Ladies and gentlemen, thank you for standing by. Welcome to the Cohen & Steers' Second 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 call is being recorded, Thursday, July 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 second 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 second 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 website at www.cohenandsteers.com. With that, I'll turn the call over to Matt.

Thank you, Brian. Good morning everyone. Thanks for joining us. As on previous calls, 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 and on Slides 16 through 20 of the earnings presentation. Yesterday, we reported earnings of $0.70 per share compared with $0.96 in the prior year's quarter and $0.76 sequentially. Revenue was $120.3 million for the quarter compared with $147.7 million in the prior year's quarter and $126.3 million sequentially. The decrease in revenue from the first quarter was primarily due to lower average assets under management across all three types of investment vehicles partially offset by one additional day in the quarter. Our effective fee rate was 57 basis points in the second quarter compared with 57.6 basis points in the first quarter. The decline was primarily due to mix as open-end funds represented a lesser portion of our average assets under management in the second quarter than they did in the first quarter. Operating income was $43.8 million in the quarter compared with $64 million in the prior year's quarter and $48 million sequentially. And our operating margin decreased to 36.4% from 38% last quarter due primarily to a second quarter adjustment to compensation that increased the compensation to revenue ratio. Expenses decreased 2.2% from the first quarter, primarily due to lower distribution and service fees and a decrease in G&A. The decrease in expenses related to distribution and service fees was primarily due to lower average assets under management in U.S. open-end funds partially offset by one additional day in the quarter. The decrease in G&A was primarily due to lower non-client related travel and entertainment and a decrease in recruitment fees. Although…

Thank you, Matt, and good morning. Today, I'd like to first cover our performance scorecard and how our major asset classes performed during the second quarter. And second, I'd like to remind investors of the strategic case for real assets and why we continue to expect it to play a meaningful role for investors over time. Turning to our performance scorecard for the quarter, 98% of our AUM outperformed, a meaningful improvement versus last quarter's 68%. For the last 12 months, 83% of our AUM outperformed versus 66% as of the end of Q1, again a significant improvement. For the last three, five and 10 years, our performance track record remains nearly perfect at 96%, 97%, and 100% respectively. From a competitive perspective, 88% of our open-end fund AUM is rated four or five star by Morningstar, which is down marginally from 90% last quarter. Our strong performance this quarter was led by our largest asset class U.S. REITs, where our flagship strategy outperformed by 210 basis points and is now up 310 basis points for the year. Not to be ignored, our flagship global real estate strategy outperformed for the quarter and year by 180 basis points and 260 basis points respectively. Over nearly every timeframe, we have demonstrated that our real estate investment team has competitive advantage. Our culture, our market position, our ability to develop and promote new leaders and our investment track record both reflects and drive our standards of excellence. We believe that our real estate platform, both listed and private, will deliver for our current and future clients, who recognize our unique capability to generate and sustain great results at scale. For the quarter, risk assets continued their recovery with global equities up 6.3% compared to the Barclays global aggregate bond index, which was…

Thank you, Jon, and good morning, everyone. I’d like to discuss the market environment and our second quarter business fundamentals, then review how we are navigating the environment. The second quarter market environment for us was a little more challenging than the first, but with inflation declining and monetary tightening nearing the end and with a lot of asset allocation shifts already made, we may be transitioning to a less challenging phase of the cycle. Last quarter we talked about how disruption in the commercial banking sector affected our largest asset classes, preferred securities, and U.S. REITs. We told you that we didn’t foresee a systemic issue with the banks which would impair preferreds and that concerns about commercial real estate finance while valid for the office sector have been overstated on the whole. While we expect more credit and funding issues may arise over time, the pressure on bank balance sheets has abated for now. We still believe that U.S. listed REITs have begun a new return phase as their prices typically bottom in recession and as the Fed ends a tightening cycle. We also believe the preferreds should enter a new return cycle as well. This phase in the macro environment and markets has been challenging, not for its depth of decline like in the global financial crisis, but for its duration. It is taking a long time for the cycle to play out as the economy across the consumer and corporate segments had significant momentum going into this. We still expect some type of recession as signaled by the inverted yield curve and as higher debt costs ripple through the economy. And we still expect that private valuation marks will decline and together with economic slowing will result in some credit reverberations and asset allocation shifts and…

Thank you. [Operator Instructions] Our first question comes from John Dunn from Evercore ISI. Please go ahead. Your line is open. John Dunn, your line is open.

