Cohen & Steers, Inc. Q3 FY2025 Earnings Call

Ladies and gentlemen, thank you for being here. Welcome to the Cohen & Steers Third Quarter 2025 Earnings Conference Call. This call is being recorded on Friday, October 17, 2025. I will now hand it over to Brian Heller, Senior Vice President and Deputy General Counsel of Cohen & Steers. Please proceed.

Thank you, and welcome to the Cohen & Steers Third Quarter 2025 Earnings Conference Call. Joining me are Joe Harvey, our Chief Executive Officer; Raja Dakkuri, our Chief Financial Officer; and Jon Cheigh, our President and Chief Investment Officer. 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 third 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 statement. 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 vehicles. Our presentation also contains non-GAAP financial measures referred to 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 Raja.

Thank you, Brian, and good morning, everyone. My remarks today will focus on our as-adjusted results. Yesterday, we reported earnings of $0.81 per share compared to $0.73 sequentially, representing an increase of 11.6% versus Q2. Key highlights for the quarter include meaningful revenue growth driven by higher AUM combined with a stable effective fee rate, expense management and discipline with revenue growth outpacing expense growth. Expanded operating margin as compared to both the prior quarter and prior year's quarter, net inflows during the period, a multiyear high in our one but unfunded pipeline resulting from investment performance and our focus on sales and distribution. And lastly, a strong balance sheet with high levels of liquidity and no leverage enabling us to be opportunistic. Now back to the detailed results. Revenue for Q3 increased 4.2% from the prior quarter to $141 million. The change in revenue from the prior quarter was driven by higher average AUM, plus an additional day during the period. Our effective fee rate was 59 basis points, in line with the prior quarter. Our operating margin increased meaningfully to 36.1% compared to 33.6% in Q2. As noted, we experienced higher average AUM compared to the prior quarter. In addition, ending AUM increased to $90.9 billion as of Q3. AUM was positively impacted by both market appreciation as well as net inflows. Net inflows into our open-end funds were partially offset by institutional net outflows. Our open-end funds have experienced positive net flows in the last 5 consecutive quarters. Joe Harvey will provide additional insights regarding our flows and pipeline. Total expenses during Q3 were essentially flat to the prior quarter due to several drivers. G&A expenses decreased meaningfully versus the prior quarter. G&A was lower across areas, including talent acquisition and travel costs. While compensation and benefits increased during the quarter, the change in compensation and benefits was below the change in revenue. As a result, our compensation ratio for the quarter was lower. This has driven our year-to-date compensation ratio down to 40.25%. Lastly, on expenses, distribution and service fees were impacted by higher average AUM in our open-end funds. Regarding taxes, our effective rate was lower for the quarter, resulting in our year-to-date rate being 25.1%. Our earnings material presents liquidity at the end of Q3 and prior quarters. Our liquidity totaled $364 million at quarter end which compares positively to $323 million in the prior quarter. Let me now touch on a few items regarding full year 2025 guidance. With respect to compensation and benefits for 2025, we expect our compensation ratio to remain at 40.25% for the full year. We expect full year G&A increase of around 9% compared to full year 2024. This full year G&A increase has been primarily driven by talent acquisition and business development costs incurred in the first half of the year. Also impacting G&A this year have been expenses such as marketing and related costs for our Active ETF launch. We remain focused on expense management and will be disciplined but balanced as we see investment opportunities in our business. In 2026, we expect annual G&A changes to moderate from this year's growth level to being in the mid-single-digit percentage range. Lastly, we expect our effective tax rate to remain at 25.1% on an as-adjusted basis. I'll now turn it over to Jon Cheigh, who will discuss investment performance.

