentially. Revenue was $126.3 million in the quarter, compared to $154.3 million in the prior year's quarter, and $125.5 million sequentially. The increase in revenue from the fourth quarter was primarily due to higher average assets under management across all three types of investment vehicles, partially offset by two fewer days in the quarter. Our effective fee rate was 57.6 basis points in the first quarter, compared with 57.8 basis points in the fourth quarter. Operating income was $48 million in the quarter, compared with $68.9 million in the prior year's quarter, and $50.9 million sequentially. And our operating margin decreased to 38% from 40.5% last quarter. Expenses increased 4.8% from the fourth quarter primarily due to higher compensation and benefits, and higher G&A. Compensation to revenue ratio for the first quarter was 38.5%, consistent with the guidance provided on our last call. And the increase in G&A was primarily due to a full quarter of rent expense for our new corporate headquarters, where the lease commenced on December 1. We expect to occupy our new space by year-end. Our effective tax rate was 25.25% for the quarter, slightly lower than the guidance provided on our last call. Page 15 of the earnings presentation sets forth our cash and cash equivalents, corporate investments, and U.S. treasury securities, and liquid seed investments for the current and trailing four quarters. Our firm liquidity totaled $247.6 million at quarter-end, compared with $316 million last quarter. Firm liquidity, as of March 31, reflected the payment of employee bonuses as well as the firm's customary repurchase of common stock to satisfy withholding tax obligations arising from vesting and delivery of restricted stock units to participating employees. At quarter end, we had no borrowings on the $100 million three-year revolving credit facility that we entered into on January 20. Assets under management were $79.9 billion at March 31, down slightly from $80.4 billion at December 31. The decrease was due to net outflows of $497 million and distributions of $694 million partially offset by market appreciation of $671 million. Joe Harvey will provide an update on our flows and institutional pipeline of awarded unfunded mandates. Let me briefly discuss a few items to consider for the second quarter and remainder of the year. First, with respect to compensation and benefits, we are taking a deliberate and measured approach to both new and replacement hires, which is intended to balance talent growth, our opportunities, and the environment so that, all things being equal, we would expect to maintain a compensation to revenue ratio of 38.5%. Next, we expect G&A to increase 12% to 14% from the $52.6 million we recorded in 2022, the majority of which relates to costs associated with our new corporate headquarters, and to a lesser extent certain other strategic infrastructure initiatives, such as establishing a new datacenter, opening a Singapore office, relocating our London office, and upgrading our trading and order management system. Excluding these costs, we would expect G&A to increase 4% to 6%. That said, in light of the environment, we have undertaken a comprehensive review of all of our non client-related expenses. And finally, we expect that our effective tax rate will remain at 25.25%. Now, I'd like to turn it over to our Chief Investment Officer, Jon Cheigh, who will discuss our investment performance.