Thank you very much. You guys – you're now one of the fee with both public and private real estate so maybe it's – and it sounds like there's a little more opportunity right now on the public side. But can you talk a little bit more about the interplay between those two and maybe looking further out the opportunity for both when we get more flat rate environment?

Sure. Let me start John, this is Joe, and I'll ask Jon Cheigh to add on. The strategic view is that you can build better real estate allocations and investor portfolios if you use both listed and private allocations. We believe that for a long time. And what's happening in the institutional market foremost and in the wealth market secondarily is that investors are increasingly willing to go to where the best opportunity is. And in Jon's comments, he set up kind of where the relative opportunity is today, and that's in the listed market because share prices have already declined, whereas the prices in the private market are – have just begun to correct. So that creates an arbitrage, so to speak. And for the marginal dollar, you want to be focused on where the best deal is, and that's in the listed market today. That opportunity is most extreme at turning points in cycles, and we're at one of those turning points today. Furthermore with those two markets, you have access to different types of real estate opportunities. In the listed market today, you've got more core type or in some cases core plus opportunities. And you have some property sectors, which are harder to gain access to in the private market. An example would be cell towers or data centers. Then in the private market, you have access to opportunities that might be tougher to get in the listed market. And you'll likely find better opportunities in opportunistic type situations, particularly now with where we're at in the cycle in the private sector. So just with that as a little bit of a sampling, we see an opportunity to help educate investors on the full spectrum of decision making points ranging from where are we at in the cycle, okay, with that where are the best opportunities, how would you want to combine different, different aspects of the listed and private market. And as I referred to in my comments, when you look at our – in particular our pipeline, both our pipeline and our shadow pipeline, as I call it, we've got a lot of those situations. We've got investors, who are hiring us for completion, strategies to gain things that complement what they already own in the private market. You've got others who are trying to time the REIT cycle. So we see our role as being unique and being able to provide advice on where those opportunities are without bias. And now with our private real estate team, we can be helpful on the private side as well.

Got it. And I thought it was interesting to see your U.S. real estate franchise outperformed the rest of the active industry where flows are a lot worse. What do you guys kind of chalk that up to and what's maybe the demand temperature difference that – differences between the different channels?

Well, I'll start with our outperformance, which Jon highlighted and as an active manager that's enabling us in the U.S. to continue to gain share versus our active peers. Our market share has actually increased to about 39%, which is impressive. But in terms of our flows this quarter we had positive U.S. REIT flows, and that was led by Japan subadvisory and our relationship as a subadvisor with Daiwa Asset Management. Our flows in that channel have been positive as I noted for – I think I said five or six quarters. And that's due to several factors. One is, I think, partially macro in terms of invest – retail investors shifting back toward value oriented versus thematic opportunities in Japan. But also our – we have new leadership at Daiwa Asset Management that's focusing on these vehicles and that's all really exciting. Like in the U.S., our performance as a subadvisor for Daiwa is stellar. We're kind of a leader in most periods. Just thinking about where that's going. Obviously, flows are very difficult to project, but we've been advising investors that now is a good entry point for U.S. REITs. And when you look at our shadow pipeline, there is activity on that front. So it's encouraging, but time will tell.

Right. Yes. And then I guess while we're talking about Japan, I mean, it's definitely been a bright spot for a while now, and it seems to me there's more room to run there. But just maybe your view on where do you think we are in the distribution cycle for that space?

Well, in Japan, it's been an area that – that we've been wanting to allocate more resources to, particularly in the institutional area. With COVID, they have been more locked down for a longer period of time. So I'd say we're just getting back to business on the institutional side of things. And I'll be honest, it is going to take a lot of education to help allocations grow in Japan. But I think the ingredients – the ingredients are there in terms of investor demand for income and diversification and based by real assets. So it is an area where we're going to spend more time.

Got you. And then on preferreds, you talked about how we've been through rapid rate hikes and concerns about regional banks and gross redemptions have improved some. Can you talk about the gross sales side of the equation where that is now? And maybe who are the natural buyers for that product?

Well wealth has been the largest investor and preferreds and – but starting three to four years ago, institutions began allocating and part of that was catalyzed by the very low interest rate environment and the need for alternative income. So with that as a base and, per my earlier comments, that there is much more opportunity and fixed income across the board. I think that that, as we go forward, there's probably going to be less overall demand for preferreds compared with a broader fixed income opportunity set. But because of where preferreds are valued and the fact that with the bank crisis earlier this year, there has been dislocations that we believe mispricings I think that that there will be opportunities for us to gain allocations in both the wealth and in the institutional channel.

