Cohen & Steers, Inc. — Q2 2012 Form 10-Q
Business and period: Global investment manager focused on real estate securities, listed infrastructure, real assets, large-cap value and preferred securities. This unaudited report covers the quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $67.4 million | $61.5 million | $131.2 million | $116.2 million |
| Operating income | $26.1 million | $22.9 million | $51.5 million | $41.8 million |
| Net income attributable to common shareholders | $16.1 million | $15.7 million | $34.1 million | $28.7 million |
| Diluted EPS | $0.36 | $0.36 | $0.77 | $0.65 |
| Operating margin | 38.7% | 37.3% | 39.2% | 36.0% |
Revenue growth reflected higher average assets under management (AUM) and increased portfolio consulting revenue. Q2 operating expenses rose 7% to $41.4 million; six-month expenses increased 7% to $79.7 million. Q2 non-operating results shifted to a $2.0 million loss from $1.3 million income, mainly due to losses on seed investments. The effective tax rate was approximately 36%; management expected a full-year 2012 rate near 36%, excluding discrete items.
Cash, liquidity and balance sheet
- At June 30, cash and cash equivalents were $120.3 million, total assets $335.8 million, total liabilities $48.9 million and stockholders’ equity $253.9 million. No corporate debt balance is listed in the provided balance sheet; the filing text does not provide a clear separate debt metric.
- Six-month operating cash flow was negative $16.5 million, compared with positive $23.8 million in 2011. Cash flow was affected by investment activity and working-capital movements, including a $47.4 million increase in securities owned.
- Investing cash flow was positive $1.6 million and financing cash flow positive $7.9 million. Financing included $30.1 million of contributions from redeemable noncontrolling interests, offset in part by $15.7 million of dividends and $8.4 million of share repurchases, primarily for employee tax withholding.
- Cash declined from $127.8 million at year-end 2011 to $120.3 million. Management said cash flows and U.S. cash and short-term investments were expected to cover anticipated needs; approximately $72.9 million of cash and available-for-sale investments was held by foreign subsidiaries and intended to be permanently reinvested outside the U.S.
Material changes and operating trends
- AUM was $44.4 billion at quarter-end, broadly unchanged from $44.3 billion a year earlier. Q2 net outflows of $1.2 billion were offset partly by $0.7 billion of market appreciation. Six-month net outflows were $1.6 billion.
- Institutional accounts had Q2 net outflows of $1.5 billion, primarily associated with global/international real estate subadvisory relationships. Open-end funds had $293 million of Q2 net inflows; closed-end fund AUM was $6.7 billion.
- Six-month average AUM rose 13% year over year to $43.3 billion. Open-end fund AUM growth and higher model-based strategy consulting revenue supported fee growth.
- Q2 portfolio consulting and other revenue increased to $5.0 million from $1.4 million. Q2 advisory and administration revenue from institutional accounts declined 3%, attributed to a lower effective fee rate despite higher average AUM.
Outlook, risks and unusual items
- On July 27, 2012, a newly launched preferred and income fund raised approximately $662.5 million before offering costs and excluding any underwriters’ overallotment. The company expected approximately $15 million of additional compensation expense in Q3 related to the offering.
- On August 7, the company declared a quarterly dividend of $0.18 per share, payable September 27, 2012.
- The company committed to co-invest 5% of capital raised by Global Realty Partners III, capped at $25 million. The amount and timing were uncertain; the commitment may be invested for up to 12 years and was not recorded as a liability at June 30.
- The New York headquarters lease was extended through January 2024; total disclosed future operating lease obligations were $103.3 million.
- A single subadvisory client represented approximately 20% of six-month revenue. Management reported no pending legal matter believed likely to have a material adverse effect and no material change to previously disclosed risk factors or market-risk disclosures.
- Seed investments contributed to trading losses, including a $2.3 million Q2 loss from the newly launched Real Asset Fund. Redeemable noncontrolling interest rose to $32.9 million from $4.8 million at year-end, reflecting fund activity and contributions.
Important facts for investors to verify
- Whether institutional-account outflows persist and how they affect AUM, fee rates and advisory revenue.
- Drivers and recurrence of negative operating cash flow, including seed-fund investment and working-capital swings.
- The Q3 timing and full impact of the expected $15 million compensation expense associated with the fund offering.
- Final co-investment funding under the $25 million commitment and the concentration of revenue in the large subadvisory client.
- Performance and valuation sensitivity of seed investments, including Level 3 holdings and consolidated funds.