Thank you, Matt, and good morning. Today, I'd like to first cover our performance scorecard and how our major asset classes performed. Then share our views on two topics, first the health of both the European and U.S. banking systems and our forward outlook for preferred securities. And second, market conditions for commercial real estate debt, the impact on private CRE values and our investment outlook for REITs. Turning to our performance scorecard for the quarter, 68% of our AUM outperformed their benchmark. For the last 12 months, 66% of our AUM outperformed versus 74% as of the end of Q4. For the last three, five, and 10 years our performance track record remained extremely strong at 98%, 97%, and 100% respectively. From a competitive perspective, 90% of our open-end fund AUM is rated four or five star by Morningstar, which is down from 98% last quarter. In summary, while our performance batting average for the longer-term remains nearly perfect, over the last 12 months we have seen it dip below our standards. The majority of our underperforming AUM relates to our preferred security strategies, where we were impacted by regional banking exposure. While disappointed with those short-term results, we and our clients don't manage the quarter-to-quarter results. I want to highlight that this year the senior PMs of our award winning preferred team, Bill Scapell and Elaine Zaharis-Nikas are celebrating their 20-year anniversaries at Cohen & Steers. Over those 20 years, we have outperformed in 19 of them. While this quarter was a performance setback, we are extremely confident in the long-term feature of the asset class, it's importance in allocation and generating tax-advantaged income, and in our team's ability to generate consistent and meaningful outperformance. For the quarter, risk assets continued their recovery with global equities up 7.4%; the Barclays global aggregate up 3%, and notably commodities down 5.4%. Equity index performance was heavily dominated by large cap technology stocks as evidenced by the median S&P 500 stock being up only 1.5%. In contrast to last year, our asset classes generally underperformed headline indices with the U.S. and global REITs up 1.7% and 0.8% respectively. Listed infrastructure up 0.5% and preferred securities down 1%. Listed infrastructure following material outperformance in 2022, posted positive returns but lagged equities. Passenger transportation subsector such as airports and toll roads led the way up 16% and 7% respectively with improving passenger volumes and better than expected economic activity in Europe. The more industrial economy sensitive railway and marine ports subsectors lagged, both in part due to idiosyncratic issues. In the context of persistent albeit falling inflation and below trend economic growth, we continue to expect infrastructure to perform relatively well. Investor interest in both listed and private infrastructure continues to grow given those attributes. Our two largest asset classes of U.S. REITs and preferred securities were both impacted by volatility in the banking sector and the possible negative feedback between real estate and banks. First, let's discuss preferred securities where approximately 50% of the universe is made up of banks with about half in Europe and half in the U.S. In over view, the banking system in Europe is well capitalized with good liquidity. And, with lower duration assets that should benefit as interest rates rise. Post GFC, regulators permanently tightened capital and liquidity requirements without exception including smaller banks. These moves made the banks safer and more credit friendly. European regulators unlike the U.S. have been consistently vigilant about interest rate risk. To us, all of this argues for a healthy and possibly improving credit picture for European bank preferreds. In the U.S., systemically important banks have strong capital and liquidity. But, the U.S. has a very long tail of smaller regional banks approximately 4700 and regulators did become more relaxed over the last five years. This increased credit risk at the margin. So, we expect pockets of weakness within that long tail and have repositioned our portfolios, credit quality. As I referenced about Europe, we think it's critical that investors understand that certain shifts can be negative for earnings in common shareholders while being positive for bank preferred investors. This is precisely what we saw for much of the global banking space post GFC. Like that period, we would expect today more common equity being raised, loan growth slowing to boost liquidity, regulations increasing, and common share buybacks being reduced or suspended. These moves are clear positives for U.S. bank preferreds. Cyclically, we also believe interest rates are near their peak. And this will support fixed income including preferreds. So with valuation support and regulation creating more conservative banks and credit tailwinds, we believe preferreds have reset for strong new investment cycle. Turning to REITs, any regular reiter of the financial press would have heard the question, is CRE debt the next shoe to drop? REITs underperformed the broader indices for the quarter. But, that was entirely because of the market reaction to that question with REITs underperforming by 8% over the two weeks following the SVB events. Recently, we published a research report entitled Commercial Real Estate Debt Market: Separating Fact from Fiction. The most important facts to address some common misconceptions included, first, the $4.5 trillion commercial mortgage market. It's highly fragmented. And regional and community banks represent less than one-third of the market with the balance comprised of other lenders such as the GSEs, life insurance companies, large banks, and securitized markets. Second, while office gets much of the media focus, it represents only about 17% of loans outstanding and 3% of the REIT market. Third, while we believe property values may come down 20% to 25% from the peak on average, one needs to keep in mind the significant price appreciation over the last 5 to 10 years. Because of this, average REIT leverage ratios are closer to 30% to 35% versus the 50% or so where refinancing can occur. Last, about two-thirds of mortgages are long-term fixed rate with the balance floating. And in those cases, many but certainly not all are hedged protect against interest rate increases. So, what does that all mean. Credit losses will likely rise as they often do in recession. But, we see little basis to believe this cycle will deviate from historical patterns. If anything, the improvement in loan underwriting post GFC implies credit losses may be lower than average. In the private market, we are seeing deal flow beginning to emerge and observing prices down in some cases 15% to 20%. But note, private real estate indices as reported and certain private vehicles still are generally only down 5% to 10% from the peak. So, likely still more to go. Credit tightening from regional banks will have the most acute impact on construction loans and smaller private developers. A pullback will impact construction activity, small businesses, and local GDP. But over a full cycle, this means less supply, less over building, and more discipline which should be a positive for rental growth and asset values on a 3- to 5-year horizon. What does this all means for REITs? Our picture for '23 and 2024 remains consistent with our views shared in January, recession, which should transition to recovery later this year or early next. REIT share prices that have generally discounted meaningful declines already, REIT balance sheets are generally healthy and in many cases will allow REITS to go on offense while local private players and private equity are either dealing with little access to new debt capital or legacy leverage problems. For Cohen & Steers, we made a lot of money for clients in the REIT recap cycle of 2009. And, we will take the same approach but likely in different ways to capitalize on both listed and private opportunities. Last, we believe 2023 will prove to be a good vintage year for listed real estate. And we believe savvy or thinking investors should be using recession to do one of two things. Either rebalance out of private vehicles that haven't repriced enough into listed REITs, or allocate new capital over the course of the year as the transition from recession to early recovery plays out. With that, let me turn the call over to Joe.