Thank you, Raja, and good morning. I'd like to focus on 2 key areas today: our performance scorecard and our investment outlook, particularly why we see emerging tailwinds for listed real assets and infrastructure. Beginning with our performance scorecard. Our shorter-term quarterly performance was slightly weaker with 33% of AUM outperforming, with strong performance from our global listed infrastructure strategy offset by weaker U.S. REIT performance. Despite the short-term underperformance, we have maintained a record of consistent long-term outperformance. On a 1-year basis, 93% of our AUM has outperformed its benchmark, while our 3- and 5-year outperformance rates are above 95%. Our 1, 3, and 5-year excess returns of 184 basis points, 227 basis points, and 216 basis points, respectively, are near or above our targets. 87% of our open-end fund AUM is rated 4 or 5 stars by Morningstar versus 90% in the prior quarter. In short, we continue to meet our objective of providing long-term alpha for our investors, which has and will continue to create opportunities for new allocations and takeaways from underperforming managers. Last, I want to flag our exceptional performance since the launch of our 3 active ETFs; our real estate ETF has outperformed by 217 basis points since inception and is #1 versus its peers. Our preferred ETF has outperformed by 124 basis points and is also #1 versus its peers. While our resource equities ETF has outperformed by 490 basis points. Our early business success with our active ETFs is a team effort, but we know it has to start with great performance. Congrats to our team for delivering. Transitioning to the market and our outlook, the third quarter was broadly positive for risk assets amid prospects for the Federal Reserve easing, corporate profits continuing to generally meet or exceed expectations and the AI CapEx boom accelerating. While the Magnificent 7 lagged the broader equity market at the start of the year, the group has surged back since the market lows in April. This continued in the third quarter as the technology sector, for example, outperformed the S&P 500 by more than 500 basis points. So far this year, the drivers of economic growth have been fairly narrow leading to the so-called K-shaped economy, where some segments, notably AI investment and high-end consumers supported by wealth effects are performing well, while other segments appear more sluggish. Looking ahead, we believe economic growth and thus corporate profits should remain resilient, but the foundations of growth will likely broaden with both monetary and fiscal stimulus. This is also consistent with estimates for earnings growth forecast for sectors that have seen sluggish growth in 2025, which is real estate, energy, and materials accelerating in 2026. In addition to a broadening economy and market, we believe 2 interrelated dynamics are also worth highlighting because they inform our investment outlook. First, despite stocks trading at all-time highs, along with lofty valuations and inflation closer to 3% rather than the Federal Reserve’s stated 2% target, the Fed seems focused on cutting rates at least once more if not twice in 2025. The Fed is focused on slowing job growth and modestly rising unemployment. Notably, an environment just like this of slightly elevated inflation and lower rates is a positive backdrop for real assets. Under the surface of the Magnificent 7 or even the press' focus on record gold and surging silver prices, natural resource equities were up nearly 21% year-to-date and our diversified real asset strategy which, as a reminder, focuses on the core 4 real asset classes of real estate, infrastructure, commodities, and natural resource equities is up over 13%. We believe these results are telling us that the market is anticipating the reacceleration of non-wage inflation as well as the continued scarcity of many commodities. The supply-demand dynamic for natural resource equities given increasing power demand and underinvestment over the last decade is a very favorable trend for the asset class. Second, we are believers in the significant productivity enhancement potential of AI, which we anticipate will lead to a multiyear period of healthy GDP growth and corporate profits. It will likely also lead to more muted employment growth. The current balancing act for the Fed between muted job growth and elevated inflation is likely to be a multiyear, if not decade challenge. Again, the risk of higher non-wage inflation remains elevated. We are only in year 2 of what is likely to be a $4 trillion to $5 trillion AI-driven investment cycle lasting at least the next 5 years. This view has driven our optimism in areas like electric utilities levered to accelerate demand growth and companies geared to natural gas production and infrastructure. Within real estate, we favor data center owners of stabilized assets focused on cloud, inference, and to a lesser degree, training. Barring a shock that undercuts profitability for the fundamental growth outlook, markets will probably remain patient and optimistic about the longer-term monetization potential of AI. Further, power constraints will be a healthy governor of excess. But as we look further out, there is a long history of CapEx cycles like this ending in pain and underperformance for the initial CapEx investors. In short, we believe it will be hard to thread the needle to get the hand-off in spending to revenue collection. While the technology is likely to be lasting and valuable, we're reluctant to conclude that this time will be different from the narrow set of winners so far. So as stocks trade at record valuations across a range of metrics and provide investors with less diversification because of increased market concentration, we believe real assets can and should help investors diversify, create more resilient portfolios, and improve Sharpe ratios given more attractive valuations and greater inflation sensitivity. With this in mind, the global listed infrastructure sector deserves a meaningful strategic allocation to begin these companies, often have inflation-linked pricing built into their revenue models, allowing them to adjust contract prices. For instance, airport and toll road operators typically have agreements that allow service rate hikes at fixed triggers above the inflation rate. There are mechanisms built into the contract structure for most infrastructure businesses that allow them to pass higher costs, whether from inflation or tariffs on to customers. This is one reason why infrastructure offers investors higher inflation sensitivity than stocks or bonds. We wrote a piece 12 months ago, which I believe remains apt. The piece was called FOMO, reversals of fortune, and the opportunity in real assets. Frankly, I have even more conviction that a major market shift is right around the corner today than I did a year ago. Elevated inflation, a dovish Fed focused on muted job growth, a significant investment cycle, and attractively valued real assets versus historically expensive broader equity markets, create an extremely compelling case for strategic allocation of listed real assets including infrastructure, natural resources, commodities, and real estate. With our strong investment performance, we believe our combination of alpha and beta will drive continued allocations to our asset classes.

