Cohen & Steers, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Cohen & Steers is a global investment manager specializing in liquid real assets and income strategies. Its fee revenue is primarily tied to average assets under management (AUM).
Financial and operating highlights
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $105.0 million | $98.3 million | $301.0 million | $287.2 million |
| Operating income | $40.1 million | $39.2 million | $113.7 million | $112.7 million |
| Operating margin | 38.2% | 39.9% | 37.8% | 39.3% |
| Net income attributable to common stockholders | $34.0 million | $30.8 million | $97.9 million | $88.3 million |
| Diluted EPS | $0.70 | $0.65 | $2.03 | $1.87 |
- Q3 revenue grew 6.7%, mainly from higher advisory and administration fees as average AUM increased. Expenses rose 9.7%, led by compensation and distribution costs; operating margin consequently declined 1.7 percentage points.
- For the nine months, revenue increased 4.8% and expenses 7.4%; operating margin declined 1.5 percentage points. Adjusted operating margin, a non-GAAP measure, was 38.8% for Q3 and 38.4% year to date, also below prior-year levels.
- Non-operating income was $6.6 million in Q3 and $26.1 million year to date, versus $1.0 million and $0.1 million, respectively, in 2018. Investment gains contributed $4.5 million in Q3 and $20.2 million year to date; the 2019 year-to-date result included $11.1 million of the company’s share of seed-investment income. These gains materially supported net income growth.
- At September 30, AUM was $70.8 billion, up 11.8% year over year; average AUM was $68.6 billion in Q3, up 7.7%. Year-to-date AUM growth reflected $2.1 billion net inflows and $13.4 billion market appreciation, offset partly by $2.6 billion of distributions. Q3 net inflows were $1.1 billion.
Cash, liquidity and obligations
- Cash and cash equivalents were $128.3 million at September 30, versus $92.7 million at year-end 2018. Net liquid assets were $238.9 million, compared with $187.4 million. The company reported no debt outstanding.
- For the nine months, operating cash flow was $73.8 million, investing cash flow was positive $20.5 million, and financing cash flow was negative $57.7 million. Cash increased $36.6 million before foreign-exchange effects. Financing uses included $51.1 million of dividends and $10.4 million of share repurchases for employee tax withholding.
- Operating lease liabilities were $46.0 million. The company had a $5.1 million co-investment commitment, of which $3.8 million had been funded; timing for the remaining amount was uncertain. Contractual obligations totaled $59.0 million, primarily leases.
Outlook, commentary and notable items
- The filing provides no specific earnings or AUM guidance. Management stated that cash and operating cash flows should be adequate for anticipated capital requirements and obligations, and that it anticipates paying dividends subject to board approval.
- On November 7, 2019, the company declared a $0.36 quarterly dividend and a $2.00 special dividend per share, payable December 3 to holders of record November 18.
- Management cited market performance, client inflows and outflows, withdrawals, distributions, foreign exchange and AUM levels as factors affecting revenue. The company’s exposure to market-driven asset values is therefore a key business risk.
- Seed-investment gains and fund consolidation/deconsolidation affected reported non-operating results and comparability. The company deconsolidated SICAV Preferred in January and PISH in September 2019 and consolidated SICAV GRE during the period.
- The company reported no pending legal matter believed likely to have a material adverse effect and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether AUM growth and net flows persist, particularly given reported outflows in some institutional and real-estate strategies.
- How much future earnings depend on volatile seed-investment gains versus recurring advisory fees; compare GAAP results with management’s non-GAAP adjustments.
- Whether compensation and distribution expense growth continues to outpace revenue and further pressures operating margins.
- The sustainability and cash impact of the $2.00 special dividend, alongside the regular dividend and remaining investment commitments.
- Fund consolidation changes and lease and other contractual obligations when assessing balance-sheet comparability and liquidity.