Thank you, Jon, and good morning. Today, I would like to begin with a review of our first quarter business fundamentals. Then, turn to our outlook. In prior calls, we talked about our forecast for an average type of recession. Those views didn't include the failure of some prominent banks. As we all now know in mid-March, a banking liquidity event emerged which appears to be contained for now. Yet, will manifest in tighter credit. The Federal Reserve has found a breaking point for the more meaningful weak links in our financial system as we adjust from zero interest rates to more normalized interest rates. So, at the margin, we've shifted our outlook from an average recession to something more protracted. If it wasn't a perfect storm for our asset classes in the quarter, it was a thorough storm with banks being the largest issuers in our preferred securities strategy and among the largest sources of credit for the commercial real estate sector. Bank sector headwinds together with contracting money supply raise the odds that the inflation cycle is breaking down potentially affecting at the margin our inflation sensitive real asset strategies. Our equity-oriented strategies underperform stocks in the quarter while our preferred strategies underperform bonds. Listed REIT stocks outperform the private real estate market as measured by appraisals which do not adjust for the lead lag timing dynamic of listed versus private real estate performance. Private real estate prices have begun to be marked down beginning the process to catch up with listed real estate price declines of last year. In the first quarter, we had firmwide outflows of $497 million. This was our fourth consecutive quarter of outflows and reflects the fundamental shift in the macroeconomic environment including declines in financial asset values, higher interest rates, the peaking of inflation and the specter of recession. Both the wealth and institutional channels contributed to outflows primarily in preferred stock strategies after the bank's situation in March. In total preferreds had outflows of $872 million which were partially offset by U.S. REIT strategy inflows of $434 million. Our Global Listed Infrastructure and Multi-strategy Real Assets portfolios also experienced modest inflows. Open end funds had net outflows of $305 million led by U.S. open end funds with $508 million out partially offset by inflows into our offshore CCAP funds, the 11th straight quarter of inflows and inflows into model based portfolios reflecting regime change in volatility, open end fund subscriptions in the quarter were 23% lower than the pace for all of 2022. Likewise, redemptions were also 23% lower. Our Preferred open end fund outflows, 42% were from model programs related to preferred strategies at a wirehouse and a private bank. Institutional advisory net outflows were $399 million led by three clients trimming, U.S. and Global Real Estate portfolios. Subadvisory ex-Japan had $45 million of net outflows. Japan subadvisory was the strongest channel in the quarter, with net inflows of $326 million representing the fifth straight quarter of inflows and led by one of Daiwa Asset Management's U.S. REIT mutual funds that we subadvise. Our one unfunded pipeline was $995 million compared with $885 million last quarter and the three year average of $1.35 billion. To bridge the change, during the quarter, there was one funding of $25 million, seven newly awarded mandates totaling $218 million and $83 million in canceled mandates. Four of the seven new mandates were in our U.S. REIT CIT vehicle for retirement plans. The other three were in multi-strategy real assets portfolios and global real estate. Both the first quarter bank failures and the macro regime change have slowed the pace of searches. Our lower than normal scheduled finals reflect that the mandate and search process inevitably slows down in volatile environments. That said, we have a healthy opportunity set of searches in process as measured by the number of prospects, number of strategies, and their geographic diversity. For several quarters, we have been talking about how the regime change in the macro economy may affect asset allocations. We have now seen meaningful examples of how a 4% to 5% treasury yield can drive money flows. We expect that the combination of a more normal range of fixed income yields and the need to compensate for