ALLIANCEBERNSTEIN HOLDING L.P. annual report, FY2010

Business context and reporting period

AllianceBernstein Holding L.P. (NYSE: AB) filed this Form 10-K for the fiscal year ended December 31, 2010. Holding is a publicly traded limited partnership whose principal income and cash flow come from its ownership interest in AllianceBernstein L.P., the operating asset manager. AllianceBernstein provides institutional, retail and private-client investment management, research and brokerage services.

Key financial and operating metrics

AllianceBernstein reported adjusted operating income of $553.6 million and adjusted operating margin of 21.3% for 2010, versus $453.3 million and 18.4% in 2009. These are management-defined non-GAAP measures, not substitutes for GAAP results.

Assets under management (AUM) ended 2010 at $478.0 billion, down 1.8% from $486.7 billion. Average AUM rose 6.3% to $474.6 billion. Institutional AUM fell 6.3% to $272.9 billion; retail AUM rose 5.3% to $127.0 billion; private-client AUM rose 4.4% to $78.0 billion. Overall net outflows were $56.2 billion, partly offset by $39.5 billion of market appreciation and an $8.0 billion acquisition-related inflow.

Fourth-quarter 2010 AllianceBernstein net revenues were $777.6 million and net income attributable to unitholders was $136.5 million; diluted earnings were $0.49 per unit. Holding reported fourth-quarter net income of $42.9 million and diluted earnings of $0.42 per unit. The fourth-quarter Holding distribution was $0.42 per unit, declared in February 2011 and payable in March.

Material changes versus the prior comparable period

• Net revenues rose 1.4%, but AllianceBernstein net income attributable to unitholders fell 20.4%; diluted earnings per unit declined 23.7%.
• Investment advisory and services fees increased 6.8%, reflecting higher average AUM, particularly in retail and private-client services. Institutional fees fell 5.7%, reflecting outflows and a shift in product mix.
• Retail revenue rose 20.3% and private-client revenue rose 10.4%; institutional revenue declined 5.7%. Bernstein Research Services revenue declined 0.9%.
• Operating expenses increased 7.5%, including a $101.7 million real-estate charge, higher distribution-related expenses and higher incentive compensation. Investment gains also declined substantially year over year.
• Fixed-income AUM grew while value and growth equity AUM declined. Management attributed equity relative-performance weakness in part to elevated second-quarter market volatility and correlations; many equity services underperformed benchmarks for the full year.

Outlook, commentary, risks and unusual items

• Management expected net outflows to improve in 2011, but said this depended on investment performance, markets, consultant recommendations and client preferences; improvement was not assured. It cited a $6.4 billion pipeline of won but unfunded institutional mandates, which are not binding commitments.
• Management reported continued strength in fixed-income performance and recovery in equity performance relative to benchmarks and peers in the third and fourth quarters. It also highlighted retail sales growth, alternatives expansion and the launch of Secure Retirement Strategies.
• The $101.7 million real-estate charge followed a decision to sublease more than 380,000 square feet in New York and consolidate offices. Management estimated occupancy-cost reductions of about $21 million in 2011 and $23 million in 2012 and later years, subject to leasing and market assumptions.
• The SunAmerica alternatives group acquisition closed in October for $14.3 million cash; the filing records a $49.0 million purchase price including contingent consideration. It added approximately $8.0 billion of AUM. Alternative investment AUM totaled $12.7 billion at year-end.
• AllianceBernstein had $225.0 million of commercial paper outstanding and no borrowings under its new $1.0 billion three-year revolving credit facility. The facility supports the commercial-paper program and is subject to financial covenants. Net operating lease commitments were $1.964 billion.
• Material risks include investment underperformance and continued outflows, market and fee pressure, reliance on terminable client agreements and key personnel, competition, regulatory changes (including Dodd-Frank and proposed mutual-fund distribution-fee rules), counterparty and operational risks, and the partnership tax structure. About 84% of hedge-fund AUM subject to high-watermarks was at least 10% below those marks at year-end, making performance fees from those funds unlikely in 2011.
• In the Hindo litigation, previously settled shareholder, mutual-fund derivative and ERISA claims were resolved for $30 million, already paid; derivative claims on behalf of Holding remained pending with unspecified damages. Management could not estimate a possible loss for that matter. It believed other pending or threatened matters would not materially affect results or financial condition.
• Holding declared a $0.42-per-unit fourth-quarter distribution after year-end. Holding’s 2010 distribution yield was stated as 6.5% based on 2010 distributions and the year-end unit price; distributions depend on cash available from AllianceBernstein.

Important facts for investors to verify

• Whether net outflows and institutional redemptions improve, and whether unfunded mandates are converted into funded AUM.
• Investment performance by strategy, particularly equity benchmark-relative results, and the implications of hedge-fund high-watermarks for performance fees.
• The sustainability of earnings and distributions given lower GAAP margin and earnings, higher expenses, and Holding’s dependence on AllianceBernstein cash distributions.
• Real-estate sublease progress and whether the projected occupancy-cost savings are achieved without further charges.
• Commercial-paper refinancing, revolving-facility covenant headroom, lease commitments and other funding obligations.
• Potential effects of regulatory changes, the pending Holding derivative litigation and any developments affecting partnership tax status.
• Distinguish Holding’s results and per-unit measures from those of operating partnership AllianceBernstein; the filing reports both entities.