I would just add, I mean, when you look at our flagship strategy, CPX, today it's yielding 6%, but it's not just about the yield. It's also about we believe there is a total return opportunity in preferreds that in the short term could be approaching double digits. The second quarter is a good example where the annual – annualized return on CPX was more like 8%. And so some may say, well, hey, I can – I'm investing in T-bills, I'm getting 5%, that's risk free and that's a view. Now it is credit risk free we believe, but it has a duration of zero. So what does that mean? That means that sometimes the duration of zero is good, but because you're getting that 5%, but that 5% is more likely to decline over time. So it may go to 4%, it may go to 3%, it may go be go to 2%. So your – as that process plays out, investors will be missing a capital appreciation opportunity that they would be getting in preferred or other yield assets with more duration. I would also say as part of the education process, of course, the issuers in preferreds, they're well known, well-recognized banks, people read about them versus say the high yield category where I believe defaults are rising to the 3%, 4%, 5%, 6% range, but they just tend to be companies that don't show up every day in the media. So the universe of preferreds, the majority, these are investment grade securities and sometimes that can get lost because of one or two notable credit events. And so I think we need to remind investors there is a high yield opportunity in preferreds with a total return opportunity where majority are investment grade as opposed to subinvestment grade. So I'd say that that's really the education process that was in earnest in March and April, but we feel, as I said, the momentum in the market, if you will, and the confidence in the asset class has certainly picked up meaningfully over the last six to eight weeks.

Right. Okay. And then maybe just to broaden out the gross sales discussion. Where would you point to is most likely areas you can get gross sales back to the place they were? And maybe some – like the signposts for maybe the – the start of the – that – this new return cycle that you guys talked about?

Well, the signpost, I think the biggest one is going to be when the Fed has done tightening and if we ultimately reach a point where they're easing that that will help things further along. So – but when you look at the history of REITs, the – as we all know the markets are anticipatory, so they've tended to bottom in the middle of a recession or right before the fed stop seizing. So it could be that that process has started. As we've talked about in the past, our view is that this cycle is probably not going to be V-shaped. And so – and keeping with, Jon’s comments and mine, the – this could play out over a longer period of time than it has in the past.

And the gross sales areas you’re most excited about?

Listed REITs infrastructure and multi-strategy real assets. When you look at our institutional pipeline, that’s where there’s the most activity. And as I said, it’s broad, it’s deep. It’s – I think well founded in the wealth channel. That’s a little bit harder to have some insight on, because those investors tend to be a little more coincident with what’s happening in the market. But not to discount them they will follow the same types of analysis. Hopefully, if they read our research, which you can go to our website and see what we’re writing about entry points and REITs and preferreds. But just taking the cue from the institutional pipeline, it’s in real estate, both global and U.S. infrastructure and multi-strategy real assets.

And you had just mentioned infrastructure, maybe could you bring that story to life a little more like where are the most demand for those products are? Like, what assets are people interested in, where are those assets? Are there going to be new ones to invest in over the next several years?

So for infrastructure, I’d say generally the most demand is on the institutional side rather than on the wealth side. These are new mandates. So in contrast to REITs where some of our new REIT business is for new mandates, but some of it is more takeaway business. I think on the infrastructure side, a lot of these are new investors to infrastructure. So we’re helping educate them on what is infrastructure, what are the different kinds of infrastructure, and how we’ve been successful investing in it. So I think there’s a lot of demand from, frankly all different parts of the globe. And it’s generally in our more diversified strategy. So when you look at our more diversified strategy, the bigger areas are within utilities, rail and cell towers.

Got you. Maybe just to quick on expenses. You talked a little bit about how you’re able to pull back that the range of G&A growth, but could you maybe just reiterate how you’re doing that, and like, what stuff – is stuff maybe on pause and could that have an impact in the medium term flows you’re potentially expecting?

Yes. I think that’s a good question. I mean, we focused on obviously the non-client facing expenses. We’ve always been pretty adept at reviewing expenses and we have a rigorous process around, even though it’s budgeted, is the needs still there. I think there are some expenses that aren’t in the forecast right now that are kind of waiting for triggers. So as we see the market open up and flows increase, some of these things that are deferred would come forward, but shouldn’t really have an impact on the margins because you should see an increase in the revenue. So I think we’re – we’ve always been good with the expenses. I think we’ve – in this period, not only on G&A, but also on hiring. The bar is very high now for new hires, has to be tied to revenue growth and even replacement positions are now being required to come to a group to plead the case that it can’t be deferred.

