Cohen & Steers, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Cohen & Steers is a global investment manager specializing in real estate securities, listed infrastructure, real assets, large-cap value stocks and preferred securities. This unaudited filing covers the quarter and nine months ended September 30, 2012, with comparisons to 2011.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $71.3 million | $61.6 million | $202.5 million | $177.8 million |
| Operating income | $12.2 million | $22.4 million | $63.7 million | $64.2 million |
| Net income attributable to common shareholders | $10.3 million | $9.6 million | $44.4 million | $38.3 million |
| Diluted EPS | $0.23 | $0.22 | $1.00 | $0.87 |
| Operating margin | 17.2% | 36.4% | 31.5% | 36.1% |
- Q3 total expenses were $59.1 million, up 51%; the quarter included $14.4 million of LDP launch distribution costs. Excluding those costs, distribution and service expense was approximately $7.0 million.
- Non-operating income was $5.3 million in Q3 versus a $4.8 million loss a year earlier, primarily reflecting seed-investment results. Nine-month non-operating income was $6.3 million versus a $2.6 million loss.
- At September 30, total assets were $365.9 million, including $121.2 million cash and cash equivalents; total liabilities were $58.0 million, stockholders’ equity was $261.1 million, and redeemable noncontrolling interest was $46.8 million. The balance sheet reports no debt balance.
- Cash declined $6.5 million during the first nine months. Operating activities used $21.7 million, investing activities provided $3.6 million, and financing activities provided $11.6 million. Operating cash use included increased securities owned and receivables; financing included $44.1 million of contributions from redeemable noncontrolling interests.
- Assets under management were $44.9 billion at quarter-end, up from $38.6 billion a year earlier. Q3 net flows were outflows of $629 million, while market appreciation added $1.2 billion. Nine-month net outflows were $2.3 billion, offset by $5.9 billion of market appreciation.
Material changes versus comparable periods
- Q3 revenue rose 16%, but operating income fell 45%, principally because of LDP launch distribution costs and higher compensation and other expenses. Common-shareholder net income increased 7%, supported by improved non-operating results and lower tax expense.
- Nine-month revenue increased 14%; common-shareholder net income rose 16%. Advisory revenue benefited from higher average AUM, while portfolio consulting and other revenue increased to $13.3 million from $3.8 million.
- Institutional accounts recorded $4.5 billion of net outflows over nine months, versus $7.1 billion of net inflows in 2011. Open-end mutual funds recorded $1.4 billion of net inflows; closed-end fund inflows of $889 million primarily reflected the LDP launch.
- Cash dividends paid in the first nine months were $23.6 million, compared with $62.6 million in 2011, which included a special dividend of approximately $43.2 million.
Outlook, risks and unusual items
- Management expected the full-year 2012 effective tax rate to be approximately 35.5%, excluding discrete items. No revenue or earnings guidance was provided.
- Management said operating cash flows were expected to be adequate for anticipated capital requirements and obligations. A co-investment commitment for GRP-TE is 5% of capital raised, capped at $25 million; final amount and funding timing were not yet known, and the commitment was not recorded as a liability.
- The New York headquarters lease was extended through January 2024. Future operating lease payments totaled approximately $99.9 million.
- One institutional subadvisory client accounted for approximately 20% of nine-month revenue ($40.4 million). The filing identifies this concentration and the risk of client-related revenue dependence.
- Some investments use Level 3 valuation inputs, including private-company shares, private-equity limited partnership interests and auction-rate preferred securities. The company reported no material pending legal matters, no material change in disclosed risk factors, and effective disclosure controls.
- Subsequent to quarter-end, the company declared a $0.18 quarterly dividend and a $1.50 special dividend per share, payable December 20, 2012.
Investor verification points
- Assess whether institutional outflows persist and whether open-end and closed-end fund inflows can offset them.
- Separate recurring operating performance from LDP launch costs and variable seed-investment gains or losses.
- Review the drivers of negative operating cash flow and the composition and liquidity of consolidated fund investments and noncontrolling interests.
- Monitor the GRP-TE co-investment commitment, client concentration, Level 3 valuations, and the cash impact of the declared special dividend and extended lease obligations.