Business Context and Reporting Period
Company: Cohen & Steers, Inc. (CNS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: CNS is an investment advisor specializing in income-oriented equity portfolios, including U.S. and international real estate securities, large-cap value stocks, listed infrastructure, utilities, and preferred securities. The company manages assets through open-end and closed-end mutual funds and institutional separate accounts. In May 2009, the company completed the sale of its investment banking subsidiary, Cohen & Steers Capital Advisors, LLC.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Total Revenue | $33,827 | $83,682 | $48,937 | $156,934 |
| Operating Income | $5,815 | $6,375 | $14,004 | $55,433 |
| Net Income (Loss) Attributable to Common Shareholders | $7,545 | $(13,355) | $(1,560) | $25,020 |
| Diluted EPS | $0.18 | $(0.32) | $(0.04) | $0.59 |
| Cash and Cash Equivalents (Sep 30, 2009) | $136,851 | |||
| Total Assets (Sep 30, 2009) | $328,015 | |||
| Net Cash Provided by Operating Activities (9 Months) | $7,285 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 31% in the third quarter and 47% for the nine months ended September 30, 2009, compared to the prior year. This was primarily driven by a 26% decrease in average assets under management (AUM) for the quarter and a 44% decrease for the nine-month period, largely due to market depreciation.
- Profitability Shift: The company reported a net income of $7.5 million for the quarter ended September 30, 2009, reversing a net loss of $1.6 million in the same period in 2008. However, for the nine-month period, the company reported a net loss of $13.4 million compared to a net income of $25.0 million in 2008.
- Non-Operating Volatility: Non-operating income swung from a loss of $10.0 million in Q3 2008 to a gain of $4.2 million in Q3 2009, driven by $3.1 million in net trading gains from consolidated long-short funds. Conversely, the nine-month 2009 period included a $32.7 million other-than-temporary impairment charge on available-for-sale securities.
- Expense Reduction: Total operating expenses decreased 20% in the quarter and 24% for the nine months, primarily due to lower employee compensation, distribution fees, and general administrative costs.
Guidance, Outlook, and Risks
- Assets Under Management (AUM): Total AUM was $22.5 billion at September 30, 2009, a 9% decrease from the prior year. Institutional separate accounts saw significant growth with $2.4 billion in net inflows for the nine months, offsetting declines in open-end and closed-end funds.
- Market Conditions: Management noted that current market conditions preclude the launch of new closed-end mutual funds, which may adversely impact future growth. Revenue is highly correlated with market values of managed assets.
- Tax Outlook: The company expects the full-year 2009 effective tax rate to approximate 21%, excluding discrete items. A valuation allowance of approximately $18.1 million was established for net unrealized capital losses.
- Liquidity: The company maintains a highly liquid position with cash and cash equivalents of $136.9 million. Regulatory capital requirements for its broker-dealer and non-U.S. subsidiaries were significantly exceeded.
- Risks: Key risks include exposure to market fluctuations affecting AUM and revenue, credit risk in preferred securities, and the potential impact of new FASB guidance on Variable Interest Entities (VIEs) effective in 2010.
Investor Verification Checklist
- Impairment Charges: Verify the composition and recoverability of the $32.7 million other-than-temporary impairment charge recorded in the nine-month period, specifically regarding preferred securities and seed money investments.
- AUM Trends: Monitor the sustainability of net inflows in institutional separate accounts versus the continued outflows or market depreciation in mutual funds.
- Fee Rate Compression: Assess the impact of the shift in AUM mix from higher-fee mutual funds to lower-fee institutional accounts on the overall effective fee rate (which declined to 63.5 bps in Q3 2009).
- Regulatory Capital: Confirm continued compliance with SEC Uniform Net Capital Rule 15c3-1 and foreign regulatory requirements, though current excesses are substantial.
- Dividend Policy: Note the declaration of a $0.05 per share quarterly dividend on November 5, 2009, and its impact on future cash flows given the nine-month net loss.