#139 - Bob Steers: Four Decades of Real Assets Investing

0:00Bob Steers:Welcome to the Insightful Investor Podcast, a weekly series that seeks to share industry, investment, and market insights. Learn more about our show at insightfulinvestor.org. Bob Steers joins us on the podcast today. Bob is Executive Chairman and Co-Founder of Cohen and Steers, one of the pioneering firms in listed real estate and real assets investing. Founded in 1986 with Marty Cohen, the firm manages about$100 billion in assets as of the end of June. Today's conversation explores Bob's journey from young analyst to industry pioneer, the evolution of real assets as an asset class, and the lessons learned from building a specialized investment firm over four decades.

0:49Bob Steers:Welcome, Bob. Thanks for joining us. It's great to be here, Alex. Thank you. Well, you met Marty Cohen on your first day at Citibank, yet by your own account, you were very different people. What allowed that partnership to succeed for nearly four decades now? Yes, Marty and I started in the institutional research department at Citibank in 1977. And we were two out of 36 equity analysts they had at the time. Citi was actually the largest institutional money manager in the world. And so we were two rookies coming into kind of a storied institution. Our director of research at that time was Howard Marks, who I think a lot of us follow and is a good friend.

1:43And we were in the same class. We shared ideas. He was following kind of an exciting group of hotel owners and the like. Unfortunately, I started out following utilities, which is ironic because we're right back in the infrastructure business. But, you know, we collaborated over the years and I ended up as a junior person on the bank's emerging growth stock team. And Marty actually was asked to start an institutional fund to invest in asset-rich, real estate-rich public companies. Not just REITs, but there were many accidental owners of property back in the day. You know, some grocery change owned their stores.

2:35And the value of the real estate underlying stock was greater value than the stock. And so, you know, we followed each other's careers. And when I left Citibank to become the CIO at a small mutual fund company called National Securities, that mutual fund company needed some pizzazz, some new strategies. and Marty and I had collaborated on a number of names in his fund, and I convinced him to join me. And we launched at that firm the first two REIT or real estate mutual funds in the nation. And so at the end of the day, we shared a vision. And ultimately, that vision was the potential securitization of real estate.

3:26And the values that we share, the commitment that we had to long-term investing, and ultimately just respect for each other's love of investing and approach to investing. I think those common values is what saw us through 40 years of ups and downs, disagreements, agreements. At the end of the day, we always walked out of a meeting or a room in agreement and understanding each other's viewpoints.

4:09Bob Steers:What I've noticed is some of the strongest, longest lasting partnerships over time are with a combination of people who are fundamentally different, but they have a shared vision, same values and motivations. And those partnerships can last a long time because they actually help each other. Yes, I think having diverse backgrounds, Marty was a city kid from Queens, New York, the suburban kid. And, you know, our backgrounds are different, but the core values, our passion for investing, our approach to investing, and again, our respect for each other's professionalism and personalities really shine through.

4:59You know, one other point I'll make is that we both have four children, and one of the decisions that we made in 1986 was in the unlikely event that we were highly successful, we were actually, we agreed to prohibit anyone in our family from going into business. So not only did we not expect family to go in, we prohibited it. And the reason for that is both his wife, Michelle, and my wife, Lauren, come from families that had family businesses that ultimately were challenged and they had family in it. And it created tremendous problems within the family. And for both Marty and I, family is paramount and we didn't want to put our families at risk.

5:52Bob Steers:When you founded Cone and Steers in 1986, 40 years ago, what did you believe that the rest of the investment industry largely dismissed or even ignored. That's when my background as an emerging growth stock manager, which that term doesn't exist anymore. It's antiquated, obviously. But I had learned from the senior people on that team at Citibank to really think in terms of waves of change, secular waves of change, think very long term. And one of the underpinnings of that approach, which I believe now more than ever is it's difficult enough to be able to see around a corner, to have an idea that others don't have, but to time it perfectly is almost impossible.

6:49And so the key, in my view, is to identify waves of change, secular trends, and position yourself in front of that wave, there's no telling when that wave will break. So it's critical to position yourself, whether you're an individual investor or you're creating a firm and an organization, position yourself so that you don't have to be right on the timing. If you're right on the idea and you position yourself properly and you can endure, that's how to invest. That is the the key to success. And so Marty and I had worked together and launched the nation's first REIT mutual funds. The platform we were on, unfortunately, they had debt and equity products.

