Cohen & Steers, Inc. (NYSE:CNS) Q2 2023 Earnings Call Transcript July 20, 2023

Operator: 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.

Brian Heller: 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.

Matt Stadler: 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 compensation and benefits were essentially flat when compared with the first quarter, the compensation to revenue ratio increased to 40.5% for the second quarter, 200 basis points higher than our previous guidance. The increase, which included an adjustment to bring the compensation to revenue ratio to 39.5% for the six months ended, was primarily due to lower revenue than originally forecasted and recorded severance costs. Our effective tax rate remained at 25.25% consistent with 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 $257.9 million at quarter end compared with $247.6 million last quarter, and we have not drawn on the $100 million three year revolving credit facility that we entered into at the beginning of the fiscal year. Assets under management were $80.4 billion at June 30th, up slightly from $79.9 billion at March 31st. The increase was due to market appreciation of $1.8 billion, partially offset by net outflows of $512 million and distributions of $757 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 half of the year. With respect to compensation and benefits, all things remaining equal, we expect that our compensation to revenue ratio will remain at 39.5% consistent with the year-to-date ratio I referenced earlier.

Next, based on our ongoing review of non client-related expenses, we expect G&A to increase 9% to 11% from the $52.6 million we reported in 2022, which is lower than the 12% to 14% increase noted on last quarter’s call. The increase relates primarily to cost projections associated with our new corporate headquarters as well as certain other strategic initiatives such as the establishment of a new data center and appending upgrade to our trading and order management system. Excluding these costs, we would expect G&A to increase 2% to 4%. And finally, we expect 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.

Jon Cheigh: 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 down 1.5%. Commodities notably continued their underperformance down 2.6% as inflation declines. Global equity markets continue to be quite bifurcated, reflecting a sharp leadership reversal versus 2022 with tech leading the way and sectors such as energy, utilities and healthcare generally lagging. Preferreds were up 2.1% in Q2 and significantly outperformed other fixed income asset classes including IG and high yield corporates, munis and treasuries. Returns are still lagging year-to-date, creating relative value attractiveness, plus the general momentum in the preferred market has greatly improved as banking sector volatility has subsided as we anticipated on our last call.

As I said then, we believed material credit troubles in significant banks are behind us, and while there are some relatively weaker banks, there are no meaningful banks with significant risk factors. Bank regulators proposing more stringent capital and funding regulations will be a tailwind for credit over time. New preferred issuance is picking up at attractive levels with IG yields at 7.5% and 8.5% plus or below IG deals. Today subordination premiums are wide and they should be given the environment. The prospects for above average returns for long-term investors are good. Our alpha for our preferred strategy over the last three months has been positive and improving, a testament to our deep and experienced team. Generating superior performance is our number one priority, so we plan to add two more investment professionals to our existing dedicated fixed income team to make sure we’re taking full advantage of all investment opportunities.

U.S. REITs roughly 1.5% for the quarter and outperformed private real estate by 4% as measured by the Odyssey index, but underperformed the S&P by roughly 6%. At the end of the third quarter of last year, REITs were down for the year while reported private values were positive. We highlighted this as being the normal lead lag relationship between listed and private. Since then, US REITs were up 7%, while private values have declined by approximately 11%. While some of the reversion processes already occurred, we continue to believe that this trend of listed outperforming will continue. So we recommend investors to take advantage and invest more in listed at the expense of their private allocations. If an underperformance versus equities, the global REIT market on a multiple basis is looking as attractively valued as it has been over the last 20 years outside of the GFC in the middle of the pandemic.

REIT fundamentals generally remain very sound as it relates to occupancy, limited new supply, pricing power and balance sheets. As a reminder, traditional office is roughly only 3% of our primary benchmark. And while fundamentals and financing in that sector remain very difficult, it is less than 2% of our flagship U.S. REIT strategy. Listed infrastructure following material outperformance in 2022, lagged equities this quarter with total returns of negative 0.3%. Utilities in particular were hurt by rising interest rates and investors pivoting back to growth year sectors of the market. To put this in context, U.S. utilities had their worst first half versus the market in over 35 years underperforming the S&P 500 by 23%. As a result, valuations of infrastructure versus the overall equity market and private markets are reaching extremes that are very attractive for long-term investors.

