CNS - Cohen & Steers: It's All About Real Estate

2023-06-27 13:34:26 ET

Summary

• Cohen & Steers, Inc.'s assets under management decreased by -3.8% month-on-month in May 2023 due to its significant real estate exposure, and this explains the stock's -15.4% year-to-date share price drop.
• But the favorable outlook for real estate in the long run remains intact, notwithstanding the short-term pain for Cohen & Steers.
• I continue to rate Cohen & Steers stock as a Hold, considering both the weak near-term prospects and the good long-term growth potential for the company.

Elevator Pitch

My Hold investment rating for Cohen & Steers, Inc. (CNS) stock stays unchanged. I previously did a review of Cohen & Steers' results for the third quarter of last year with my earlier October 24, 2022, write-up .

In the current update, I assess Cohen & Steers' recent share price weakness and evaluate the company's prospects. I come to the conclusion that there are both positives and negatives relating to CNS' positioning as a real estate-focused investment manager. While Cohen & Steers' real estate exposure is expected to be a drag on the company's short-term performance, CNS should eventually become a beneficiary of the property sector's favorable long-term outlook. This explains why I continue to have a Neutral view of Cohen & Steers.

YTD Share Price Drop For CNS Is Linked To Weak AUM Performance

Cohen & Steers' stock price fell by a substantial -15.4% in this year thus far. Also, it is worthy of note that CNS' current consensus forward next twelve months' normalized P/E multiple of 18.9 times (source: S&P Capital IQ ) represents a -20% discount to the stock's highest forward P/E metric registered in 2023 (23.4 times). The year-to-date, or YTD, share price underperformance and valuation de-rating for CNS are understandable, if one evaluates the company's AUM (Assets Under Management) performance.

CNS' most recent monthly performance disclosure suggests that its AUM had decreased by -3.8% from $80.9 billion as at the end of April this year to $77.9 billion as of May 31, 2023. In fact, Cohen & Steers' AUM as of end-May 2023 is about -15.0% lower than the company's 2022 average AUM of $91.6 billion, as indicated in its FY 2022 10-K filing .

As of March 31, 2023, Cohen & Steers had approximately 63.7% of its AUM concentrated in real estate strategies as highlighted in its Q1 2023 results presentation . CNS had earlier made reference to "headlines about the looming risk of a commercial real estate debt crisis" at its Q1 earnings briefing in explaining its below-expectations AUM performance. Also, a June 21, 2023, Seeking Alpha News article cited Jerome Powell's recent comments that "there will be commercial real estate losses related to the office sector for some banks."

As such, it is reasonable that Wall Street has lowered expectations regarding Cohen & Steers' stock price and financial performance in a significant way. In the past six months, the sell-side's consensus fiscal 2023 top line and bottom line forecasts for CNS were revised downwards by -17.1% and -10.5% , respectively. Separately, the analysts' consensus price target for CNS stock was cut by -10.0% from $74.50 in February this year to $67.00 now.

In summary, Cohen & Steers' near-term financial outlook is unexciting, in consideration of the company's most recent AUM metrics and the changes to consensus financial projections. The significant exposure to real estate strategies is a short-term headwind for CNS, and this has put pressure on the company's share price in recent months.

Taking A Long-Term View

There are bright spots relating to CNS' most recent May 2023 AUM performance, which implies that the long-term prospects for Cohen & Steers should remain healthy.

The $3.1 billion decline in Cohen & Steers' AUM last month comprised of $2.4 billion in market depreciation, $0.5 billion in outflows, and $0.2 billion in distributions. In other words, the decrease in the market value of assets, rather than outflows, was the most significant contributor to CNS' AUM contraction for the previous month. At the company's first quarter earnings call , Cohen & Steers shared its observations that many investors "recognize, on a buy and hold basis, if they buy (real estate) today they'll be very happy three to five years from now." This suggests that there is a meaningful number of investors who are willingly to take a longer-term view and stick with their current real estate allocations.

Assuming that one puts the short-term headwinds relating to the global real estate sector aside, the outlook for the property market in the long run remains pretty decent considering various factors like supply and diversification.

A recent June 20, 2023, research report published by PIMCO predicts that "land-use restrictions and high construction costs will reduce supply more than in any previous cycle, underpinning (long-term global) real estate values." Separately, Cohen & Steers' view is that "the range in property sectors and underlying businesses is probably as diverse as it's ever been" with new sub-categories of assets like "cell towers and data centers" as compared to two decades ago as per management's comments at the Q1 2023 results call. This means that the downside for global property is protected by the relatively more diversified profile of the real estate market today. On the other hand, worldwide properties in general have capital appreciation potential thanks to favorable supply dynamics.

Therefore, CNS' exposure to the real estate asset class is expected to be a tailwind for the company in the long term.

Closing Thoughts

A Hold is the most appropriate rating for Cohen & Steers stock in my opinion. I find it difficult to be bullish on CNS in view of its unfavorable short-term outlook. However, I don't think that Cohen & Steers deserves a Sell, provided that the positive long-term prospects for the global real estate market stay intact.

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