7:43The salespeople knew how to sell a yield or a stock fund. They had no idea what to do with this thing called a REIT fund. And again, back then, the market capitalization of the entire REIT industry was$6 billion. Okay, it's an approaching$2 trillion market, a global market today. So we mutually decided that, yes, we believe in this wave of change called securitization, that if Wall Street was good at anything, it was putting a value on an income stream, such as is generated from real estate. But that, frankly, if we were going to be successful in raising assets, we were going to have to do it ourselves.

8:39We were going to have to create a platform where there is no other story to tell, not stocks, not bonds, but REITs and why REITs belong in client portfolios.

8:51Bob Steers:And would convince you that public real estate securities represented a much larger opportunity than many investors may have appreciated at the time. At that time, real estate was commercial. Real estate was owned virtually 100 % privately by pension and endowment funds and insurance companies in very large measure. In our view, this was at that time the largest asset class in the world. And the reason why private investors were so enamored with allocations to real estate were the returns that competed extremely well with the broader equity market, income streams or yields that were generally above market.

9:44and as importantly, the diversification benefits of real estate and the very low correlations to stocks and bonds. And to us, for all of those attributes, returns, income streams, yields, low correlations, those are all the things that individual investors are looking for. And so it was just very clear to us that there was no reason why real estate had to be owned 100 % privately. the REIT structure, which had actually been enacted by Congress in the 60s, but had basically been dormant for decades, was actually a terrific structure to securitize equity real estate. And so that's what we expected to happen.

10:42Candidly, when we started the firm, term. If you had asked us how much money we thought we'd like to raise, we would have told you that if we were able to raise$1 billion, we would have died and gone to heaven. So again, this wave of change idea where it's hard enough to be right on the idea, timing is tough and our timing was not good. We were way too early. And the scalability of these opportunities is hard to predict as well.

11:15Bob Steers:It's so interesting when you hear this story now, it seems so obvious, but your firm spent years educating investors before the opportunity became obvious to them. But what did that experience teach you about conviction? Patience. We, uh, You know, we are a firm that, you know, our first priority, of course, is generating consistent and very significant alpha. But we, to your question, we've always been in the education business, whether we liked it or not, because virtually everything we've done, we were among, if not the first to do it. And in most cases, for example, we launched infrastructure capabilities in 2002, 2003.

12:07Nobody knew what infrastructure was. We were way early there, too. So that required a fundamental approach to education where we would take and share with anybody who would listen very deep dives on what should you expect from real estate, public or private, what role does it play in a diversified portfolio? Return expectations, correlations, volatility, educating our clients on cycles for each of the property types and so

12:44Bob Steers:forth. As any startup you would expect, and we had great difficulty getting meetings and getting people's attention. But again, I think whether it was our decision to just put our heads down and when the world woke up and wanted what we did, we would have the best track record. And that's what we did. And same with education. I think ultimately, investors, after consistently great investment returns, value that relationship with their managers where there's a flow of knowledge and information that is useful for portfolio construction. It goes back to what you said earlier in terms of you want to just make sure you can see these big waves coming and you want that at your back, not knowing the timing and you could be way early.

13:43Bob Steers:You just don't want to be too late. Yeah. And I think that becomes even more acute these days, you know, back in the 90s and even the early 2000s, markets moved more slowly, economic and stock market cycles unfolded at a reasonable pace. Everything now and every year, things speed up, cycles, digestion of information is instantaneous. and I think it's not possible to be late because if you're late, you're not in the game. And also, frankly, and I endorse this, but whether it's individual investors or platforms or some of the biggest sovereign funds that we manage money for, you need at least a three to five year track record of excellence before you're seriously considered because there's such an abundance of alternatives available today again you know comparing it to the 90s or even early 2000s you know there's you can bet on anything today and uh you know that may be good it may be bad, but as an investor, you have to keep that in mind.

15:11So being early and everything we've done, we've assumed that it would be three to five years before we would see a break even, if you will, in terms of asset gathering. And that's fine with us. That's always been the case. And that's kind of our moat, if you will, where we tend to be early by the time the markets appreciate what we do. We have three, five, ten-year track records, which competitors, you know, can't accelerate. I do want to emphasize that unlike some other organizations, one of the decisions that we made early on in our formation phase is we've observed that, you know, whether they're public asset managers like ourselves or private equity firms and venture firms.

16:10The successful ones by and large are the leadership is investment professionals, not product or marketing professionals who, in my view, have a habit of losing sight of what their product is. The product is not a hot dot. It's not short-term asset gathering. Our product is alpha. It's investment performance. And that drives all of our decisions as an organization.

