Cohen & Steers, Inc. — Q2 2019 Form 10-Q
Business and period: Global investment manager specializing in liquid real assets, preferred securities and other income solutions. This unaudited report covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods. Dollar amounts below are in millions unless noted.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $101.8 | $94.4 | $196.0 | $188.9 |
| Operating expenses | $63.7 | $58.1 | $122.5 | $115.4 |
| Operating income | $38.1 | $36.3 | $73.5 | $73.5 |
| Operating margin | 37.4% | 38.4% | 37.5% | 38.9% |
| Net income attributable to common stockholders | $31.3 | $30.0 | $63.9 | $57.5 |
| Diluted EPS | $0.65 | $0.63 | $1.33 | $1.22 |
| Dividends declared per share | $0.36 | $0.33 | $0.72 | $0.66 |
Q2 revenue grew 7.8%, mainly from higher advisory and administration fees as average AUM increased across investment vehicles. Expenses grew faster, up 9.6%, principally due to compensation and distribution costs; operating margin declined one percentage point. For the first half, revenue rose 3.8%, operating income was essentially unchanged, and operating margin fell 1.4 percentage points.
Non-operating income was $4.5 million in Q2 versus a $0.8 million loss in Q2 2018, and $19.4 million in the first half versus a $1.0 million loss. The first-half 2019 result included $15.7 million of net investment gains, largely related to seed investments. Consequently, net income growth reflects investment results as well as operating performance. Effective tax rates were 24.2% in both 2019 periods.
Assets, liquidity and cash flow
- AUM: $62.4 billion at June 30, 2019, up 3.6% from $60.2 billion a year earlier. Average Q2 AUM was $63.0 billion, up 7.2%. The quarter had $13 million of net outflows before a $753 million conversion of institutional assets to model-based portfolios, which are excluded from reported AUM. First-half net flows were positive $1.0 billion. Open-end funds had net inflows; institutional accounts experienced outflows.
- Cash and investments: Cash and cash equivalents were $102.1 million. Investments totaled $153.0 million, including $49.9 million of U.S. Treasury securities classified as held to maturity. Management reported net liquid assets of $221.8 million, versus $187.4 million at December 31, 2018.
- Cash flow, first half: Operating cash flow was $45.9 million, compared with $6.1 million in 2018; investing cash flow was positive $23.7 million, compared with negative $4.2 million. Financing cash flow was negative $60.6 million, including $34.0 million of shareholder dividends, $32.0 million of distributions to redeemable noncontrolling interests and $10.4 million of share repurchases for employee tax withholding. Cash ended the period at $102.1 million.
- Debt and obligations: The company reported no debt outstanding. Operating lease liabilities were $48.8 million. Total liabilities were $109.5 million; redeemable noncontrolling interests were separately reported at $38.1 million.
Material changes, outlook and risks
- Compensation and benefits increased 13.4% in Q2, including higher incentive compensation, restricted-stock-unit amortization and salaries. Distribution and service expense increased 14.1%, reflecting higher U.S. open-end-fund AUM and intermediary-related fees. General and administrative expense declined.
- Seed-investment gains materially affected reported non-operating results. Management also presents non-GAAP “as adjusted” results; adjusted diluted EPS was $0.62 for Q2 and $1.19 for the first half, compared with $0.59 and $1.20, respectively, in 2018. These measures exclude specified seed-investment, foreign-exchange, accelerated-vesting and other items; they supplement, not replace, GAAP results.
- During the first half, the company deconsolidated SICAV Preferred after its ownership interest declined and consolidated SICAV GRE after its interest increased. These fund changes affected reported balance-sheet amounts and redeemable noncontrolling interests.
- Management said operating cash flow and liquidity should be adequate for anticipated capital requirements and obligations. No earnings or AUM guidance was provided. The company declared a quarterly dividend of $0.36 per share on August 1, 2019, payable August 22.
- The company had an unfunded co-investment commitment: up to $5.1 million total, of which approximately $3.8 million had been funded at June 30; timing of the remaining funding was unknown. No pending legal matter was identified as likely to materially affect results, cash flows or financial position. Management reported no material changes to previously disclosed risk factors or market-risk disclosures, and concluded disclosure controls were effective.
- Key business risks include market movements affecting AUM and fee revenue, client subscriptions and withdrawals, investment performance, foreign-currency fluctuations and the risks described in the company’s 2018 Form 10-K.
Important facts for investors to verify
- Whether AUM flows and retention improve, particularly in institutional and global/international real-estate mandates, and whether reported AUM trends translate into fee revenue.
- How much of earnings growth comes from recurring operating results versus seed-investment gains, fund consolidation changes and other non-operating items.
- Whether compensation and distribution-cost growth moderates and operating margins stabilize.
- The liquidity and timing implications of the remaining co-investment commitment, lease payments and distributions to fund investors.
- That comparisons of reported AUM and financial results account for the $753 million model-portfolio conversion and changes in fund consolidation.