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Text: Joining me are our President and Acting Chief Executive Officer, Joe Harvey; our Chief Financial Officer, Matt Stadler; and our Chief Investment Officer, Jon Cheigh.
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.
Before we go through our regular agenda, I'd like to provide an update on Bob Steers who as we announced in February is currently on medical leave.
Bob's recovery has been remarkable and he is doing well.
He is available to provide input on business decisions and we expect him to resume active duties as CEO by the end of the second quarter.
In the meantime, our executive committee and broader leadership group continue to perform at a high level.
I'll return later to summarize the quarter after Matt and Jon provide the reports.
Next up is Matt, who will review our financial results for the quarter.
Yesterday, we reported record earnings of $0.79 per share, compared with $0.61 in the prior year's quarter and $0.76 sequentially.
Revenue was a record $125.8 million for the quarter, compared with $105.8 million in the prior year's quarter and $116.6 million sequentially.
The increase in revenue from the fourth quarter was primarily attributable to higher average assets under management across all three investment vehicles, partially offset by two fewer days in the quarter.
Our implied effective fee rate was 57.3 basis points in the first quarter, compared with 57 basis points in the fourth quarter.
Excluding performance fees our fourth quarter implied effective fee rate would have been 56.3 basis points.
No performance fees were recorded in the first quarter.
Operating income was a record $53.2 million in the quarter, compared with $40.4 million in the prior year's quarter and $49.4 million sequentially.
Our operating margin decreased slightly to 42.3% from 42.4% last quarter.
The fourth quarter included a cumulative adjustment that reduced compensation and benefits to reflect actual incentive compensation that was paid, which increased our fourth quarter operating margin by 153 basis points.
Expenses increased to 8% compared with the fourth quarter, primarily due to higher compensation and benefits, distribution and service fees and G&A.
The compensation to revenue ratio for the first quarter was 35.5%, consistent with the guidance provided on our last call.
The increase in distribution and service fee expense was primarily due to higher average assets under management in US open-end funds.
And the increase in G&A was primarily due to higher professional and recruiting fees.
Our effective tax rate was 27.25% for the first quarter, in line with the guidance provided on last quarter's call.
Our firm liquidity totaled $118.8 million at quarter end, compared with $143 million last quarter.
Firm liquidity as of March 31 reflected the payment of bonuses as well as the firm's customary funding of payroll tax obligations, arising from the vesting and delivery of restricted stock units on behalf of participating employees.
We remain debt free.
Total assets under management was a record $87 billion at March 31, an increase of $7.1 billion or 9% from December 31.
The increase was due to net flows of $3.8 billion and market appreciation of $4 billion, partially offset by distributions of $690 million.
Advisory accounts which ended the quarter with a record $20.3 billion of assets under management, had record net inflows of $1.7 billion during the quarter.
$1.1 billion, of which were included in last quarter's pipeline.
We recorded $968 million of inflows from five new mandates and $799 million of inflows into existing accounts.
These inflows were evenly a portion between US real estate, global real estate, preferred and global listed infrastructure portfolios.
Joe Harvey, will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan subadvisory had net outflows of $204 million during the quarter, compared with net inflows of $83 million during the fourth quarter.
We believe the outflows were largely attributable to a distribution rate cut made by the Japanese advisor to one of the funds we sub-advise in January 2021.
The last time the Japanese Advisor made a distribution rate cut to one of the funds we sub-advise was in the second quarter of 2019, which coincided with the last time Japanese Subadvisory had net outflows.
Encouragingly the annualized organic decay rate for the two months since January 2021 distribution rate cut was considerably less than what we experienced in 2019.
Subadvisory excluding Japan had net inflows of $97 million, primarily from the new Taiwanese mandate into a blended next-gen REIT digital infrastructure portfolio.
Open-end funds, which ended the quarter with a record $38.6 billion of assets under management had record net inflows of $2.2 billion during the quarter, primarily to US real estate and preferred funds.
Distributions totaled $238 million, $193 million of which was reinvested.
Let me briefly discuss a few items to consider for the second quarter and remainder of the year.
With respect to compensation and benefits, which includes the cost of our newly formed private real estate group that we announced earlier this week, we expect that our compensation to revenue ratio will remain at 35.5%.
We expect G&A to increase by about 9% from the $42.6 million we recorded in 2020, which is higher than where we guided to on our last call.
In addition to incremental investments in technology and global marketing, we expect an increase in recruitment costs associated with the hiring of certain key investment and distribution personnel in addition to the new private real estate group.
