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Text: Joining me are our Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler.
Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund.
These non-GAAP financial measures should be read in conjunction with our GAAP results.
Yesterday, we reported record earnings of $1.06 a share compared with $0.67 in the prior year's quarter and $0.94 sequentially.
Revenue was a record $154.3 million for the quarter compared with $111.4 million in the prior year's quarter and $144.4 million sequentially.
The increase in revenue from the second quarter was primarily attributable to higher average assets under management across all three investment vehicles and one additional day in the quarter, partially offset by a sequential decline in performance fees from certain institutional accounts.
Our implied effective fee rate was 57.5 basis points in the third quarter compared with 58 basis points in the second quarter.
Excluding performance fees, our third quarter implied effective fee rate would have been 57.3 basis points compared with 57 basis points in the second quarter.
Operating income was a record $70.4 million in the third quarter compared with $44.2 million in the prior year's quarter and $62.6 million sequentially; and our operating margin increased to a record 45.6% from 43.4% last quarter.
Expenses increased 2.6% compared with the second quarter, primarily due to higher compensation and benefits, distribution and service fees and G&A.
The compensation to revenue ratio, which included a cumulative adjustment to lower the incentive compensation accrual was 33.19% for the third quarter and is now 34.5% for the trailing nine months.
The increase in expenses related to distribution and service fees was primarily due to higher average assets under management in U.S. open-end funds, partially offset by a favorable change in share class mix.
And the increase in G&A was primarily due to higher travel and entertainment expenses as well as costs attributable to preparation for a new closed-end fund that combines public and private real estate with preferred and debt securities.
Our effective tax rate, which was 25.93% for the quarter, included a cumulative adjustment to bring the rate to 26.5% for the trailing nine months.
The reduction in the effective tax rate from the second quarter was primarily due to the diminished effect of the non-deductible portion of executive compensation on a higher than previously forecasted pre-tax base.
Our firm liquidity totaled $241 million at quarter-end compared with $185.6 million last quarter and we continued to be debt free.
Total assets under management were $97.3 billion at September 30, an increase of $1 billion or 1% from June 30.
The increase was due to net inflows of $1.3 billion and market appreciation of $469 million, partially offset by distributions of $718 million.
This marks our ninth straight quarter of net inflows.
Advisory accounts, which ended the quarter with $22.8 billion of assets under management had net outflows of $311 million during the quarter.
We recorded $1.1 billion of inflows, the majority of which were from existing accounts.
Offsetting these inflows were $1 billion of outflows from an unexpected account termination after a client decided to eliminate its allocation to multi-start real assets as well as $300 million of client rebalancings.
This account termination is unrelated to the one noted on previous calls.
Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan Subadvisory had net outflows of $52 million during the quarter, compared with net outflows of $272 million during the second quarter.
Distributions from these portfolios totaled $295 million compared with $309 million last quarter.
Subadvisory, excluding Japan, had net outflows of $253 million, primarily from a client that decided to convert its global listed infrastructure portfolio to passive.
Open-end funds, which ended the quarter with a record $45.6 billion of assets under management had net inflows of $2 billion during the quarter.
Net inflows were primarily into U.S. real estate and preferred funds.
Distributions totaled $276 million, $225 million of which was reinvested.
Let me briefly discuss a few items to consider for the fourth quarter.
With respect to compensation, we continue to refine our estimates as we approach year-end.
Given our double-digit year-over-year growth in assets under management, revenue and operating income, driven by our leading organic growth and strong investment performance, we reduced the compensation to revenue ratio from the previous quarter's guidance of 35.25% by 75 basis points to 34.5%.
All things being equal, we expect our compensation to revenue ratio for the fourth quarter to remain at 34.5%.
We now project that our G&A will increase by about 9% from the $42.6 million we recorded in 2020.
And finally, we expect that our effective tax rate will remain at approximately 26.5%.
Today, I will review our investment performance, discuss the macro environment and its impact on our asset classes and talk about certain key priorities for our investment department.
The third quarter felt like a transitory phase in the markets with the S&P 500 up 0.6% and low dispersion across sub-sector performance.
The markets are evaluating several important macro shifts, including stabilization of virus trends after the variant scares, deceleration in the economic recovery, potential for a transition from monetary easing to tightening and gridlock in Washington DC regarding stimulus and potential tax increases.
The one trend that continued to gain traction was the likelihood that inflation will be more persistent.
Reflecting that, commodities reached a seven-year high and were up 7% in the quarter, one of the top-performing asset classes.
The commodities rally has been broad-based with spot prices positive year-to-date for 80% of commodities.
Looking at our performance scorecard, in the third quarter and for the last 12 months, eight of nine core strategies outperformed their benchmarks.
International real estate, which is global ex-U.S. was the one strategy that underperformed for both time periods.
Measured by AUM, 79% of our portfolios are outperforming benchmarks on a one-year basis compared with 99% last quarter.
On a three and five-year basis, 100% of AUM is outperforming.
The one-year figure declined primarily due to global real estate, where our batting average declined from 99% last quarter to 25% in Q3.
Our core global real estate accounts are outperforming year-to-date.
