CNS

Business Context and Reporting Period

Company: Cohen & Steers, Inc. (CNS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: CNS is a manager of high-income equity portfolios specializing in 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. As of December 31, 2006, CNS managed $29.9 billion in assets across closed-end mutual funds, open-end mutual funds, and institutional separate accounts.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 31% to $191.5 million, driven by a 27% increase in investment advisory fees due to higher AUM and a 59% increase in investment banking fees.
• Expense Surge: Operating expenses nearly doubled (99% increase) to $196.5 million. This was primarily due to a one-time $75.7 million payment in Q2 2006 to terminate compensation agreements related to closed-end fund offerings. Excluding this payment, distribution and service fees actually decreased.
• Profitability Decline: Net income dropped significantly from $31.9 million in 2005 to $3.2 million in 2006. The company reported an operating loss of $5.0 million, compared to an operating income of $47.6 million in the prior year.
• AUM Expansion: Assets under management grew 46% to $29.9 billion. The increase was attributed to 56% market appreciation, 33% net inflows, and 11% from the acquisition of Houlihan Rovers S.A.
• Acquisition: On December 18, 2006, CNS acquired the remaining 50% of Houlihan Rovers, adding approximately $1.0 billion in AUM and expanding its global footprint.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The financial results for 2006 were heavily impacted by the $75.7 million termination payment for compensation agreements. This non-recurring expense resulted in a tax loss for the fiscal year.
• Management Commentary: Management highlighted successful product launches, including the Cohen & Steers Closed-End Opportunity Fund ($499 million raised) and the expansion into London and Brussels. They noted that investment performance remains the primary driver for asset growth.
• Risks:
  • Key Personnel: The company relies heavily on co-CEOs Martin Cohen and Robert Steers; their loss would have a material adverse effect.
  • Market Volatility: Revenue is directly tied to the market value of assets managed. A decline in real estate securities prices could reduce fees and trigger client withdrawals.
  • Concentration: 59% of managed assets were concentrated in U.S. real estate common stocks as of year-end 2006.
  • Regulatory: Changes in SEC regulations regarding mutual fund governance and fee structures could pressure profitability.
• Outlook: The company expects cash flows from operations to remain the principal source of working capital. No specific numerical guidance for future periods was provided in the text.

Investor Verification Checklist

• One-Time Expense Impact: Verify the sustainability of earnings by excluding the $75.7 million termination payment from operating expenses to assess core profitability.
• AUM Composition: Confirm the stability of the 59% concentration in U.S. real estate common stocks and the impact of interest rate changes on this specific asset class.
• Fee Waivers: Review the schedule of expiring fee waivers for closed-end mutual funds, which are set to increase revenue rates through 2012.
• Key Person Risk: Assess the succession plan and retention strategies for co-CEOs Cohen and Steers, who control approximately 59% of the common stock.
• Acquisition Integration: Monitor the integration and performance of the newly acquired Houlihan Rovers assets and the associated goodwill ($20.6 million).