Thank you, Jon, and good morning. Today, I will review key business trends in the third quarter and then discuss our strategic priorities and some industry topics. For the quarter, our financial results were solid. Flows were positive. Our institutional pipeline built up meaningfully. New strategies and vehicles are gaining traction, and we are making progress on distribution initiatives. On the investment front, while all of our strategies had positive returns, our equity strategy returns except for natural resource equities at 10.7%, lagged the S&P 500 with our largest strategy, U.S. REITs returning 1.4%, ranking ninth of the 11 S&P industry groups. Our preferred stock strategies continued to perform well versus fixed income, reflecting the continued strength of credit and the soundness of the U.S. banking system. If the macro outlook transitions to slower growth with a bias toward lower short rates with sticky inflation, our strategies should perform better on a relative basis, particularly with equities at top decile valuations across most metrics. Since the Fed began easing in September 2024, we have had 4 or 5 quarters of net inflows averaging $494 million. This contrasts with 9 quarters of outflows, averaging $745 million during the Fed rate tightening period from March 2022 to September 2024. In the third quarter, we had net inflows of $233 million bringing year-to-date inflows to $325 million. Major story lines were net inflows of $768 million into open-end funds and net outflows of $455 million and $82 million from institutional advisory and sub-advisory respectively. We had net inflows into all of our strategies except U.S. real estate with the largest flows in global and international real estate, which has seen a positive inflection in terms of market performance and investor interest. Open-end funds, active ETFs, and offshore CCAP funds all had net inflows, while model portfolios for wealth had modest net outflows. With respect to institutional advisory, we had 2 account terminations totaling $269 million and net outflows from existing client accounts totaling $186 million. Regarding the 2 largest outflows, one was due to a European client derisking their U.S. allocation in favor of international and one was due to the restructuring of a retirement plan, which I put in the category of old architecture. Our one unfunded pipeline grew substantially to $1.75 billion at quarter end compared with $776 million last quarter and a 3-year average of $900 million. That is the largest pipeline since the fourth quarter of 2021. We were awarded $972 million of new mandates in the quarter, and an additional $55 million was won and funded. The largest percentage of the pipeline at 66% is in U.S. REIT strategies with a balanced spread across 5 other strategies. We believe this increased activity is driven by several factors, including more confidence by allocators in the interest rate cycle, a bit more flexibility in portfolios due to listed equity outperformance, the search for more inflation-sensitive allocations, and reallocations from underperforming managers. Of the $500 million in known terminations we disclosed last quarter, 72% has been realized. Incremental additions since then have brought the total back to $500 million to $600 million. As the pipeline demonstrates, we believe we have transitioned to a net positive position on the institutional flow front. In addition to the pipeline, last night, we priced an equity rights offering for our closed-end fund, Cohen & Steers Infrastructure Fund listed on the New York Stock Exchange under symbol UTF. We raised $353 million in equity, which combined with associated leverage will provide over $500 million in dry powder to allocate to opportunities in global infrastructure such as increased power demand and decarbonization, the digital transformation of economies, and deglobalization with transforming supply chains. This was the third largest closed-end fund rights offering — transferable rights offering ever and was a firm-wide team effort. I'd like to give special thanks to Ted Valenti from our product team, who was a closed-end fund champion and led this effort. UTF's returns have compounded at 9.7% since its inception over 21 years ago. The timeline for scaling up our active ETF strategy is a bit ahead of plan. We had $70 million in net inflows into our 3 active ETFs in real estate, preferreds, and natural resource equities lifting total AUM, including our seed capital to over $200 million. We are on track to launch 2 more ETFs in the fourth quarter in the preferred stock and listed infrastructure categories. Together with others in the industry, we continue to evaluate the model of ETFs as a share class of an open-end fund. Given the complexities with that structure, we are comfortable with our decision to move forward and establish our market position with these individual launches, more to come. In private real estate, we continue to make progress on both the capital raising and investment fronts. Our first closed-end drawdown fund, Cohen & Steers Real Estate Opportunities Fund had its final close at the end of September raising $236 million overall. Our non-traded REIT Cohen & Steers Income Opportunities REIT has continued its industry-leading investment performance with a focus on open-air shopping centers. We are targeting the RIA channel for both additional strategic seed capital as well as traditional allocations. We will be launching on a major enterprise RIA firm in a few weeks, and we are in advanced discussions to onboard with the second major distribution partner. With these 2 vehicles, we have begun to record revenue from the private real estate business and are focused on driving this strategic initiative to profitability. One of the hotly debated topics in the asset management industry today is the potential addition of private investments to individual retirement plans, principally through target date funds. From an industry perspective, it's far from clear how far this will advance in light of the wariness of 401(k) sponsors against potential liability, which has resulted in sterile lineups of core style box strategies in equities and bonds with passive strategies and low fees pervading. I'm a huge advocate for adding diversifiers via listed real asset strategies to these plans. However, that goal can be achieved right now simply by using mutual funds and CITs and listed strategies real estate, infrastructure, and diversified real assets. And these products, unlike most private vehicles, come with the added benefits of attractive fees, daily liquidity, and market-based, not stale or appraisal-based pricing. Today, about 16% of our mutual fund assets are from 401(k) plans with the vast majority being listed real estate. We welcome the conversation on adding real assets to 401(k) lineups and believe we can make a strong case that there is an easy way to do it without the illiquidity, opacity, and potential liability associated with private allocations. This year marks the 65th anniversary of the legislation of the REIT structure signed by President Eisenhower. This innovation was genius and has resulted in a $1.5 trillion market cap asset class in the U.S. alone and the first 3 decades were relatively quiet, but the early 1990s saw a flurry of activity when the public market was called upon to rescue the commercial real estate industry with much-needed IPO equity capital that couldn't otherwise be found. This phenomenon fundamentally reshaped the landscape, corporatizing the real estate industry, both organizationally and strategically. It's amazing to see how real estate has helped foster the growth of our economy in recent decades, from an industrial age to today's digital age with the largest sectors comprising data centers, cell towers, single and multifamily, and seniors housing among many others. Listed REIT returns have outperformed core private real estate returns by 150 basis points annually from 1998 to 2022 according to a CEM benchmarking study. Amazingly, despite this outperformance, listed allocations in U.S. pension portfolios are just 60 basis points compared with 6% in private real estate. So you ask, what gives? Despite the 150 basis point net of fee performance advantage, allocators continue to choose private real estate extensively due to the higher perceived volatility of listed REITs and the desire to have something unique. While we continue to build our private real estate platform in order to serve clients across the real estate spectrum, we're not satisfied with getting just 10% of the allocation pie for listed. Hence, at the 65-year milestone, we will continue to make the case for listed REITs to innovate and find ways to help our clients build better portfolios. If this sounds like a full-throated endorsement of the listed markets, it is; it happens there first. I'll close by thanking Raja Dakkuri for his service to Cohen & Steers and wish him all the best in his new opportunity. We'll be cheering for him as we do with many alumni. Mike Donohue will take on the role of interim CFO; and Brian Meta as Head of FP&A and IR, will continue to facilitate communications with you. Now I will turn the call back to the operator, Julianne, to facilitate Q&A.