higher volatility will drive portfolios to increase their fixed income weightings. At the same time, the lag in private equity value markdowns may push allocations to illiquid investments above portfolio target weightings. Allocators will need to balance the secular momentum private investments have versus the markdowns and illiquidity that will be factors in the intermediate term. As these shifts occur and as return cycles turn to the positive, liquidity will be valued at a premium, while all asset classes, including ours will be affected by these trends. We believe that secular tailwinds remain for allocations to our core strategies. Combined with our strong long-term investment performance and we will be relentless in steering our one-year batting averages back to the levels to which we are accustomed. We believe we are well positioned to resume organic growth. REITs should attract marginal flows as their prices have already corrected meaningfully and Investors pause for price discovery in the private market. All investors should ask the question, "Why should you buy in the private market if you can get meaningfully better values in the listed market?" It's a healthy discipline that more investors are using to guide capital. In infrastructure, demand is growing and investors are below target weights, just as in real estate and private equity, we believe listed infrastructure complements private infrastructure. For multi-strategy real assets, inflation has been significant. What had been just a theory became reality. For those that believe inflation will be sticky or resurgent, the insurance premium and an allocation is valuable, and we see more investors evaluating this strategy. Our most underappreciated and under-owned strategy is resource equities, which includes energy, agriculture and metals and mining. These are all sectors with finite resources and supply constraints, which may serve as drivers of both intrinsic value as well as price appreciation. To emphasize Jon's comments on the macro environment, we believe that the banking system is fundamentally sound, notwithstanding the recent turmoil, and as a result, the preferred market will stabilize and ultimately participate in the new return cycle for bonds that likely has begun. As it relates to headlines about the looming risk of a commercial real estate debt crisis, we believe that, with some exceptions, property owners maintain adequate equity, reflecting appreciation over the past cycle, even with the 20% to 25% price correction we've been calling for. The exceptions are urban office markets and properties developed or acquired and financed with debt over the past several years at the peaks of the most recent price and interest rate cycles. While equity needs for these properties are not insignificant, they appear to be manageable in light of current levels of dry powder and private equity, the size and development of private credit markets and the expected capital flows into REITs once investment opportunities ripen. We continue to build our private real estate initiative for our Institutional Private Equity Fund, we had a second closing. For our non-traded REIT, Cohen & Steers Income Opportunities REIT, we have been declared effective by the SEC, are nearly through the state registration process and conversations with distributors are progressing. We continue to evaluate the commercial real estate price correction and believe that the cyclical downturn will present attractive investment opportunities. We are therefore being especially disciplined and patient in deploying capital. On the client engagement front, we have developed tools to help investors optimize portfolios in terms of weightings and allocations between listed and private real estate markets within a financial asset portfolio. Our recently published annual report was entitled Change Creates Opportunity. The regime change in the macro economy is significant and will take time to unfold. It will present a new menu of cyclical and secular trends and asset class valuations, all of which will lead to money in motion. Our job is to manage prudently as the shifts play out, balancing investments in the business with prudent cost controls, and be prepared to capitalize on opportunities for our clients. We look forward to reporting to you on our progress. Thank you for listening. Operator, please open the lines for questions.