Right. Okay. And you guys kind of referred to your global real estate franchise not getting as much attention as the U.S., but like could you talk about specifically there, the demand, alpha opportunities, maybe different – any different trends from global versus U.S.?

Okay. So from an investor perspective, generally the wealth channel is very U.S.-centric. But just to clarify we have a lot of global interest in global real estate. It tends to be more institutional, and that’s what you see in our business. Our U.S. REIT business tends to be more fund and wealth oriented at the margin. And our global real estate business and our global infrastructure business tends to be much more institutionally focused. And we are seeing good interest there. In terms of what are the drivers, look, I’d say just the top down macro in different markets, it’s going to be the same set of drivers. In terms of things that are getting us more excited about the investment prospects within global real estate, a place like Japan, so Japan is – so U.S. is about 60% of a global real estate strategy for the other 40% Japan is by far the biggest market. It’s around 10 or 11 of that 40%. Japan was one of the best markets last year. It’s the best market so far this year. I’d say we are seeing inflation pickup, we are seeing growth pickup. And I would also say that, Abenomics was a phrase that was tossed around 10 years ago, talking about improvements in corporate governance and capital allocation. These are changes that are slow to happen. But we are seeing those changes happen, which makes us more optimistic about the returns that are available to investors in Japan. Of course, we’ve seen Warren Buffett make more of a take some actions over the last few months, and that’s highlighted that valuations in Japan are very attractive versus other global equity markets combined with perhaps some of this re-rating opportunity for the market as corporate governance improves. So I think that’s a driver. The other thing I’d add is, we all know that geopolitics has been in the news over the last 12 months to 18 months. It’s going to shift what the chess board looks like if you will, or where the growth may come from. Some may say, well, hey, China might not be the growth engine it was over the last 10 years or 15 years, but you need to look at who are the new growth engines. So for us, we’re going to spend time in places like India, Southeast Asia, Middle East, and eventually Africa from an investment standpoint, because it’s – you shouldn’t focus on where the growth was. We want to be focused on where the growth is going. And so those are new avenues of investment opportunity. It’s inefficient. You don’t want to just buy the index. There isn’t really an index. And so this is an avenue for both absolute and certainly relative returns versus you can’t just buy an ETF to get those exposures.

And I’d like to check in on the advisory channel. I mean, what are the cross currents going on in that channel? Can you just have a flavor of what consultants are asking about how the conversations with institutional investors are going? It sounds like you’re in a lot of finals, but when rates stuff like that?

Yes. So let me start with, we’ve had I think two years of outflows from advisory. And that’s obviously not where we want to be and not where we think our business stands today. I think those outflows have been catalyzed by the macro regime change, the change in asset allocations, I mean, is being driven by the volatility in the markets, the higher fixed income yield curve, et cetera. However, our backlog is very strong and then gets back to my comment that we think that listed real assets. Real assets are underrepresented in investor portfolios and on a long-term secular basis, they’re going higher. Our institutional team is very well organized, very focused, and as I said, we’ve got a lot of activity. And along with our performance I think we’re well positioned to see a turn in that trend in outflows toward inflows. And that’s one of the most important factors that we’re focused on.

Great. And maybe just one last one to finish. I think, you touched on basically all the different geographies throughout the call, but could you kind of thumbnail for us the strongest geographies for you guys and the products in each of those geographies so we get a sense of what’s going to lead over the next stretch?

Well, as I said, the – our outflows have been in North America and it is the biggest market. So that’s the one to pay most attention to. We’ve had inflows into the other major geographies, EMEA, Japan, and Asia Pacific. In terms of again, so North America is just, it’s the biggest. So we spend the most time there. And I think when the advisory flows turn, it’s going to be led by that. In terms of where the demand is newest and growing the most, it would be EMEA and also Asia. And that’s why we’re adding some resources to Asia. EMEA is pretty well along in the adoption phase, I’d say we’re three years into that process, and that – those investment needs and allocations are becoming more sophisticated. So it is – it’s – I’d say it’s getting a little more difficult because the – just the needs that the desires are higher. In Asia, I’d say it’s a lot earlier. We’re seeing some major plan sponsors shift from passive to active. Others are who have say, private real estate allocations are adopting listed for the first time. So the demand for real assets is earliest in the Asia region. And it’s – it is a big region, but it’s more disparate than say North America.

Thanks very much. Appreciate it. Very helpful.

Thanks, John.

We have no further questions in queue. I would like to turn the call back over to Joe Harvey for closing remarks.

Well, thank you, operator. And thanks everyone for tuning in this morning. We look forward to talking to you next quarter. Have a great day.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.