STT · Q3 2025 Earnings

Management noted that while interest rate cuts historically stimulate REIT returns, the current cycle is different due to the extreme transition from quantitative easing and zero rates. Real estate pricing had advanced significantly in the zero-rate environment and has adjusted as rates normalized. Management expects continued rate cuts to be a catalyst for strong REIT performance. They highlighted very good results in wealth and strong institutional activity, with 66% of the $1.75 billion pipeline in U.S. REIT strategies. John Shea added that while rates are important, the fundamental supply-demand cycle is equally critical, with the industry working through oversupply in industrial and apartments, but REIT earnings expected to accelerate into 2026-2027.

Management expects cash to flow into diversifiers and real asset strategies that are inflation-sensitive, particularly real estate, infrastructure, and multi-strategy real assets portfolios. Additionally, they expect movement into shorter-duration preferreds due to the yield curve steepening and capital preservation objectives. Management also noted potential flows out of private credit into preferreds as SOFR comes down and expected private credit returns compress.

Management indicated that revenue growth and market appreciation are the best drivers for maintaining the compensation ratio. They noted that some hiring timing is being pushed into next year, so current trends shouldn't be extrapolated too far. They emphasized that new initiatives (private real estate, active ETFs) are beginning to generate revenue while their associated costs are already in the system. Management also highlighted ongoing investments in distribution, particularly in the RIA channel, and noted that market appreciation relative to their performance and industry-wide compensation pressures are factors. They expect margins to improve as new initiatives scale and revenue grows.

Management stated the pipeline is predominantly North America with a wide variety of investors including retirement plans and annuity providers. Notable recent wins include benefiting from restructuring of annuity-type plans (old architecture). A European institution reduced U.S. exposure but added to a European real estate strategy. Another interesting pipeline item is from a nuclear decommissioning entity in Europe seeking global real estate allocation. Management characterized the pipeline as containing good stories spanning strategic allocation changes and continuing to win from underperforming peer managers in both real estate and infrastructure.

Management identified the two largest outflows totaling $269 million. One was due to a European client de-risking their U.S. allocation in favor of international exposure. The other was due to a retirement plan restructuring, which management categorized as 'old architecture.' Management indicated these were not performance-related but driven by client portfolio strategy and structural changes.