Cohen & Steers, Inc. — Q2 2021 Form 10-Q
Business context and period: Cohen & Steers is a global investment manager specializing in real assets and alternative income. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $144.3 million | $94.1 million | $270.0 million | $199.9 million |
| Operating income | $59.7 million | $35.3 million | $111.6 million | $63.7 million |
| Operating margin | 41.4% | 37.5% | 41.3% | 31.8% |
| Net income attributable to common stockholders | $46.6 million | $28.5 million | $95.4 million | $49.1 million |
| Diluted EPS | $0.95 | $0.59 | $1.95 | $1.01 |
- Q2 revenue increased 53.3%; six-month revenue rose 35.1%. Investment advisory and administration fees drove the increase, reflecting higher average assets under management (AUM). Q2 also included $2.3 million of performance fees from certain institutional accounts.
- At June 30, AUM was $96.2 billion, up 45.1% from $66.3 billion a year earlier. Management attributed the increase to $12.5 billion in net inflows and $20.4 billion in market appreciation, partly offset by $3.0 billion in distributions. Twelve-month organic growth was 18.9%.
- Q2 expenses increased 43.8%, including higher employee compensation and distribution fees. Six-month expenses increased 16.2%; the prior-year period included approximately $12.0 million of RQI rights-offering costs. Six-month 2021 compensation also included higher incentive compensation and accelerated vesting costs.
- Six-month net cash provided by operating activities was $90.0 million, versus $55.6 million in 2020. Investing activities provided $38.1 million, while financing activities used $58.2 million. Cash and cash equivalents ended the period at $111.2 million, compared with $41.2 million at year-end 2020.
- Management reported no outstanding debt and net liquid assets of $184.6 million at June 30, versus $119.3 million at December 31, 2020. The company said cash and operating cash flows should be adequate for anticipated capital requirements and obligations.
- The company declared a quarterly dividend of $0.45 per share on August 5, payable August 26, 2021. It paid $43.5 million in dividends during the first half and repurchased $21.3 million of shares, primarily to satisfy employee tax withholding on vested restricted stock units.
Material changes and unusual items
- GAAP six-month non-operating results shifted from a $11.9 million loss in 2020 to $13.5 million of income in 2021, primarily reflecting investment gains versus prior-year investment losses. Q2 investment gains were $7.8 million, compared with $7.3 million a year earlier.
- The six-month 2021 effective tax rate was 17.5%, compared with 19.0% in 2020; the company cited reversal of certain unrecognized-tax-benefit liabilities and tax effects related to restricted stock units. Q2 rates were 25.4% and 28.0%, respectively. Tax items affect period-to-period comparability.
- Management also presents non-GAAP “as adjusted” results. Adjusted diluted EPS was $0.94 for Q2 2021 versus $0.54 in 2020, and $1.73 for the first half versus $1.15. Adjustments include seed-investment results, accelerated RSU vesting, foreign currency items, tax adjustments and, for 2020, RQI rights-offering costs; these measures are supplemental, not substitutes for GAAP results.
- There were no material changes to the risk factors in the 2020 Form 10-K. The company reported no pending legal matters it believed would materially affect results, cash flows or financial condition, and no material changes to contractual obligations in the first half.
Outlook, risks and contingencies
- The filing provides no quantified earnings, revenue or AUM guidance. Management stated it expects operating cash flows and cash on hand to cover reasonably foreseeable commitments.
- Revenue is largely tied to client AUM and market values: investment advisory and administration agreements generated 93.1% of revenue in the first half. Market declines, redemptions, or weaker conditions for closed-end fund offerings could reduce AUM and fees.
- At June 30, real estate represented 62.4% of AUM and preferred securities 26.5%. Management cautioned that interest-rate changes or a prolonged economic downturn could adversely affect those asset classes and the company’s revenue and growth.
- The company had a co-investment commitment of up to $5.1 million alongside GRP-TE, of which approximately $3.8 million had been funded. The timing of the remaining funding is unknown; the unfunded amount was not recorded as a liability. Seed investments also expose the company to market-price risk, partly mitigated with economic hedges.
Important facts for investors to verify
- Whether AUM growth is sustained by net flows as well as market appreciation, and how flows develop by vehicle and strategy.
- How much future fee growth depends on market levels, performance fees and the mix of higher- or lower-fee products.
- Whether compensation and distribution costs continue to rise with revenue, and how adjusted results reconcile to GAAP, especially for tax and seed-investment items.
- The sensitivity of seed investments and fee revenue to market declines, interest rates and the company’s real-estate and preferred-securities concentration.
- The timing and funding of the remaining co-investment commitment, and the sustainability of dividends and other capital returns.