CNS

Business Context and Reporting Period

Company: Cohen & Steers, Inc. (CNS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: CNS is a holding company for asset management and investment banking subsidiaries specializing in high-income equity portfolios, including U.S. REITs, international real estate securities, preferred securities, and utilities. The company manages assets through open-end and closed-end mutual funds and institutional separate accounts.

Key Financial Metrics

Liquidity: The company maintains a highly liquid position. Cash, cash equivalents, accounts receivable, and marketable securities comprised 63% of total assets as of September 30, 2006. Regulatory net capital exceeded minimum requirements by approximately $11.5 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 48% in the third quarter and 23% for the nine-month period compared to 2005. This was driven by a 774% surge in investment banking fees in Q3 and a 22% increase in investment advisory fees due to higher AUM.
• Profitability Volatility: While the third quarter showed a net income of $15.7 million, the nine-month period resulted in a net loss of $13.4 million. This contrasts with a net income of $23.6 million for the same period in 2005.
• Expense Spike: Total operating expenses for the nine months ended September 30, 2006, increased 121% to $161.3 million. This was primarily due to a one-time payment of $75.7 million in the second quarter to terminate compensation agreements related to closed-end mutual fund offerings.
• AUM Expansion: Total AUM grew 26% to $25.5 billion, driven by market appreciation and net inflows, particularly in open-end mutual funds (up 39%) and institutional separate accounts (up 56%).

Outlook, Risks, and Unusual Items

• Unusual Item: The $75.7 million termination payment in Q2 2006 significantly impacted the nine-month operating results and cash flow from operations. Management expects this payment to create a tax loss for the full fiscal year 2006.
• Acquisition: On October 5, 2006, CNS entered into an agreement to purchase the remaining 50% ownership interest in its affiliate, Houlihan Rovers S.A. The transaction is expected to close in Q4 2006, adding approximately $900 million in AUM and consolidating Houlihan Rovers' financial results.
• Tax Outlook: Management estimates a 33.5% effective tax rate for 2006 due to the tax loss from the termination payment. Absent unusual items, the effective tax rate is expected to be approximately 40% beginning in 2007.
• Risks: Revenue is highly correlated with market performance (approx. 71% of revenue derived from asset-based fees). A decline in real estate securities or interest rate increases could negatively impact AUM and fee revenue. Additionally, growth in closed-end funds depends on favorable market conditions for public offerings.

Investor Verification Checklist

• One-Time Expense Impact: Verify the sustainability of earnings by excluding the $75.7 million termination payment from the nine-month expense analysis.
• Investment Banking Volatility: Assess the consistency of investment banking revenue, which is transaction-dependent and showed extreme volatility (774% increase in Q3).
• Houlihan Rovers Acquisition: Monitor the closing of the Houlihan Rovers acquisition and the subsequent consolidation of its financials and AUM.
• Tax Rate Normalization: Confirm the shift in effective tax rate from the estimated 33.5% in 2006 to the projected 40% in 2007.
• AUM Flows: Track net inflows/outflows in open-end funds and institutional accounts to gauge organic growth independent of market appreciation.