Cohen & Steers(CNS) - 2023 Q4 - Earnings Call Transcript

Financial Data and Key Metrics - Earnings per share (EPS) for Q4 2023 were $0.67, down from$ 0.79 in the prior year's quarter and $0.70 sequentially [6] - Revenue for Q4 2023 was$ 119 million, compared to $125.5 million in the prior year's quarter and$ 123.6 million sequentially [6] - Operating income for Q4 2023 was $41.3 million, down from$ 50.9 million in the prior year's quarter and $43.9 million sequentially [7] - Operating margin decreased to 34.7% from 35.5% last quarter [7] - Compensation to revenue ratio for 2023 was 40.65%, 15 basis points higher than last quarter's guidance of 40.5% [8] - Effective tax rate for Q4 2023 was 25.88%, an increase of 15 basis points from last quarter's guidance of 25.25% [10] Business Line Performance - Core preferreds outperformed for three straight quarters, with seven out of nine core strategies outperforming in 2023 [15] - Low-duration preferred strategy outperformed by 130 basis points in Q4 2023, bringing full-year outperformance to 190 basis points [15] - Global listed infrastructure outperformed by 110 basis points in Q4 2023 and 100 basis points over the same period [15] - 94% of open-end fund AUM is rated four or five-star by Morningstar, up from 88% last quarter [15] - US-listed REITs returned nearly 18% in Q4 2023, outperforming US equities and significantly outperforming US private real estate, which fell 5% [38] Market Performance - Listed infrastructure surged by nearly 11% during Q4 2023, with all sub-sectors rising [17] - Tower companies posted the strongest gains, buoyed by falling interest rates, healthy earnings reports, and shareholder activism [17] - Midstream energy gains were more modest due to concerns about weakness in global energy commodity prices [17] - Global real estate led the way in real assets, with the ECB joining the Fed in pausing rate hikes in October for the first time in 15 months [39] Strategic Direction and Industry Competition - The company expects the compensation to revenue ratio in 2024 to decrease to 20.5% from 40.65% in 2023, driven by disciplined hiring and projected revenue increases [11] - The company believes listed real estate prices have bottomed and the asset class has entered a new return cycle, while private real estate is expected to bottom in mid to late 2024 [16][20] - The company is focusing on expanding its investment universes in global portfolios, including real estate, infrastructure, and preferred strategies [49] - The company is prioritizing research and education to help clients navigate the next phase of macroeconomic regime change [50] Management Commentary on Operating Environment and Future Outlook - The company expects G&A expenses to increase 5% to 7% in 2024, driven by office relocations, higher technology costs, and client-related travel and entertainment expenses [12][35] - The company anticipates a decrease in rental growth in 2024 compared to 2023 but expects rents to reaccelerate once the effects of tightening abate [73] - The company believes the peak in interest rates has paved the way for a sustainable bottom in listed real estate prices, with an average 12-month forward return of 18.1% for US REITs following the end of a Fed rate hiking cycle [42] Other Important Information - The company reported net outflows of$ 935 million in Q4 2023, bringing total 2023 net outflows to $2 billion [23] - Open-end funds drove the outflows, with$ 504 million out in Q4 2023 and $1.7 billion out for the year [23] - The company's AUM ended 2023 at$ 83.1 billion, up from $75.2 billion in the prior quarter and$ 80.4 billion at the beginning of the year [45] - The company's unfunded pipeline increased to $1.2 billion at year-end, up from$ 784 million at the end of Q3 2023 [79] Q&A Session Summary Question: Instincts on gross sales and redemptions in 2024 for US REITs and preferreds in the wealth channel [58] - The company observed tax loss selling at the end of 2023, with some investors already returning. The tone for 2024 is positive, but specific flow data will be reported in February [90] Question: Trajectory of fundamentals versus valuation in real estate, and the importance of rate cuts versus a plateau [63] - The company expects a slowing of fundamentals over the next 12 months, with improving fundamentals in 24 to 36 months. The market is expected to discount lower interest rates and a reacceleration of fundamentals [93][94] Question: Differentiation of CNS REIT in the crowded wealth market [107] - The company is focusing on unique property types and using listed markets as an alpha source rather than a liquidity source. The strategy includes asset allocation advice and a combination of listed and private capabilities [108][109] Question: Potential loosening of the closed-end fund window [110] - The company believes rates will remain higher than in the past decade, making it difficult for closed-end funds to generate positive spreads. No immediate plans for new closed-end funds are expected [100]