Cohen & Steers, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. Cohen & Steers is a global investment manager focused on real estate securities, infrastructure, real assets, value stocks and preferred securities.
Financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $63.7 million | $54.8 million | +16% |
| Operating expenses | $38.3 million | $35.8 million | +7% |
| Operating income | $25.4 million | $18.9 million | +34% |
| Operating margin | 39.9% | 34.5% | +5.4 percentage points |
| Net income attributable to common shareholders | $18.1 million | $13.0 million | +39% |
| Diluted EPS | $0.41 | $0.30 | +37% |
| Net cash used in operating activities | $56.3 million | $10.6 million | Greater cash use |
Investment advisory and administration fees were $58.2 million, up from $51.1 million. Portfolio consulting and other revenue increased to $3.1 million from $1.3 million. Non-operating income rose to $3.0 million from $1.0 million, principally reflecting trading gains in the sponsored onshore real estate long-short fund. The effective tax rate was approximately 36%, versus 35%.
Assets under management (AUM) ended the quarter at $44.9 billion, up 18% year over year, with average AUM of $43.0 billion, up 19%. Q1 total net outflows were $425 million: institutional accounts had $1.4 billion of net outflows, partly offset by $938 million of open-end fund inflows. Market appreciation added $4.0 billion during the quarter.
Financial position and liquidity
At March 31, 2012, cash and cash equivalents were $90.6 million, compared with $127.8 million at year-end. Total assets were $318.2 million and total liabilities were $46.9 million. The filing reports no material capital lease obligations and does not report corporate borrowings in the presented balance sheet. Securities sold but not yet purchased were $14.4 million, compared with $9.3 million at year-end.
Operating cash use reflected, among other items, increases in securities owned, accounts receivable and amounts due from brokers, alongside payment of accrued compensation. Investing activities provided $0.2 million; financing activities provided $18.1 million, including $23.4 million of contributions from redeemable noncontrolling interests. The company said cash flows from operations should be more than adequate for anticipated capital needs and obligations. Cash and short-term investments held in the U.S. were described as sufficient for working capital; approximately $67.6 million of cash and available-for-sale investments was held by foreign subsidiaries and management intended to permanently reinvest those funds outside the U.S.
There is no explicit debt balance or debt guidance stated in the filing. The broker-dealer exceeded its minimum regulatory capital requirement by approximately $0.8 million at quarter-end; the company contributed $1.0 million to it on April 25, 2012. Foreign regulated subsidiaries exceeded aggregate requirements by approximately $64.4 million.
Changes, outlook and risks
- Revenue growth was driven mainly by higher average AUM and increased portfolio consulting revenue. Expenses grew more slowly than revenue, supporting improved operating margin.
- Institutional net outflows worsened from $1.2 billion of inflows in Q1 2011, although open-end fund inflows increased year over year. Management attributed longer-term AUM growth primarily to U.S. real estate subadvisory relationships and market appreciation.
- The Real Asset Fund launched in January 2012; its assets and third-party interests were consolidated, with the latter classified as redeemable noncontrolling interest. The company’s redeemable noncontrolling interest rose to $28.5 million from $4.8 million at year-end, including fund contributions.
- Management expected a full-year 2012 tax rate of approximately 36%, excluding discrete items. No revenue, earnings or AUM guidance was provided.
- The company committed to co-invest 5%, up to $25 million, of capital raised by GRP-TE. The investment is illiquid and may be invested for up to 12 years; the ultimate amount and funding schedule were undetermined, and the unfunded commitment was not recorded as a liability.
- A third-party institutional client represented approximately 17% of Q1 revenue. Investments include Level 3 fair-value assets requiring significant judgment. Management reported no pending legal matter it believed would have a material adverse effect, and no material changes to the risk factors in its 2011 Form 10-K.
- A $0.18-per-share quarterly dividend was declared May 8, 2012, payable June 28 to holders of record June 4.
Important facts for investors to verify
- Whether institutional outflows persist and whether open-end fund inflows continue to offset them.
- How much of revenue growth reflects durable fee-generating AUM versus market appreciation, and the impact of the major client concentration.
- The drivers and sustainability of negative operating cash flow, especially changes in receivables, broker balances, securities owned and compensation payments.
- The eventual size, timing and liquidity implications of the GRP-TE co-investment commitment, and the effects of consolidated sponsored funds on reported assets and cash flows.
- Valuation assumptions for Level 3 investments, as well as the company’s ability to meet regulatory capital requirements and maintain U.S. working-capital liquidity.