16:42Bob Steers:In your career, you've lived through a few real estate downturns, 1987 crash and others. What is a lesson from those periods that remain central to your decision-making today? The ones that really come to mind, 1987 was short and sweet, if you will. It was deep, but it was quick. And then for us, the early 90s, when the commercial real estate world blew up and the RTC was created to digest all of the failed SNLs, they were all traumatic. But I'd probably refer to the financial crisis in 08 and 09 as the real example of how to position ourselves to benefit or to survive first and then benefit from a crisis.

17:43And again, it gets back to positioning yourselves for the long term. The key to our success has been, one, we have a deep investment capability that we've never cut back or reduced. And the ability to have continuity in our investment team has been, number one, we think of ourselves both before and after our IPO as an infinite life entity. We have no debt. We insiders control our equity. And so to us, it doesn't matter if we have a year or two where our earnings decline precipitously. We're not worried about being taken over. And there are years when senior management took serious pay cuts in order to have continuity in our team.

18:45And that's what happened in 2008 and 2009. We saw our stock go down dramatically, but we retained our staff. We retained our focus. Again, we had no debt and we owned all the equity. And coming out of that in 2009 and 2010, we had our best years ever in alpha generation because we led the REIT industry's recapitalization, which was dramatic. What are the biggest misconceptions you think investors still have about real estate and

19:27Bob Steers:real assets? Some of the misconceptions are on how to own these assets. So, to us, we've always asked the question, do you think the office building knows how it's owned? Is it owned in a public company? Is it owned privately? The opportunity, I think, is that these misconceptions about real estate's better when it's private because there's no volatility, that's a fallacy. There are misconceptions based on a product orientation so that there are, whether it's a mutual fund or a non-traded REIT that pays out more. than its earning. And, you know, to me, that's fake yield. And I think there are also misconceptions about liquidity, certainly listed as daily liquidity.

20:42But, and I think it's a very timely topic right now, and that is some of these alternatives that are in non-traded vehicles, there have been misconceptions about liquidity. So I think a lot of the misconceptions are created by, in our view, flawed products that advertise artificial yields, artificial liquidity, and some claims that private has no volatility and no correlations. Those are huge misconceptions as well. And that's what some of our research over the years has tried to address, try to be objective about the pros and cons of owning real estate or real assets through the public markets.

21:39The public markets aren't perfect, but they are what they are. And so the same with private markets for real estate and for infrastructure. And I think that's all coming to a head now in the press every day. You know, there are debates and issues that stem from investors just not being fully aware of what's real and what's hype.

22:08Bob Steers:It is challenging. And what I found in the investment world is there's generally not a lot of transparency. And there's a heavy incentive to try to be really good at marketing to grow your assets under management. And you have very smart people who work in the industry. So you put all that together and it's understandable why there may be a lot of misconceptions and misunderstandings and potentially negative surprises down the road for the investors. I agree. I think transparency is your friend. And we always try to under promise and over deliver. And so, you know, what you'll see in virtually all of our strategies is, you know, we don't pay out more than we can earn.

23:00You know, we have a very conservative view of leverage, obviously. Our firm has never employed leverage, and that's been a huge strength of ours. And so the key is transparency. And I think that will improve. Unfortunately, it's mainly because, and again, we're seeing it a lot now where when you have investor queues out of credit and other non-traded vehicles, the liquidity is not exactly what they had expected. So it will improve because it's in everyone's best interest to improve transparency.

23:36Bob Steers:During periods of uncertainty, and we may be going through one now, how do you determine whether fear is signaling danger or opportunity? The primary way we do that is through having more investment resources than anybody else in our fields of focus. And so, you know, we don't draw secular or strategic conclusions based on what's in the headlines or even necessarily what the stocks are telling us, although stocks are usually telling you something valuable. But the key to our success historically has been our long-term wave of change, secular approach to things. But nearer term, we just operate with more and better information about our industries and our companies than anybody else.

24:40I can't tell you that we have a better view of what GDP is going to be next year or where interest rates are going. I don't think there's anybody who knows how to integrate those variables as they occur and understand how it will affect positively or negatively. in our case, the real asset world, be it real estate, infrastructure, data centers, what have you. And that's the underpinnings to our investment success. As I mentioned earlier, it gets tougher every year as technology improves and moves decision-making more rapidly. But that's our challenge and that's what we deliver. So again, it's our focus on fundamentals, our ability to operate with better information than our peers.

25:47Bob Steers:If we look back as Cohen and Steers grew and scaled, were there moments when you and your partners had to step back and ask whether the firm's original edge was still as relevant as it had been at the founding? One of my favorite stories is in 2003, which is the year before we went public. And that was about 16 or 17 years after the firm's formation. And we had had some modest success. We were probably 10 or 12 billion in assets under management, which was a lot to us at that time. And so we decided to have an offsite. It was fishing in Canada. We took our executive committee and the theme of the offsite was buy, sell, or hold.