[Operator Instructions] Your first question is from the line of John Dunn with Evercore ISI. Your line is open.

Thank you. Maybe we could start off with the biggest drag on flows right now. You talked about a performance reset for preferreds, but can you talk about what's going to drive demand for preferreds and maybe where we are in a demand cycle? Also, any early post-quarter shifts?

Sure, John, let me start, and maybe Jon Cheigh can add to my response. The primary attraction of preferred securities is their current yields and potential for capital appreciation, particularly at times like this one when you've had some dislocation. So, I talked a little bit about how asset allocations are shifting now that there are more fixed income choices to have something better than a 0% yield. And what we've experienced over the past couple years is that preferreds have stood out through that period of low rates. But now, with the banking situation and the price declines, yields are even better. And it appears that the banking system has stabilized for now. And as Jon articulated our view on the system overall, with certain exceptions, is positive. So, as it relates to recent activity, the outflows have abated, and so I'd say we're at a neutral level at this point. And if the banking system continues to heal, I would expect that the flows will ultimately resume for preferreds.

Great. So, I'm a believer real estate is a secular allocation, but how do you think flow demand for REITs will continue to play out over '23, maybe by the different sales channels?

Well, I'll start and Jon could add some color because we're in conversations with a lot of different types of investors. But REITs have a great history now, so you can look at how they've performed throughout recessions and credit cycles. And we put out the research that said that you want to tend to start to average into REITs as recession takes hold. And some of the best returns can come by way of that. Looking past that and thinking about our comments on the challenges in real estate financing, ultimately REITs, as they have been at many points in time and major turning points in the real estate markets, that they'll be providers of capital to take advantage of the opportunities and help sort out any of the debt refinancing issues that come up in the sector. So, I would say on the wealth side, that there's just much better education than there has ever been on how to use REITs in a portfolio. We have been developing, particularly in light of our private real estate initiatives and our non-traded REIT have developed tools for investors to help them allocate between how much they should have of real estate in a financial asset portfolio, but then how to allocate that between private and listed. So, I think we're in a great position to help advice financial advisors on how to navigate with some pretty exciting turning points in the commercial real estate market. Institutionally, there's a lot of activity. As I've said in my comments, it's not manifested yet in official finals, but we're in a lot of searches, and there's a lot of interesting dynamics as we're seeing around the world things like institutions who have invested in enlisted real estate using passive strategies, wanting to convert those strategies to active strategies, to coming up with what we call completion portfolios, like you might have an institution who has a lot of capital in a core private real estate strategy but they'd like to complement that with some of the sectors and exposures you can get in the listed market. And we've also just seen recently just more interest on this whole topic of, okay, the listed markets have already corrected, that's where the values are presenting themselves. We can't put capital work in the private market because there's price discovery that's happening, and it's an [illiquid] (ph) market, nothing is trading. So, I'd say, and this is not just with the institutions themselves but the asset consultants who have, I'd say, been laggards on this whole concept, but just more interest in being dynamic along the cycle as to where the marginal dollar goes.

I guess the only thing I'd add is, despite the media, is CRE the next huge drop, et cetera, I think the vast majority of investors agree with you, John, and us that they have strong faith in real estate as an asset class, and want to continue to get more exposure to it. We're seeing a limited amount of people moving from existing private vehicles into the listed market, so there's definitely some of that, but of course there's limits on that. But we are definitely also seeing some investors that are trying to calibrate and time how they get exposure over the course of 2023. I think people recognize, on a buy and hold basis, if they buy today they'll be very happy three to five years from now. But, of course, they want to find the "bottom", and that's why our advice to them is that as we normally transition from these recessionary kind of periods to early recovery periods, no one ever really times the bottom perfectly. And so, there are certainly some milestones, but that's why we'd expect people to, so called, [leg in] (ph), if you will, to these allocations over the course of 2023, rather than just try to make one bold call at a certain point in time.

Got you. And then, maybe a little [downer] (ph), if you look at your guys at the fund level, your top real estate exposure or some version of industrials, healthcare, infrastructure, datacenter, does positioning matter? Does everything get dinged if sentiment turns against real estate writ large, particularly what we're seeing on the CRE side?