We continue to see listed infrastructure as a growing and dynamic new allocation for institutional investors given the unique combination of income, total return, economic durability, and inflation protection. Shifting gears on our last two earnings calls, I spent most of my time discussing real estate in the preferred securities market. Today, especially in light of inflation finally moderating, I want to come back to the strategic case for real assets in both individual and institutional portfolios. Last year, inflation was high and surprising and the 60:40 portfolio performed historically poorly. Our concern is that years like 2022 may prove more frequent over the next 10 years than the recent history. This year as measures [ph] of inflation have come in from 9.1% in June of last year to 3% in June of this year.

The market has too easily returned to the “transitory narrative” with long-term measures of inflationary expectations remaining in the low twos. We believe there are good reasons to question the consensus view that a return to the “old normal” is just around the corner. Instead, it is more likely that we are in the early stages of a significant and far reaching macroeconomic regime change that was set in motion over the past three years. While we are past peak inflation, risk of episodic bouts of inflationary shocks over the next decade has increased. This new period will be marked by labor scarcity, commodity under investment, increased geopolitical uncertainty, and a move away from globalization rather than a return to the old normal higher inflation is the more likely result.

History suggests that once inflation problems have taken root, they’ve remained a stubborn recurring issue even if initial containment is achieved. The UK’s inflation re-acceleration may be a leading indicator of such challenges. While this is our review, even if one’s base case is that long-term inflationary risk will not come to bear, we believe the risk case alone is worth investors owning significantly more real assets than most do at present. A permanent full cycle allocation helps portfolios maintain expected returns while reducing overall volatility, attempts to tactically time investments in real assets based on inflation forecasts, whether over the short- or long-term, is more likely than not a fool’s errand. Inflation shocks have historically taken their toll on portfolios precisely because investors in markets have failed to anticipate them.

Investing in real assets isn’t a trade. It must be a permanent allocation. As it relates to valuations today because investors heavily discount inflation risks, real assets appear very attractively valued relative to stocks. Inflation is coming down today and that’s a positive, but we expect the emergence of real assets as a major asset class will occur in multiple phases with perhaps 2022 best being viewed as the first phase. Given attractive valuations, the upside case for inflation and a meaningful under allocation of real assets, we continue to believe that diversified real assets can be a significant and meaningful driver of our business growth over time. With that, let me turn the call over to Joe.

Joe Harvey: 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 opportunities. Against that backdrop, I would give our company performance a solid B plus grade. Looking at investment performance, as Jon reviewed, our batting averages and alphas range from good to great and put us in a strong position to compete for new mandates. While our flows have been negative year to date, our backlog of active searches is strong and we continue to enhance our organizational structure to stay abreast of distribution opportunities. We are executing well on corporate infrastructure investments and talent development. So when the return cycle really kicks in, we are already out front rather than playing catch up.

We are building strategically while we are waiting for the cycle to play out. We continue to believe that most of our asset classes are underrepresented in investor portfolios based on their particular merits of return, income, diversification and risk. That said, with a more normalized and attractive spectrum of bond yields, we expect to see greater allocations to fixed income, which will need to be sourced elsewhere. Equities, private equity and real asset allocations are all candidates. We recently published a capital markets analysis, which indicates that we enjoy attractive investment opportunity sets and our asset classes. Our outlook includes higher inflation compared with the pre pandemic trend line, higher interest rates, greater volatility, and higher risk premia.

Notable shifts in our outlook include higher expected returns compared with the past 10 years for global real estate, commodities and natural resource equities. Turning to our fundamentals. In the second quarter, we had firm-wide net outflows of $512 million, about the same pace as the first quarter’s $497 million. As in the first quarter, preferred saw the largest net outflows at $365 million, yet at a slower pace than last quarter with 54% of that from our low duration preferred strategy and the balance from our core preferred strategy. Notably flows in our flagship preferred mutual fund, Cohen & Steers preferred securities and income fund turned positive in June. Global listed infrastructure had outflows of $171 million and global real estate had outflows of $90 million.

A bright spot was net inflows of $114 million into U.S. real estate. By region, our net outflows were concentrated in North America, whereas we had inflows in EMEA, Asia Pacific and Japan. Open-end funds had net outflows of $508 million led by U.S. open-end funds with $522 million out, partially offset by our offshore SICAV funds, which had their 12th straight quarter of inflows at $46 million. Reflecting investor uncertainty in the markets, U.S. open-end fund gross sales in the quarter were 38% lower than the pace in 2022 and redemptions were 33% lower. Our two U.S. open-end preferred funds drove the outflows at $333 million. Institutional advisory net outflows were $214 million, the eighth straight quarter of outflows. We had one account funding for $53 million offset by four account terminations totaling $118 million.