26:41And Marty and I decided we had our own views, which were pretty well formed before this, but we wanted to make sure that our senior leadership was in sync with that and without us biasing their views. And so we went to Canada and we posed the question, should we sell the company? Should we hold? Or should we double down and buy? And what is the criteria for that decision? And the criteria mainly came down to, do we think we can continue to deliver high levels of alpha consistently far into the future. Is our asset class being accepted as a permanent asset class, meaning will there continue to be demand and hopefully strong demand for our asset class?

27:45And evaluating the competitive landscape, we had a lot more competitors back then, every bank, all the mutual fund companies, insurance companies were getting in the business. And so we went through that exercise. Marty and I had already agreed. The answer to us was buy. And the rest of the group agreed. And it wasn't surprising that they would agree. What was helpful was as a group, we identified what we had to do going forward to continue to be successful and focus on that and develop our subsequent business plans around that. And that's what we did.

28:29Bob Steers:Over the next 12 months, we went public. We began growing our institutional infrastructure team and capability. We went global. And so that's why it's my favorite story. It was a great process. It was a great team building exercise. It was a great exercise on coalescing our focus. And almost immediately after, we doubled down and we created this infinite life entity by going public importantly part of the answer to that offsite was shared equity transitioning from a founder led and owned company to a more broadly owned infinite life company is a big step both culturally and you know for the founders and it was one of the best things we ever did and looking back it looks like a major inflection point in the firm's history tremendous inflection point for us again we identified these waves of change such as converting from a real estate only manager to real assets why did we do that Our institutional clients, who had a great experience with real estate, themselves thought, well, what other asset-based investments can we make that give us similar investment characteristics, income, diversification, equity-like returns to real estate?

30:15And ultimately, our institutional clients had real estate became subsumed into this broader category called real assets. And, you know, we saw that. We observed it. We agreed with it. And we asked ourselves, again, coming out of this 2003 offsite, what other strategies could we be the best at? We decided not to do CMBS or other debt securities because that business was already dominated by PIMCO and BlackRock and we weren't going to displace them. And again, we're not a product firm. We could have launched things, but we wouldn't have been excellent or the best at it. But nobody was doing infrastructure at that time, energy transition.

31:13And also, we went global, which was a really big step for us because there was very limited, if any, competition for listed real assets outside this country. So we went from basically a U.S.-only REIT manager in 2003 to global, to real assets. We expanded our preferred securities team, which we've been the industry leader in for a very long time. So yes, that was a pivotal time for us. And fortunately, it happened about five years before the financial crisis. So it really allowed us to establish ourselves so that we would be prepared for something as momentous as that.

32:00Bob Steers:It's helpful when you go through the examples of what it meant to buy. You're saying buy, hold, sell. And when the group agreed to buy, it's really interesting to look back and see what buy actually meant and all the things that you did to expand your opportunity set, broaden the ownership of the firm, reinvest in the organization. And I'm sure it's gratifying looking back and seeing the inflection point that actually occurred over time. I'm very proud. But much of the credit goes not to Marty and I, but to the culture that our employees created for themselves. I think we should get credit for going public and pounding the table that we're no longer a founder-led firm.

32:55This is a public company that we fully embrace public ownership and the governance that goes along with that. And so we pledged to be a leader in governance. There's not going to be family in the business. There's not going to be crony board members. And most importantly, for this to be an infinite life entity that's successful, our employees needed to take ownership of their culture and of their value system. And it was interesting, Alex, that after we went public, we would say all this, but I think employees were cautious or even skeptical as to whether we really meant it, that we would really delegate and empower and ask our employees to build their own culture.

33:54It took a couple of years and actions on our part for employees to really fully embrace that and take it and run with it. And that's been one of the key drivers is our employees, their ownership, not just of the equity, which compensation here involves substantial equity for almost all employees. But, you know, just the merit-based culture and the respect for diverse cultures here.

34:30Bob Steers:Over the last 40 years, what has changed most about the way investors think about real estate? I think investors have learned that real estate can be owned a lot of different ways. And I think the misconceptions that owning private is better than public or public is better than private is largely gone. And today you're seeing innovation in how investors can access real estate and the benefits, again, the equity-like returns, current income, and diversification benefits. And we've seen the success of non-traded REITs, for example. And one of the, I think, very exciting developments is the ability to combine public and private together.