Look, I think there's always short-term things that happen. So, CNBC says CRE debt, and then everyone talks about office, and people say, "Okay, I think REITs are bad." That's why we always try to reiterate to people office is 3% of the REIT index. And our exposure to office might be something like 1% or 1.2%, something like that. And we can say that a hundred times, and certainly it'll still educate someone because of their understanding of what REITs are. So, I think when those overreactions happen, look, that's the opportunity. That really is the opportunity, but I don't think these misconceptions are so strong that they're going to persist for quarters and years. Those reflexes usually create an opportunity on, like I said, something happened with SVB and REITs underperformed by 8% versus the broader equity market. These tend to be more shorter-term reactions than durable trends that longer-term investors should worry about.

I'd just add that, today the range in property sectors and underlying businesses is probably as diverse as it's ever been 20 years ago, there's just much more representation by the core property sectors that we all know office, industrial apartments, et cetera. But today, with cell towers and data centers, you have some sectors that are a little bit less connected to the economics that drive the property sector and the financing markets in the case of cell towers. So we've actually with our re-completion strategy or next generation REIT strategy, it's performing extremely well this year, a little bit more consistent with what Jon talked about on concentration of performance in the equity market from some tech names.

Right, makes sense. Okay. We haven't talked a lot about non-U.S. real estate, what are the kind of dynamics going on overseas and what's the differences for sourcing flows for that part of the menu?

Yes, that's a good question. So I guess obviously the two big drivers, when you think about whether it's Europe or Asia, it's the economic trajectory, which was somewhat driven by, at some point, so called COVID reopening. We are further behind in that in places like Japan, Hong Kong, China and Singapore. So there are places that are seeing more accelerating economic growth as opposed to Europe and Asia. So I would say, Asia is a place generally that we have favored at the margin over the U.S. and Europe because it is further behind. And frankly, valuations are generally more attractive. The other thing with Asia is generally balance sheets for the most part are healthier than the U.S. and Europe. Again, I think that the U.S. balance sheets are very, very healthy from the REIT side. But Asia, we feel both from a reopening perspective and from a balance sheet perspective, very good. I would say in Europe you certainly have that reopening dynamic, which is a positive, and we're seeing it in places like retail. But I would say at the margin, European REIT balance sheets are a little bit worse than here in the U.S. And so while we feel very good about European bank balance sheets, we feel more cautious on the European REIT balance sheets. Again, this is all at the margin. So when we talk to investors, I would say, or large institutions, particularly global institutions, pension fund sovereigns, the conversations are almost always about global real estate. They're occasionally about U.S., but it's primarily about having a global allocation. So whether it's sovereigns in Asia, the Middle East or Europe, I'd say that's the dominant conversation. So I think we're definitely seeing all those opportunities for all the things we've talked about. Valuations have improved. A lot of those entities have capital that they still want to deploy, albeit maybe deployments are less than what they were making three years ago. They're still making new capital commitments and REITs are a place where number one, we're educating them on, in some cases they've never invested in REITs or they've only done it passively. And secondly, we're educating them on how can it be that private real estate is going down and public REITs are going to do well. And when we tell them, it always happens this way, they're learning something new and it gives them confidence to become a more active investor in REITs at this point in the cycle.

Got you. And then, it's early days for private real estate, but it sounds like stuff is happening, maybe just talk a little more about the timing of things that could happen over the rest of this year and the demand you're seeing and then you talked about potentially a good return environment?

Yes, so we are in the capital raising mode for both the institutional vehicle as well as the CNS REIT vehicle. In terms we're not deploying capital at this point. We're waiting for the prices to correct and we're waiting for our shots to get the type of returns that we want. So we're going to be, as I said, very patient, very diligent. So, I can't tell you when that's going to be, but it's probably sometime in the second half of this year. And the two topics, capital raising and deployment, at some point are connected, right? And investors want to know that what you're going to be doing. And so to the extent there's no activity in the transaction market, investors sometimes want to sit on their hands. But we're in contact with some investors who really understand what we are doing. I think sometime toward the end of this year, the acquisition markets will start to open-up as the whole debt situation starts to get resolved for the types of situations that Jon and I talked about.