One of the terminations was performance related in our concentrated global real estate strategy. One was due to a change in an outsourced CIO provider and the other two funded private commitments. We’ve been focused on improving our performance in our concentrated global real estate strategy, which is now performing in line with expectations. We had $228 million of inflows from existing accounts offset by $377 million of outflows. These outflows were generally not strategic and instead were marginal adjustments across multiple accounts, which raised cash for asset allocation tweaks or other funding purposes. Japan’s subadvisory was the strongest channel in the quarter with net inflows of $194 million for the six quarter of inflows led by one of Daiwa Asset Management’s U.S. REIT mutual funds.

Our one unfunded pipeline was $1.1 billion, up from $995 million last quarter. By strategy, 53% of the pipeline is global real estate, 31% is U.S. real estate, 12% is multi-strategy real assets and 4% is global listed infrastructure. By domicile, 51% is from North America, 40% is Asia Pacific and 9% is EMEA. During the quarter, there were three fundings totaling $86 million and a newly awarded mandate of $250 million. One account of $53 million was awarded and funded in the quarter. Finals competitions are picking up after a slow first quarter. As discussed last quarter, our opportunity set continues to be quite broad in terms of the number of prospects, strategies and markets of domicile. The activity spans U.S. and global real estate, global listed infrastructure and multi-strategy real assets.

Demand drivers include takeaways from underperforming managers, shifts from passive to active, catch ups on inflation protection, allocations for the next REIT return cycle and optimizations of listed and private real estate and infrastructure portfolios. The activity levels are encouraging. Under the theme building while waiting for the cycle to improve, we are investing in critical support initiatives for our long-term growth, while deferring more market dependent opportunities. We will move into our new corporate headquarters in New York in December and next year expect to take on new space in both London and Tokyo. We recently opened our Singapore office, a strategic move to compete for emerging demand for real assets in the region, while providing another business location for our talent in Asia.

We also continue to build new strategies and vehicles to drive organic growth. These range from simple extensions of our core strategies to more strategic areas such as private real estate, which we believe is both a new strategy and an extension of our traditional strengths. In terms of listed real estate, we continue to innovate with next generation and completion strategies and our developing strategies that use options to alter investment characteristics such as income or volatility. We’ve made significant progress with our private real estate initiatives. We are ready to capitalize on the opportunities that are emerging from the macro regime change and the change in private real estate pricing that is now underway. Meantime, our listed and private real estate research strategy and investment capabilities are resonating with clients and prospects.

Tied back to our view, the new return cycle and fixed income is emerging, we have recently seated an account for a broader global preferred strategy and filed for an offshore short duration preferred vehicle. In addition, we are developing capabilities in commercial mortgage backed securities to complement our current income strategies. Our major distribution priorities include capitalizing on our market position and wealth to participate in the increasing allocations to alternatives and focusing more on the registered investment advisor channel. And institutional, we are focused on the opportunities in our pipeline. In Asia, we’ve added resources for both institutional and financial intermediaries. We must be out front educating as real assets are adopted in Asia.

In the category of improvement, we need to do a better job with commercializing strategies we have seeded. To wrap up, we are – we continue to focus on the things we can control, which include our relative investment performance and gaining market share in our asset classes. We are optimistic about our asset classes and their power to enhance investor portfolios as well as our ability to outperform, innovate, and gain market share relative to our peers. We look forward to reporting on our progress in the coming quarters. Thank you for your interest. Operator, please open the line for questions.

Q&A Session

Operator: 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.

John Dunn: 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?

Joe Harvey: 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.

John Dunn: 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?

Joe Harvey: 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.

John Dunn: 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?

Joe Harvey: 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.

John Dunn: 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?

Joe Harvey: 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.

Jon Cheigh: 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.

John Dunn: 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?

Joe Harvey: 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.

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

Joe Harvey: 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.

John Dunn: 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?

Jon Cheigh: 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.

John Dunn: 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?

Joe Harvey: 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.

John Dunn: 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.?

Jon Cheigh: 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.

John Dunn: 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?

Joe Harvey: 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.

John Dunn: 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?

Joe Harvey: 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.

John Dunn: Thanks very much. Appreciate it. Very helpful.

Joe Harvey: Thanks, John.

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

Joe Harvey: 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.

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