CNS

Business Context and Reporting Period

Company: Cohen & Steers, Inc. (CNS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: CNS is a holding company for asset management and investment banking subsidiaries specializing in high-income equity portfolios, including U.S. REITs, international real estate securities, preferred securities, utilities, and large-cap value stocks. The company operates two primary segments: Asset Management and Investment Banking.

Key Financial Metrics

Earnings Per Share (Nine Months 2007): Basic $1.36; Diluted $1.33.
Effective Tax Rate (Nine Months 2007): Approximately 38%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 28% for the quarter and 59% for the nine-month period compared to 2006. This was driven by a 43% increase in investment advisory fees and an 83% increase in distribution fees for the quarter, largely due to higher Assets Under Management (AUM).
• Profitability Turnaround: The company reported a net income of $56.8 million for the nine months ended September 30, 2007, a significant improvement from a net loss of $13.4 million in the same period in 2006. Operating income swung from a loss of $27.4 million in 2006 to a profit of $83.0 million in 2007.
• Expense Variance: Total operating expenses for the nine months decreased 22% to $132.5 million from $161.3 million in 2006. This decrease was primarily due to the absence of $75.7 million in lump-sum payments made in 2006 to terminate compensation agreements for closed-end funds. Excluding these one-time items, expenses increased due to higher compensation and amortization.
• Investment Banking: Revenue in this segment decreased 54% for the quarter ($4.8M vs $10.4M) but increased 78% for the nine-month period ($23.5M vs $13.2M), reflecting the cyclical nature of transaction-based fees.
• AUM Growth: Total AUM grew 36% to $34.7 billion from $25.5 billion in the prior year, driven by net inflows of $6.1 billion and the acquisition of Cohen & Steers Europe S.A.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes growth to successful fund launches, the acquisition of CNS Europe, and strong net inflows in institutional separate accounts. The company noted that open-end mutual funds experienced net outflows in the third quarter, the first such occurrence since Q2 2005.
• Capital Resources: The company maintains a highly liquid position with cash and marketable securities comprising 78% of total assets. Regulatory capital requirements for broker-dealer subsidiaries were exceeded by approximately $36.5 million.
• Dividends: On November 7, 2007, the company declared a quarterly cash dividend of $0.20 per share, payable December 27, 2007.
• Risks and Contingencies:
  • Market Risk: Approximately 79% of revenue is derived from investment advisory fees based on AUM. A decline in real estate securities or general market prices could reduce revenue.
  • Interest Rate Risk: An increase in interest rates could negatively impact REIT valuations and the company's ability to raise capital for new funds.
  • Concentration Risk: As of September 30, 2007, 46% of managed assets were concentrated in U.S. real estate common stocks.

Investor Verification Checklist

• AUM Sustainability: Verify the sustainability of net inflows, particularly given the net outflows in open-end funds during Q3 2007.
• Expense Normalization: Confirm that the reported expense decrease is not misleading due to the one-time $75.7M payment in 2006; analyze run-rate expenses excluding this item.
• Investment Banking Pipeline: Assess the volatility of investment banking revenue, which dropped significantly in Q3 2007 compared to Q3 2006.
• Regulatory Capital: Review the net capital levels of broker-dealer subsidiaries to ensure continued compliance with SEC Rule 15c3-1.
• Stock Repurchases: Note the $35.6 million used in financing activities for stock repurchases, primarily to satisfy employee tax withholding on restricted stock units.