Business Context and Reporting Period
Company: Cohen & Steers, Inc. (CNS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: CNS is a manager of high-income equity portfolios specializing in U.S. REITs, international real estate securities, preferred securities, utilities, and listed infrastructure. The company operates two segments: Asset Management and Investment Banking. As of December 31, 2007, CNS managed $29.8 billion in assets across closed-end mutual funds, open-end mutual funds, and institutional separate accounts.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Revenue | $282.4 million | $191.5 million |
| Operating Income | $110.3 million | ($5.0 million) loss |
| Net Income | $75.5 million | $3.2 million |
| Earnings Per Share (Diluted) | $1.77 | $0.08 |
| Assets Under Management (AUM) | $29.8 billion | $29.9 billion |
| Cash and Cash Equivalents | $137.0 million | $139.4 million |
| Total Assets | $332.2 million | $285.1 million |
| Total Liabilities | $50.3 million | $43.7 million |
| Stockholders' Equity | $281.9 million | $241.4 million |
Segment Performance (2007):
- Asset Management: Revenue of $255.1 million; Pre-tax income of $109.5 million.
- Investment Banking: Revenue of $27.3 million; Pre-tax income of $12.3 million.
Material Changes vs. Prior Period
Revenue Growth: Total revenue increased 46% to $282.4 million in 2007 compared to 2006. This was driven by a 44% increase in investment advisory and administration fees and a 46% increase in investment banking fees.
Profitability Turnaround: The company returned to significant profitability, reporting $110.3 million in operating income in 2007, compared to a $5.0 million operating loss in 2006. The 2006 loss was heavily influenced by a one-time $75.7 million expense to terminate compensation agreements related to closed-end fund offerings.
Expense Management: Total operating expenses decreased 12% to $172.1 million in 2007. This reduction was primarily due to the absence of the $75.7 million termination payment recorded in 2006, partially offset by increases in employee compensation and general administrative expenses.
Assets Under Management: AUM decreased slightly by 0.4% to $29.8 billion. This decline was caused by $5.5 billion in market depreciation, which was nearly offset by $5.4 billion in net inflows. Notably, average assets increased 37% year-over-year as inflows occurred early in the year before market depreciation in the final two months.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items:
- 2006 Termination Payment: A $75.7 million expense in 2006 for terminating compensation agreements significantly distorted year-over-year comparisons.
- 2007 Compensation Payment: A $5.8 million expense was recorded in 2007 related to an additional compensation agreement for a closed-end fund offering.
Outlook and Commentary:
- Management expects cash flows from operations to remain the principal source of working capital.
- The company continues to diversify product offerings, including the launch of the Cohen & Steers Global Income Builder, Inc. and the Cohen & Steers SICAV Asia Pacific Real Estate Securities Fund in 2007.
- Fee waivers for certain closed-end funds are scheduled to expire between 2006 and 2012, which may impact future fee revenue structures.
Risks and Contingencies:
- Market Volatility: Revenue is directly tied to the market value of assets managed. A decline in real estate securities prices could reduce revenue and trigger client withdrawals.
- Key Personnel: The business relies heavily on co-CEOs Martin Cohen and Robert Steers; their loss would have a material adverse effect.
- Client Concentration: The six largest institutional separate accounts represented approximately 17% of total AUM and 7% of total revenue.
- Regulatory Changes: Changes in SEC rules regarding mutual fund governance and fee structures could exert downward pressure on fees.
Investor Verification Checklist
- Fee Waiver Expirations: Verify the schedule of expiring fee waivers for closed-end funds and the potential impact on future revenue growth.
- Market Depreciation Impact: Assess the sensitivity of revenue to further declines in real estate securities markets, given that 43% of AUM is concentrated in U.S. real estate common stocks.
- Key Person Risk: Review succession planning and retention strategies for co-CEOs Cohen and Steers.
- Client Concentration: Monitor the stability of the top six institutional separate accounts, which comprise a significant portion of revenue.
- Regulatory Capital: Confirm continued compliance with SEC Uniform Net Capital Rule 15c3-1 for broker/dealer subsidiaries.