Cohen & Steers Continues To Face Headwinds Created by a Rising Interest-Rate Environment

We have lowered our fair value estimate for narrow-moat-rated Cohen & Steers CNS to $72 per share from $75 to account for weaker equity and credit market returns in the near term, which will have a negative impact on the company’s assets under management. Cohen & Steers reported a nearly 25% decline in its managed assets during 2022, as rising interest rates negatively affected investor perceptions of REITs and other publicly traded real estate equity securities (which accounted for 63% of the company’s AUM on average last year), leading to both market losses and outflows for its funds.

Rising interest rates impact REITs because they not only rely on debt to buy properties but could have variable rate debt attached to properties they already own and/or may need to refinance debt on their properties in the near to medium term. Higher rates also increase the likelihood of a recession, which could compound occupancy issues for a lot of retail and office property REITs. On top of that, higher yields on fixed-income securities have made bonds, which are generally viewed as being less risky than stocks, more attractive when compared with REITs and other publicly traded real estate equity securities.

Our revised forecast for Cohen & Steers has the firm generating organic AUM growth (adjusted for distributions) of positive 2.9% (negative 0.7%) on average annually during 2023-27, with managed assets expanding at a mid-single-digit rate annually on average based on expectations for mid- to high-single-digit average annual gains for U.S. equities. With Cohen & Steers not being able to fully escape the fee compression affecting traditional active asset managers, the net result would be a positive 2.7% CAGR for revenue during our five-year forecast. That said, we are projecting relative stability in Cohen & Steers’ operating margins during the next five years, with adjusted GAAP operating margins in a 39%-43% range, compared with 41.5% on average during 2018-22.