Cohen & Steers, Inc. — Q3 2017 Form 10-Q
Business and period: Global investment manager specializing in real assets, including real estate securities and listed infrastructure, and in preferred securities and other income strategies. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 | Nine months 2017 |
|---|---|---|
| Revenue | $96.4 million, up 2% | $278.9 million, up 7% |
| Operating income / margin | $41.0 million / 42.5% (39.4% prior year) | $113.9 million / 40.8% (38.3% prior year) |
| Net income attributable to common stockholders | $25.1 million, versus $23.9 million | $71.5 million, versus $66.8 million |
| Diluted earnings per share | $0.53, versus $0.51 | $1.53, versus $1.44 |
| Dividends declared per share during period | $0.28 | $0.84 |
Revenue growth primarily reflected higher investment advisory and administration fees, supported by higher average assets under management (AUM). Q3 operating expenses fell 3%, mainly from lower distribution and service fees and general and administrative costs; nine-month expenses rose 3%, principally from compensation. The Q3 effective tax rate increased to 41.2% from 38.2%; the nine-month rate was 38.6% versus 37.2%.
- AUM: $61.5 billion at September 30, up 2% year over year and $1.1 billion from June 30. Q3 net inflows were $1.4 billion and market appreciation was $719 million, partly offset by $1.0 billion in distributions. Management reported a 9% annualized organic growth rate for the quarter.
- Cash flow: Nine-month operating cash flow was $10.6 million, down from $60.8 million; investing cash flow was $6.8 million, versus $1.0 million; financing used $2.5 million, versus $39.7 million. Cash increased $15.0 million before foreign-exchange effects to $198.9 million.
- Liquidity and debt: Net liquid assets were $263.7 million, up from $221.8 million at year-end 2016. The company reported no debt. Total liabilities were $69.3 million; total assets were $424.0 million.
- Capital returns: The company paid $38.9 million in stockholder dividends during the first nine months and repurchased $9.1 million of shares to meet employee tax-withholding obligations.
Changes, outlook, and risks
- Year-to-date AUM growth was supported by $3.6 billion in net inflows and $4.1 billion in market appreciation, partly offset by $3.4 billion in distributions. Preferred securities and U.S. real estate were notable sources of inflows. Japan subadvised AUM was $12.3 billion, down 18% year over year, with significant distributions.
- Management cited institutional demand for preferred securities, CIT inflows, and global listed infrastructure inflows. A $265 million global real estate subadvisory mandate was awarded and was expected to fund in Q1 2018. No company-wide earnings or revenue guidance was provided.
- On November 8, 2017, after quarter-end, the board declared a $0.28 quarterly dividend and a $1.00 special dividend per share, payable December 13 to holders of record November 22.
- Reported non-operating income reflected seed-investment results. For the nine-month period, non-operating income fell to $2.8 million from $6.5 million, primarily due to lower seed-investment fair values. Adjusted results exclude, among other items, seed-investment results, accelerated vesting costs, and a foreign withholding-tax refund; these non-GAAP measures supplement, not replace, GAAP results.
- Operating cash flow declined sharply, including working-capital and trading-investment movements. Seed investments increased to $62.1 million; some co-investments are illiquid. The company had an unfunded commitment of approximately $1.3 million under a commitment of up to $5.1 million alongside GRP-TE. Future draw timing was unknown.
- Foreign subsidiaries held $81.6 million of cash; management stated an intention to permanently reinvest these funds, and repatriation could incur U.S. income tax. Operating lease obligations totaled $75.6 million. Management reported no pending legal matter it believed could materially affect results or financial position; risk factors were unchanged from the 2016 Form 10-K.
Investor verification points
- Review whether AUM inflows persist and whether Japan subadvised distributions or other strategy-level flows materially affect fee revenue.
- Reconcile the sharp year-over-year drop in operating cash flow, including the effect of trading investments and changes in receivables and other working capital.
- Compare GAAP performance with management’s adjusted measures and assess the impact of seed-investment gains and losses, tax items, and one-time adjustments.
- Check the funding timetable and liquidity implications of the GRP-TE commitment, lease obligations, and any restrictions or tax costs associated with overseas cash.
- Confirm the declared quarterly and special dividends, their payment dates, and the company’s capacity to sustain distributions.