So if we at least break even in the fourth quarter, our figures will improve next quarter.
We believe the macro environment is favorable for most of our strategies in terms of both fundamentals and investor demand.
We expect above trend economic expansion and more persistent inflation.
If the pandemic continues to subside and the recovery broadens, some of the most negatively affected sub-sectors in real estate and infrastructure should continue to recover and help sustain the fundamental recovery.
In terms of investor demand, the need for income is acute as is the need for equity-like returns with diversification.
Adding inflation to the picture should increase demand for more of our strategies.
As we said last quarter, our reading of the factors contributing to inflation supports a phase of higher for longer inflation.
U.S. real estate returned 0.2% in the quarter and we outperformed in all of our sub strategies.
Year-to-date, U.S. real estate is up 21.6%, outperforming the S&P 500's 15.9%.
The powerful recovery in real estate security prices has been driven by a return of overall demand and increased market need for effective inflation hedges and the ongoing search for income.
So far in 2021, $13 billion has flowed into REIT, mutual funds and ETFs, the largest inflow since 2014.
We continue to see increased adoption of listed REITs by institutional investors as a core component of their real estate allocations.
Investors better understand and can tolerate short-term volatility, knowing that over the long-term, REITs are highly correlated to the fundamentals of their underlying real estate.
And the long-term record of listed REITs compared with core private real estate is undeniably compelling.
REITs have outperformed by nearly 400 basis points annually for over 40 years, while providing liquidity.
These dynamics are powerful in terms of potential flows as REIT allocations get right-sized higher based on merit.
Global real estate returned negative 0.7% in the quarter.
While our core strategies outperformed slightly, our international strategy underperformed, primarily due to the Asia sleeve of our portfolios.
Global listed infrastructure returned negative 0.25% in the quarter and we outperformed in all of our sub-strategies.
The downward trajectory of the virus spread and return of travel and global commerce has made marine ports and airports some of the best performing sectors in the quarter.
The big news for infrastructure was what didn't happen that being passage of infrastructure legislation in Washington, DC.
The longer the process takes, the more it underscores the need for infrastructure capital investment and generates interest in the asset class.
Institutionally, infrastructure as an asset class is understood and accepted, and we see strong search activity.
The dry powder amassed by private equity infrastructure managers reached a record $300 billion and provides fuel for our investment thesis that private equity capital will find its way into the listed markets to buy companies and assets with the latest example being the announced privatization of Sydney airport.
In terms of the wealth channel, we need to continue to educate on how infrastructure best fits into allocation strategies.
Notwithstanding that, we've seen strong inflows into our open-end infrastructure fund in part based on the headlines related to significant infrastructure spending.
Preferred securities returned 0.6% for our core strategy and 0.2% for our low duration strategy.
We outperformed in both.
Preferreds continue to look attractive in the fixed income world with yields of 4.8% for investment-grade preferreds in our core strategy and 4.2% for our low duration strategy.
For context, corporate bonds yield 2.25%, municipals yield 1.75% and high-yield yields 4.75%.
Our portfolios are positioned defensively relative to interest rates and we continue to guide incremental allocations to our low duration strategy, which by design has a duration of less than three years and is the only one of its kind.
The benchmark for our multi-strategy real assets portfolio returned 1% in the quarter and we outperformed.
As a reminder, this strategy combines real estate, infrastructure, commodities, resource equities, gold and short duration credit with an asset allocation overlay.
Over the past year, the real assets portfolio returned 32.5% compared with the S&P 500 at 30%.
This strategy is designed to provide protection from unexpected inflation and produce equity-like returns with a low correlation to financial assets.
Somewhat surprisingly, we haven't seen a significant increase in demand for this portfolio, but with a long history of head fakes on inflation, it simply may be early and the demand for this strategy may follow rather than lead inflation.
We continue to expand our investment department, including the addition of a Portfolio Manager and Head of Multi-Asset Solutions, who will join us next month to oversee asset allocation, strategy research and macroeconomic research.
This is a strategic role that will expand our real assets and real estate solution investment capabilities and enable us to engage with clients at a higher level.
We've made tremendous progress preparing strategies for our private real estate business, including a strategy with a capital appreciation objective.
We have commenced the investment process and are evaluating acquisition opportunities.
In addition, for our closed-end real estate funds, we will pursue an income strategy to capitalize on mispriced property sectors.
This will expand our investment universe for our closed-end funds and supplement these funds' primary focus on listed real estate with higher income generation and rifle shot opportunities in the private market.
These are examples of our broader vision using both listed and private real estate to broaden our opportunity sets and provide investors with optimized allocations to real estate by tilting portfolios to where the best values are.
Looking into 2022, we will be developing other vehicles for the wealth channel and we expect to add a real estate strategist to further enhance our asset allocation and advisory capabilities.
Meantime, commercial real estate has a positive outlook with fundamentals strong or recovering, compelling income generation, and particularly in this environment, attractive inflation sensitivity.
Finally, we're looking forward to the next phase of our return to office plan whereby everyone will be in the office three days a week beginning next week.