Well, stay tuned. So advisors have been sliding for bit, and you talked about some slowdown in searches. But can you talk a little more, give us a little more flavor of the advisory conversations going on and do you think we get a normal stuff that's already in the pipeline, normal fundings over the year, or do some get delayed? And maybe regionally, overall how can you get that channel back to positive?

I think a lot of the slowdown and you can see that in our one unfunded pipeline, if you bridge, if you followed my comments, you saw there's not a lot of funding activity in the quarter. And so it's not a matter of interesting demand changing. It's just a matter of within the environment that things have just slowed down. So, in terms of the search activity, I think it's been as active as I've seen it. It's just taking it longer for them to get through the process. And the asset owners are dealing with a lot of things, dealing with volatility in the markets, shifting opportunity sets. And I tried to convey that in my comments, and it just results in the process taking a longer period of time. But as it relates to the number of prospects that we're and conversations with, it's still very active. And it's across real estate, both U.S. and global. It's across infrastructure as well as multi-strategy real assets, notwithstanding the fact that inflation is coming down.

Right. And then maybe just to check in on Japan, we're now a year into deposit part of the distribution cycle, it normally lasts multiple years. Any concerns for people that you can see?

Japan is very difficult to predict. It's been our strongest inflow channel. The drivers behind that include going back a little ways, just the strength of the dollar, but also in the wealth channel, there can be at points in time a lot of faddish type investing and chasing of things like tech. So, the fact that tech went into a downturn has helped investors go back to more value and income oriented allocations. So that's hard to predict. I'd say the other dynamic that as it relates to our subadvisory business, there is, as is the case in Japan, managements change every couple of years. And I would say the current management at Daiwa Asset Management is very interested in our strategies and very interesting and doing things to promote those vehicles. So, that makes me optimistic. Institutionally because of the fact that the market has been closed due to COVID but now reopening, it's been slow but we would expect that to get better as that country overall tends to get back to more to normal in terms of business activity.

Good to hear. So maybe just on closed end funds, what do you think the window looks like for the rest of the year? Will it open because there's probably some good returns out there for new money?

I think the window is closed for the foreseeable future and one of the reasons is that with the cost of debt financing today, there are not many strategies for which you can create a positive spread on the cost of your financing. So you can't enhance the yield of the closed end fund using leverage. At the same time, there are discounts in the market to asset value that are very attractive. So those things are going to make it hard for the window to reopen. I will say though that once the interest rate cycle turns, those things can change pretty quickly, meaning discounts can narrow if yields settle out at certain levels. There are a couple of strategies you could do a close down fund for, but right now I mean our outlook is that yields will be more normal. And so, if that's the case, it's going to be tougher to use leverage and close down funds.

One more real estate one, how do you guys think about real estate debt lending in addition to your private vehicles?

Well, we don't currently have a capability in that. We invest in certain types of real estate company, debt and preferred stock, as well as REIT debt. It's a capability that would be a natural one for us. And based on our view of the fact that some regional banks will pull back as lenders and there's going to be an opportunity, and some asset managers are talking about it already. But it's something that we're going to spend time on and see if we could find a capability that would complement everything that we built in real estate.

Got you. And then maybe just a thumbnail for people in January 24, what do you think, we'll look back and say these were the areas that drove positive flows in '23?

Well think that if the interest rate cycle does in fact peak as Jon articulated, and the markets respond to that, it will create flows in REITs. It will create flows in preferred securities. I'd say that both, one precondition would be that the banking system has to continue to show that it's stabilized. But to answer your precise question like that, that to me would be if the environment starts to normalize, then we have a lot of interest that's kind of waiting on the sidelines for those conditions to get better.

Thanks very much, guys.

Thanks, John.

There are no further questions at this time. I will now turn the call back over to the CEO, Mr. Joe Harvey.

Great. Well, thank you for your time this morning and we look forward to speaking to you in July as we report our second quarter earnings. Have a great day.

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.