We expect that our effective tax rate will remain at 27.25%.
And finally, you will recall that on our last call, Bob Steers mentioned the termination of an institutional global real estate account of approximately $900 million that was expected to be withdrawn in the next quarter or two.
This account, which has a lower than average fee is still being managed and while we expect it to terminate this year, we have no visibility as to timing.
Today, I plan to review the investment environment, our performance and then provide some deeper perspective on our larger asset classes and their outlook.
So markets continued their strength in the first quarter as evidenced by US and global equities being up 6.2% and 4.7% respectively.
But beyond the noise, there were three noteworthy economic and market trend that stood out.
First, strong upward global growth revisions driven primarily by the US.
Second, underneath the surface, the market has increasingly taken on a reflationary tone as reflected by repricing of medium-term inflation prospects and a strong performance in our more inflation sensitive investment areas, such as commodities, which were up 6.9% for the quarter and are now up 35% over the last 12 months.
Last, with a higher growth and higher inflation as the context, we saw a repricing of Fed policy expectations, which partially drove the meaningful rise in the US 10-year treasury yield, ending the quarter at around 1.7%.
So given those three dominant trends of higher growth, inflation and rates, the high level summary of our asset class absolute performance is that listed real assets generally outperformed US and global equities.
This was led by MLPs, natural resource equities, and US REITs.
This performance was consistent with our expectations given deeply depressed relative valuations and that fundamentals for these asset classes were held disproportionately back in 2020 by the recession, but also some unique aspects from social distancing.
On the other side of the ledger, preferred securities were very modestly negative in the quarter.
Compression of preferred credit spreads could only partially offset the headwinds of the steep rise in yields.
That said, this flattish performance still far outpaced traditional fixed income in both income rate and total return with the Barclays Global Ag down 4.5%.
So turning to our performance scorecard.
In the first quarter six of nine core strategies outperformed their benchmark, but for the last 12 months seven of nine core strategies outperformed.
As measured by AUM, 93% of our portfolios are outperforming on a one-year basis, an improvement from 84% last quarter, mostly due to our preferred portfolios.
On a three and five year basis 99% and 100% respectively are outperforming, which is marginally better than last quarter.
By most medium and long-term measures, our investment performance continues to be strong and have high breadth.
That said the regime has shifted, particularly since the November of vaccine announcements.
We expect the market, which has been quite factor dominated to exhibit more idiosyncratic behavior over time, typically a more bottom up environment has allowed our specialist teams to achieve even higher performance batting averages.
So digging deeper into some of our major asset classes.
US and global real estate returned 8.3% and 5.8% respectively in the first quarter, both outpacing their respective equity indices.
Leadership has been in the Retail, Gaming, Lodging and residential areas in anticipation of significant pent-up demand supported by high global savings rates, driving multi-year recoveries in those areas.
The early phase -- the early cycle phase, excuse me, of an economy tends to be the strongest phase for listed real estate.
This is when economic recoveries are the strongest and where tightening is still several years away.
We continue to educate our clients by producing thought leadership demonstrating the historically higher growth and inflation expectations, triumps higher interest rates when it comes to reperformance.
Q1 absolute performance is a perfect reflection of that.
While we outperformed in our US and European strategies, our performance was weaker in Asia.
In general, while we have adopted a more value and reflationary repositioning in the US given stronger growth in vaccination success, we had been positioned more secularly in Asia given different growth dynamics.
Despite these different growth dynamics, Asia like the US has seen the value versus growth momentum reversal.
Preferred securities returned minus 0.6% in the first quarter and we outperformed in both our core and low duration preferred strategies.
After one quarter of underperformance last year, our highly experienced and accomplished team has now outperformed the last four quarters and 10 of the last 13 quarters.
We have also been communicating to our clients for the last three to six months that interest rates were more likely to move up over time, while the 10-year has trickled down since quarter-end, our expectation is that the 10-year will move more toward 2% by the end of 2021 and 2.25% by the end of 2022.
Importantly, in contrast to the start of the year, most market participants have already socialized the idea that rates will likely be higher over time, which in our view, reduces the odds of a tantrum or a disorderly unwind [Phonetic].
Given our rate view, we continue to suggest that investors consider our low duration preferred strategy when building portfolios.
Credit fundamentals of preferred issuers continues to improve with the economic recovery.
Take for instance US banks, who are the largest issuers of preferreds.
