Cohen & Steers, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Cohen & Steers is a global investment manager focused on real estate securities and other liquid real assets, preferred securities and income strategies. The filing also reports fourth-quarter results.
Financial results and key metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $349.9 million | $328.7 million | +6% |
| Operating expenses | $214.4 million | $201.1 million | +7% |
| Operating income | $135.5 million | $127.5 million | +6% |
| Operating margin | 38.7% | 38.8% | Down 0.1 percentage point |
| Net income attributable to common stockholders | $92.9 million | $64.6 million | +44% |
| Diluted EPS | $2.00 | $1.41 | +42% |
| Operating cash flow | $115.0 million | $89.8 million | +28% |
FY 2016 non-operating income was $7.9 million, compared with a $14.8 million loss in 2015; the prior-year result included seed-investment losses and a $2.8 million impairment. The effective tax rate fell to 35.3% from 42.9%, primarily reflecting the release of a valuation allowance related to seed-investment gains and discrete items. Management’s adjusted, non-GAAP diluted EPS was $1.85 in 2016 versus $1.71 in 2015.
In Q4 2016, revenue was $89.4 million, operating income was $35.9 million, net income attributable to common stockholders was $26.2 million and diluted EPS was $0.56. Q4 2015 figures were $81.7 million, $30.4 million, $12.4 million and $0.27, respectively.
Assets under management (AUM) rose 9% to $57.2 billion at year-end, from $52.6 billion. The increase reflected $6.7 billion of net inflows and $3.1 billion of market appreciation, partly offset by $5.2 billion of distributions. Average AUM increased 7% to $56.4 billion. Year-end AUM comprised $28.7 billion in institutional accounts, $19.6 billion in open-end funds and $9.0 billion in closed-end funds.
Cash and cash equivalents were $183.2 million, up from $142.7 million. Total assets were $333.7 million, total liabilities $67.1 million and stockholders’ equity $265.8 million. The filing describes the company’s financial condition as highly liquid; cash, specified investments and receivables represented 79% of total assets, versus 71% in 2015. The filing does not report corporate borrowings as a material debt balance. Separately, sponsored closed-end funds used $2.3 billion of leverage at year-end; this is fund leverage, not identified as company debt.
Cash used in financing was $74.5 million, primarily reflecting $70.8 million of dividends and $8.0 million of share repurchases for employee tax withholding. The 2016 declared dividend was $1.04 per share quarterly plus a $0.50 special dividend. A $0.28 quarterly dividend was declared in February 2017.
Material changes versus the prior period
- Revenue growth was driven mainly by higher average AUM in institutional accounts and open-end funds. Their fees rose 9% and 10%, respectively; closed-end fund fees declined 6%.
- Expenses rose faster than revenue, chiefly from higher employee compensation and distribution and service costs, leaving operating margin nearly flat.
- GAAP net income increased substantially as non-operating results improved from a significant 2015 loss. Seed-investment results were a major source of volatility: 2016 included $6.7 million of non-operating seed-investment income, mostly unrealized, while 2015 included a $14.0 million seed-investment loss excluding redeemable noncontrolling interest.
- Net inflows improved to $6.7 billion from $2.7 billion in 2015. U.S. real estate and preferred securities were important sources of 2016 inflows; global/international real estate had net outflows.
Outlook, commentary and risks
- No quantified earnings or revenue guidance is provided. Management identified collective investment trusts and retirement markets, Japan institutional business, and expansion of real-assets products as strategic priorities. The company launched an Irish-domiciled commodities fund in January 2017 and seeded a second real-assets multi-strategy account with $10 million.
- Revenue depends heavily on managed asset values and client flows. A majority of AUM remained concentrated in real estate securities; 51% of AUM was in U.S. real estate and 17% in preferred securities. Market declines, interest-rate changes, weak performance or redemptions could reduce fees.
- Client and product concentration is material: Daiwa Asset Management generated 12% of 2016 revenue and represented approximately 24% of total AUM. Two affiliated funds, Cohen & Steers Realty Shares and Cohen & Steers Preferred Securities and Income Fund, each generated 13% of revenue.
- Other stated risks include fee pressure and competition, dependence on third-party distribution channels, regulatory change including Brexit and MiFID II, foreign-exchange exposure, cyber incidents, business disruption and reliance on key vendors. The company reported minimal insurance specifically covering cyber attacks.
- There were no pending legal matters that management believed could materially affect consolidated results, cash flows or financial condition. The company had a $5.1 million co-investment commitment, of which $3.3 million had been funded; the unfunded amount was not recorded on the balance sheet. Operating-lease commitments totaled $79.9 million.
- The company’s chairman and CEO beneficially owned approximately 51% of common stock, giving them significant influence over shareholder votes. Management and the independent auditor reported effective internal controls over financial reporting.
Important facts for investors to verify
- Whether AUM inflows, performance and client retention remain strong, particularly for Daiwa and the largest affiliated funds.
- How much of the 2016 net-income and EPS increase came from non-operating seed-investment results and the lower tax rate; compare GAAP results with the company’s adjusted measures.
- Whether expense growth, especially compensation and distribution costs, affects margins as the business expands.
- The sensitivity of AUM and fee revenue to real-estate and preferred-securities markets, interest rates, fund distributions and redemptions.
- Future funding needs for the co-investment commitment, lease obligations, dividend policy and any changes in fund leverage or regulatory requirements.