Our first question today comes from John Dunn from Evercore ISI.

The demand for U.S. REITs in the wealth management channel has been good lately. Can you compare how that's developed compared to past cycles leading up to interest rates? Has it taken longer to materialize? Is it about the same? And do you think that flows in the wealth channel can accelerate from where they have been in the past few months?

Well, the long story is that historically, returns have tended to be stimulated by interest rate cuts, but that's a pretty one-dimensional way to think about it. You also have to think about what's happening in the economy, fundamentally, the trajectory of growth rates and inflation and such. I would say that the progression of the interest rate cycle this time, which has been about as extreme as we've ever seen it, because of the transition from quantitative easing and leaving zero interest rates behind has created a different dynamic and that real estate pricing had really advanced within the zero interest rate environment. And as rates have normalized, real estate pricing has had to adjust. We think that's mostly occurred. But in some sectors, it still needs to happen. So there's less of a feeling that we're going to have a V-shaped recovery in the REIT return cycle. All of that said, we think we're at a good point in that cycle. And that it's likely that, as Jon said, rates are going to continue to come down. And I think that's going to be a continued catalyst for strong REIT performance. In terms of your question, I think we've had very good results in wealth. We're also seeing good activity in the institutional market for U.S. REIT. As I mentioned, 66% of the $1.75 billion pipeline is in U.S. REIT strategies, and there are a lot of different stories with that. So maybe with that, I'll stop and see if Jon would like to add anything.

