Cohen & Steers, Inc. — Q1 2019 Form 10-Q
Business and period: Global investment manager specializing in liquid real assets, preferred securities and other income strategies. This unaudited report covers the three months ended March 31, 2019, compared with Q1 2018.
Financial results and liquidity
- Revenue: $94.2 million, down 0.3% from $94.5 million. Investment advisory and administration fees were $84.6 million; distribution and service fees were $7.0 million.
- Operating performance: Operating income was $35.4 million, down from $37.2 million; GAAP operating margin was 37.6%, versus 39.4%. Expenses rose 2.7% to $58.8 million, mainly from higher employee compensation.
- Profit and EPS: Net income attributable to common stockholders was $32.5 million, up from $27.6 million. Diluted EPS was $0.68, versus $0.59. The increase primarily reflected a $13.9 million net investment gain, compared with a $4.5 million investment loss in Q1 2018. As adjusted, diluted EPS was $0.58, down from $0.62; adjusted net income was $27.4 million, versus $29.0 million.
- Cash flow: Operating cash flow was negative $29.5 million, similar to negative $29.1 million in Q1 2018. Investing cash flow was positive $8.7 million; financing cash flow was negative $16.2 million. Cash and cash equivalents fell by $36.9 million to $56.4 million during the quarter.
- Balance sheet and liquidity: Total assets were $405.8 million and total liabilities $106.3 million at March 31. The company reported no debt. Net liquid assets were $197.0 million, up from $187.4 million at year-end 2018. Operating lease liabilities were $51.6 million.
- Capital returns: The company declared $0.36 per share in dividends for Q1, compared with $0.33 a year earlier. It paid $17.0 million in dividends during the quarter and repurchased shares to satisfy employee tax withholding obligations.
Material changes and operating trends
- Assets under management (AUM) were $62.6 billion at March 31, up 7.1% from $58.5 billion a year earlier; average quarterly AUM increased 0.6% to $59.5 billion. The year-over-year AUM increase primarily reflected $7.6 billion of market appreciation, partly offset by net outflows of $58 million and distributions of $3.3 billion.
- Quarterly AUM flows were positive overall: net inflows of $1.0 billion and market appreciation of $7.5 billion were partly offset by $695 million of distributions. Open-end funds had $1.4 billion of net inflows; institutional accounts had $362 million of net outflows.
- Revenue was nearly unchanged, while operating margin declined as compensation costs increased. General and administrative expense fell partly because Q1 2018 included $871,000 of costs for a potential business transaction that was not pursued.
- GAAP results included significant seed-investment and consolidated-fund effects. In Q1 2019, the company deconsolidated SICAV Preferred and consolidated SICAV GRE following changes in ownership interests; these changes also affected redeemable noncontrolling interests and reported investment balances.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or AUM guidance. Management said cash and operating cash flows were expected to be adequate for anticipated capital requirements and obligations; it also stated it anticipated paying dividends subject to board approval and other considerations.
- Results depend on AUM, market performance, client flows, distributions, foreign currency movements and fee rates. The company cautioned that actual results may differ from forward-looking statements and referred investors to the risk factors in its 2018 Form 10-K; it reported no material changes to those risks.
- Management reported no pending legal matters it believed could materially affect results, cash flows or financial condition. The company had an unfunded co-investment commitment of approximately $1.3 million (up to $5.1 million total, with $3.8 million funded); timing of future funding was unknown.
- Operating lease payments totaled $55.0 million undiscounted, and contractual obligations totaled $66.0 million, including leases, purchase obligations and other liabilities. The company reported effective disclosure controls and no material change in internal control over financial reporting.
- The 2019 GAAP investment gain was largely unrealized: net unrealized gains on investments still held were $14.6 million, while realized investment losses were $0.8 million. Management’s adjusted measures exclude specified seed-investment, foreign-exchange and other items and are supplemental, not substitutes for GAAP results.
Important facts for investors to verify
- Whether recent AUM gains persist and translate into fee revenue, given modest average AUM growth and mixed institutional flows.
- How much reported earnings depend on seed investments, consolidated funds and market-driven unrealized gains; compare GAAP and adjusted results.
- The sustainability of operating margins as compensation expenses and other costs evolve.
- Cash conversion and liquidity, including the reasons for negative operating cash flow and the effect of dividends, share withholding repurchases and fund-related cash flows.
- Future funding needs for the co-investment commitment, lease obligations and regulatory capital; the filing reports no corporate debt.