Banks have just come off an earning season in the US where they announced their releasing nearly $10 billion in loan loss reserves, as the pandemic-related losses they had accounted for have not been realized.
In addition their capital levels remain far in excess of their regulatory capital requirements.
The first quarter returned 3.5%, which slightly lagged global equities.
Returns in the quarter were led by economically sensitive businesses such as marine ports and freight railways and sustained higher energy prices provided a tailwind for midstream energy companies.
An important catalyst for the asset in the future will be infrastructure focused, fiscal stimulus packages around the world.
President Biden recently proposed over $2 trillion in spending and tax credits, which we see as a clear positive for listed infrastructure, tying into key themes we've highlighted over the past year.
Specifically, we see direct benefits for renewable energy developers in electric utilities, primarily through tax incentives.
We see the potential for new revenue opportunities for cell tower and data center companies, due to a larger addressable market for wireless carriers.
And last, we see broader support for the most economically sensitive segments of listed infrastructure, such as freight railways and marine ports.
Related, we continue to see increased adoption of infrastructure allocations with asset consultants and institutions, and we see growing interest from wealth advisors, as evidenced by record flows into our infrastructure open-end mutual fund and the NAV premium at which our infrastructure closed-end fund, UTF, continues to trade.
Disappointingly, we underperformed our benchmark during Q1 and while our three-year excess return is still attractive, we have underperformed over the last 12 months, so improving our performance here is a key focus area.
I also want to mention that our real assets multi-strategy portfolio was up 6.6% in the quarter, outpacing US and global equities.
We had very good relative performance of plus 100 basis points, with strong alpha contribution from asset allocation and natural resource equities.
We now have good relative performance over the last one, three and five years.
Over a full cycle, this portfolio is designed to provide equity like returns with inflation protection and with diversification versus stocks and bonds.
As a reminder, we launched this multi-strategy offering now more than nine years ago.
And in the last deflationary secular stagnation regime, it's fair to say, there wasn't much interest in diversified real assets.
Fast forward to today, it's clear that inflation is top of mind, while economic forecast always have wide confidence intervals, we expect that there is a very reasonable probability that inflation isn't just a short-term story, but it is more likely to be elevated for the long-term.
As a result, we expect that this is very good nine-year track record may be a hidden asset as we look out over the next three or five years.
And it's something we will speak about more on future calls.
We know that there is a fantastic opportunity to leverage the performance DNA in intellectual capital of our listed real estate team.
One with Jim's team, we are going to be able to create high performing stand-alone private strategies as well as integrated listed and private strategies that dynamically allocate over time to optimize for the best investment opportunities.
The start to 2021 couldn't have been more different than the start to 2020, as we begin to see the pathway out of the pandemic and toward economic recovery, rather than face the sea of uncertainty that the pandemic unleashed one year ago.
We're off to a good start in 2021.
Record fiscal and monetary stimulus combined with the continued rollout of vaccine distribution in the US have set the stage for reopening of our society and economy.
We expect this will be a gradual process and should result in a vigorous extended economic recovery.
Last year we achieved industry leading organic growth despite depreciation and share prices for REITs and infrastructure.
This year to date, we've had some catch-up appreciation, which has provided momentum to our results on top of our continued organic growth.
To set the stage for discussion of our fundamental trends, I'd like to share some thoughts on the big picture for our business and strategy.
Allocations to most of our asset classes are rising because of what I call the asset allocation dilemma.
That is fixed income yields cannot meet investors return targets, which places a significant ask on the equities portion of portfolios.
This creates a need for alternatives including real assets, which can provide equity like returns as well as diversification benefits.
This allocation dynamic combined with our strong investment performance has helped fuel our organic growth.
The current macro environment further supports the demand for our strategies.
Recently, Michael Hartnett, the Chief Investment Strategist at Bank of America, released a report citing five reasons to own real assets.
Number one, they're cheap and at the lowest valuations versus financial assets since 1925.
Number two, there are a hedge for inflation, infrastructure spending and the war against any quality.
Number three, they diversify portfolios.
Number four, they are under-owned and number five, they are scarce and more valuable in the coming digital currency era.
I believe that Hartnett's case for real assets only adds to the demand for our asset classes.
Turning to our fundamental results.
As Jon reviewed, we had an OK quarter in investment performance with six of nine core strategies outperforming as some portfolio managers didn't rotate strongly enough to value in cyclicality as the reopening rally unfolded.
We are confident in our investment teams ongoing portfolio adjustments.