While we have performed well working remotely as our operations and investment performance attest, we want to get back to in-person interaction, debate and decision-making on the investment team and across the firm.
The creativity, innovation and cross-team collaboration our business requires is best done in person.
Current indicators point to the general containment of the pandemic, thereby allowing us to return safely as we transition to being together once again as a team while having the best of both worlds with some work model flexibility.
As you heard from Matt and Joe, we had a very strong quarter.
Continued excellent investment performance across the board, record AUM, revenues, earnings and profit margins.
For the first time in several years, we benefited from strong, absolute and relative market returns.
We believe this is significant because fundamentals indicate that this is the beginning of a new trend, not the end.
An inside joke here at Cohen & Steers is how often I use the metaphor of how important it is to skate to where the puck will be and not stare at where it is now.
Where the puck is now is only useful in helping to see where it's going.
Broad-based, demand-driven inflation will persist and is most definitely not transient, but the bond market, like most investor portfolios is where the puck was.
The latest inflation measures have all moved broadly higher.
September CPI increased 5.4% year-over-year and the core CPI was also up 4%.
In a surprise announcement, the Social Security Administration last week disclosed that future payments will be increased by 5.9%, the largest such increase in over 40 years.
Consumer spending surged 11.9% in the second quarter and 13.9% in the month of September.
But the real story beyond these surging spot indicators is the steady increase of the more persistent and heavily weighted components of these inflation measures.
Rent is a key category as it makes up over 30% of CPI.
Tenant rent jumped 0.5% in September which was the biggest monthly increase in 20 years.
Owners' equivalent rent, which is the accepted measure of what homeowners would pay if they had to rent their homes rose 0.4%, the most since 2006.
Lastly, as these persistent measures of inflation continue to rise, it can cause expectations to become self-fulfilling.
According to the New York Fed, consumers' median inflation expectations for the next three years is 4.2%.
So where the puck is today isn't bad as we saw this quarter, but to get to where the puck is going, will require investors to reposition their portfolios to hedge against or even benefit from the shift to a more enduring inflationary environment.
All real asset classes and especially infrastructure and real estate have historically provided investors with the solutions that they'll be looking for.
At the risk of being repetitive and with the benefit of strong, absolute and relative returns from our real asset strategies, we achieved record AUM of $97.3 billion and over $100 billion intra-quarter; record open-end fund AUM of $45.6 billion and $1.3 billion of net inflows in the quarter.
As has been the case, recently, the wealth channel led the way with $2 billion of net inflows, representing 18% organic growth and our third best quarter on record.
Both the BD and RIA verticals were strong and DCIO fund flows were positive for the 13th straight quarter.
From a product standpoint, we saw strength in preferred security strategies, which generated net inflows of $1.1 billion, and in real estate which had net inflows of $755 million.
Looking forward, as inflation and interest rates move higher, we anticipate that flows into our low duration infrastructure and multi-strategy real asset portfolios will all benefit.
In addition, we have filed with the SEC to launch a closed-end fund offering in the first quarter of next year that will combine public and private real estate in one actively managed listed portfolio.
In the advisory channel, due to a planned design change, we had an unexpected $1 billion termination of a high performing multi-strategy real asset portfolio, which resulted in $311 million of net outflows in the quarter.
Gross inflows remained strong, totaling $1.1 billion with U.S. real estate accounting for over two-thirds of that amount.
The pipeline of awarded but unfunded mandates is at $900 million and we recorded $550 million of mandates, which were both won and funded in the quarter, our second best result on record.
Japan Subadvisory net outflows were $52 million pre-distributions and totaled $347 million, including distributions.
All things being equal, we are optimistic that flows, especially for our U.S. real estate portfolios, may shortly begin to improve.
First, the portfolios are performing extremely well, especially after currency adjustments.
Second, we are approaching the 12-month mark for the last distribution cut, which typically coincides with flows turning positive.
Lastly, the end of COVID restrictions -- with the end of COVID restrictions in Japan, our teams have been asked to resume a significant number of in-person sales seminars.
Subadvisory ex-Japan had net outflows of $253 million as well, primarily driven by the termination of an offshore global listed infrastructure portfolio and modest outflows elsewhere.
We did bring on a new $83 million global real estate mandate in the quarter.
We believe that the next several years will witness a generational shift in the economy and capital markets.
Higher growth rates sustained by unprecedented monetary and fiscal stimuli have produced demand-driven supply/demand imbalances resulting in asset price inflation, which is becoming self-fulfilling.
Real estate values and rents, labor costs and commodity prices are rising with no current end in sight.
Many investors have never experienced this set of economic variables.
We believe that as investors begin to extrapolate these trends, allocations to real assets, especially infrastructure and real estate will substantially increase.
Our traditional range of products is well positioned to capture this shift.
In addition, we recently commenced the marketing process for our private real estate strategies that we discussed last quarter.
And as I've said, we hope to launch our first public-private real estate closed-end fund this February.
Given the favorable outlook for real assets, we are committed to adding new capabilities and products that will provide the solutions that investors need when they ultimately see where the puck is going.

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cohen & steers inc - qtrly diluted earnings per share of $1.05; $1.06, as adjusted.

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