I want to emphasize that, as Joe mentioned, the interest rate cycle is certainly significant, but we also need to consider the fundamental cycle of supply and demand. In 2021, fundamentals were exceptionally strong, but low interest rates led to excessive building in sectors like industrial and apartments. Now, the industry is facing an oversupply issue in warehouses and apartments. We are presently navigating through this adjustment. Importantly, I mentioned our expectation that the economy and earnings growth will start to diversify, and we project REIT earnings will pick up pace going into 2026 and 2027. So it’s not solely about interest rates; it's also about earnings and rental growth.

Got you. On the institutional side, you mentioned the profile of clients who are redeeming. Could you provide some insights on the geographical and client-type breakdown of those investing with you? Are there any areas besides U.S. REITs where clients are currently allocating their funds?

In the pipeline, it's mainly North America with a diverse range of investors, including individual retirement plans and annuity providers. Interestingly, I keep highlighting the outdated architecture of vehicles, and we have experienced some losses because of that. A significant recent success is our involvement in the restructuring of annuity-type plans. One noteworthy non-U.S. allocation I mentioned earlier came from a European institution that is feeling uneasy about the situation in the U.S. and decided to redeem some of its U.S. position. However, they reinvested about half of what they redeemed into a European real estate strategy. Additionally, we have another promising opportunity in the pipeline involving global real estate allocation from a nuclear decommissioning entity in Europe. Overall, there are compelling stories in the pipeline, ranging from strategic allocation shifts to our continued success against underperforming peer managers, which applies to both real estate and infrastructure.

Our next question comes from Rodrigo Ferreira from Bank of America.

As rates continue to go down, where do you expect that cash sitting on the sidelines to go into? And I guess, which of your strategies do you feel stand to benefit the most from a flows perspective?

Well, as everybody knows, we've had record levels of cash sitting in money funds and T-bills and such. And I would expect as Jon laid out, the big picture that allocations to and diversifiers to real asset strategies that are inflation-sensitive probably should be going up. So that would point to our real estate strategies, our infrastructure strategies, and our multi-strategy real assets portfolios, which are the most inflation-sensitive because they include resource equities and commodities along with real estate and infrastructure.

The only other things I'd add is we would probably expect some movement to go into preferreds, probably our shorter duration and lower duration preferreds where, of course, high tax-advantaged income is an investment objective, but capital preservation is also an investment objective. And so what we found when short rates were high was that cash was yielding more than short and long-duration fixed income, in some cases, including preferred. So I think to the extent the yield curve continues to steepen, we should see more of that deposit and money market move into things like short-duration preferreds. I'd also say that, of course, a lot of money at the margin has gone into private credit funds over the last several years to the extent there are new allocations to the extent of SOFR is coming down with Fed funds. And obviously, total returns for private credit are expected to be compressed. So again, I think both of those incremental movement from private credit into preferreds and out of cash into preferreds are likely places to look.

Got it. And then just for my follow-up, you've given us good visibility on the comp ratio in 2025. How should we think about it in 2026 and longer term? I guess at this moment, like how do you think about the balance of investing in the business versus the opportunity to continue to expand the operating margin?

Yes, so far this year, we've experienced decent revenue growth, which positively impacts the compensation ratio and associated margins. Towards the end of the year, the timing of some hiring is being pushed into next year, so I wouldn't read too much into the current trend yet. We need to focus on what's developing with our new initiatives, particularly our revenue generation from private real estate and active ETFs, where related costs are already accounted for. However, we're still in the launch and buildup phase. This year, we've been on the losing side compared to broader market appreciation; the S&P 500 has performed well, affecting compensation across the industry as we compete for talent. Overall, we believe we're improving our compensation ratio considering how the markets and our investments are performing, along with new initiatives beginning to produce revenue. The investment landscape is changing rapidly, opening up numerous opportunities. Many of our projects are nearing completion or are reflected in our numbers, but we will continue to find new opportunities driven by strategic developments in the industry. We're also experiencing opportunistic situations, such as the UTF rights offering. On the corporate infrastructure investment front, we've established four new headquarters facilities worldwide, providing ample space for our growth. We've launched active ETFs, and while scaling up will incur additional expenses, we expect this to be beneficial overall. With private real estate, the costs are set, and as we attract assets and generate revenue, it will positively influence our compensation ratio. In terms of seed capital, we still have funds to allocate for our commitments related to our non-traded REIT and new ETF launches, but soon we will recycle some of that capital, reducing the need for additional seed funding for now. I’ve previously highlighted our focus on investing in distribution, especially within the RIA segment of the wealth market, where we've made significant progress. As we continue to see success, we will enhance our efforts in this area.

No, that was perfect.

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

Great. Well, thanks, Julianne. And we look forward to reporting fourth quarter next January. In the meantime, please call us, call Brian Meta with any questions that you have. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.