Importantly with 93% and 99% of our AUM outperforming over one and three years respectively, we are in a terrific position to retain assets and compete for new allocations which continue at a good pace.
Our AUM set a record $87 billion at quarter-end with all three of our investment vehicles setting firm records.
Starting from a record $7.5 billion of gross inflows in the first quarter, firmwide net inflows were $3.8 billion and annualized growth rate of 19%.
Open-end funds led the way on net inflows with a record $2.2 billion, driven primarily by US REITs and secondarily by preferreds.
We were awarded $460 million asset allocation model placement in US REITs from a wealth advisory firm.
We also had multiple allocations from small to mid-sized institutions into our institutional US refund, in part driven by several new consultant recommendations.
Notwithstanding rising treasury yields, we had inflows into both our core and low duration preferred strategies, albeit with an anticipated shift and flow momentum to the low duration strategy.
Another notable open-end fund trend was a pickup inflows into our infrastructure fund.
We believe this increased interest has been driven in part by President Biden's infrastructure proposal as Jon mentioned.
In our major asset classes of Global real estate, US real estate, preferreds and infrastructure, we gained market share, measured against both active and passive fund vehicles combined, attribute to both our consistent performance and the strength of our distribution.
Institutional advisory had record net inflows of $1.7 billion.
We believe that the record results are partially attributable to attractive relative valuations and allocation entry points for real estate and infrastructure as well as the strong execution by our distribution team in the Middle East where we've seen growing demand for real estate and infrastructure strategies.
Subadvisory ex-Japan had net inflows of $97 million, relatively quiet, but importantly included a mandate combining two of our recently developed strategies.
Japan subadvisory was our only channel with net outflows, primarily due to one funds distribution reduction that Matt explained.
For perspective, Japan subadvisory peaked in the third quarter of 2011 at 33% of our AUM, but is now just 11% of our AUM as assets have declined by 34% in Japan, while the firm's AUM and other channels has grown by 69%.
Our current won unfunded pipeline stands at $1.4 billion.
Working from last quarter's $1.8 billion pipeline, we had $1.1 billion of fundings in the quarter and won $940 million in seven new mandates and account top-ups across global real estate, infrastructure and a multi-strategy blend of US REITs and preferreds.
Three of the seven new mandates were in our focus strategies, which have higher active share and where performance has been very strong.
We continue to see growing interest for these differentiated, high-performing strategies.
Turning to corporate strategy.
We are confident and continuing to invest in the business.
We believe the next several years will be good allocation entry points for both real estate and infrastructure, providing additional support for resource allocation.
Priorities always start with alpha generation, so we will continue to invest in people, process, data and strategy development.
On that front, we continue to allocate resources to next-generation strategies, focused portfolios, multi-strategy allocation capabilities, ESG integration, and as we announced earlier this week, expanding our real estate capabilities.
Our strategic rationale is to create another growth driver through private investment in the $15 trillion universe of real estate in the US that is not owned by listed REITs.
Leading the group is Jim Corl, who previously worked with us from 1997 to 2008, in his last four years as Chief Investment Officer of our listed real estate team.
Jim spent the last 11 years at Siguler Guff & Company, where he helped build and led an opportunistic real estate investment business.
We're excited about the team that Jim has built to execute our private business, which is a testament to Jim and to our platform.
Without distractions from legacy assets, this team will be able to focus on the best investment opportunities available today.
Our goal is to excel in private real estate as a stand-alone as we haven't listed -- but more importantly, to innovate in combining listed and private to create more alpha levers.
Investors have become more interested and agile in allocating between the two markets.
Moreover, many institutions have real estate allocations that are heavily weighted in legacy property types such as office and retail.
As a result, they need new solutions, and we believe we are well positioned to provide advice on how to rebalance using the listed markets or segments of the private market.
These dynamics will position us to gain a greater share of real estate allocations, where private typically has the greatest share.
We have a product plan that includes strategies and vehicles for both the institutional and wealth channels.
Bob Steers's and my collective vision is to have both private and listed capabilities in real estate and infrastructure, enabling us to provide stand-alone strategies and bespoke solutions that include both markets.
We will work closely with Greg Bottjer, who heads Product Strategy, as well as our Executive Committee to build this foundation for our next phase of growth.
In conclusion, while the past year has been unprecedented, we are energized and optimistic about our future.
We look forward to returning to the office and seeing our colleagues and all of you in person.

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qtrly net inflows of $3.8 billion.
qtrly adjusted earnings per share $0.79.

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