CNS - Cohen & Steers: The Issue Is Real Estate

2023-11-28 10:05:35 ET

Summary

• Cohen & Steers is an asset management company with substantial exposure to preferreds and to real estate.
• The decline in assets under management and operating leverage in the business has resulted in significant year-over-year income hits.
• There is a concentration risk to Daiwa in Japan, exposing the company to potential rate pivots by the BoJ and the effects that could have on Japanese allocators' US holdings.
• With a pretty high PE and also some secular concerns, we don't see great value here at the moment.

Cohen & Steers ( CNS ) is an asset management company with quite a unique angle in that it provides slightly more value through more active management and access to slightly more unusual asset classes that allow it to charge higher fees. However, they are pretty exposed to real estate which has been affected by rate revisions on the long-end, and while the declines in REITs have already been very substantial, there could in principle be more downside. The declines in AUM and operating leverage have resulted in meaningful YoY income hits, and while it's conceivable that things might start improving next year, it still isn't guaranteed and the expectations are nonetheless too high. Also, there is a key customer concentration risk in Japan, opening up exposure to the BoJ rate pivot here, so we steer clear.

Key Earnings Points

The major exposure with CNS is their real estate strategies, mainly through REITs.

As a consequence, performance hasn't been great. Generally, REITs are down around 30% , and this has obviously affected both performance based components of the fee structure as well as overall AUM, in addition to prompting flows as people rotate away from these poor performing exposures in favour of other assets. Preferreds, which also tend to underperform due to innate duration exposure and therefore negative correlations with long-dated rates, also drove outflows similar to real estate. The YoY declines in AUM were pretty meaningful at more than 10%, and the sequential performance hasn't been great either due to continued concerns around these asset classes and ongoing risk factors as evaluated by markets.

Still, there was evidence of relative strength within asset classes, with the company reporting that at least last quarter almost all funds overperformed .

Operating income declined by almost 33% YoY as a consequence of lower revenues and meaningful operating leverage.

Bottom Line

The PE is over 20x at current levels, and we don't think it's realistic to expect incomes higher than they were averaging in 2022 in 2024. So expectations are a little high. Moreover, there are some overall pressures that are secular on businesses like these.

While there is some outperformance going on in their funds on a relative basis, active management will always be under threat from the shift to more efficient and statistically better-performing passive investments.

Furthermore, we have concerns that the last leg of inflation may be tough to beat and long-dated securities like preferreds as well as real estate could continue to suffer, especially if another credit event like the regional banking crisis were to occur, for example around government finances in the US.

But for CNS specifically, we note the very large customer concentration to Daiwa ( DSEEY ) as a major institutional client. They are substantial owners in US REITs since after the financial crisis, and are responsible for around 10% of CNS's revenue. Our concern is that if the decades long policy of accommodation ends in Japan, this could generally bring back a lot of Japanese institutional money to Japan and out of US equities, which would have a disproportionate effect on CNS's results. This is a remote risk but something to think about.

Comprehensive of our general concerns around asset managers, especially those levered to things negatively correlated to long-dated rates when we know little about the extent of inflation's stickiness, we'd rather look elsewhere.

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