CNS

Business Context and Reporting Period

Company: Cohen & Steers, Inc. (CNS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: CNS is an asset management firm specializing in income-oriented equity portfolios, primarily U.S. and international real estate securities, large-cap value stocks, listed infrastructure, utilities, and preferred securities. The firm manages open-end mutual funds, closed-end mutual funds, and institutional separate accounts. In 2009, the company completed the exit of its investment banking business, which is now reported as discontinued operations.

Key Financial Metrics

Operating Cash Flow: Net cash provided by operating activities was $22.1 million in 2009, down from $35.2 million in 2008.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 34% to $123.6 million, primarily driven by a 30% decrease in average assets under management (AUM) due to market depreciation in 2008 and early 2009. Investment advisory fees fell 31% to $112.6 million.
• AUM Growth: Despite lower average AUM, year-end AUM increased 64% to $24.8 billion from $15.1 billion. This growth was driven by $5.7 billion in market appreciation and $4.0 billion in net inflows during 2009.
• Net Loss: The company reported a net loss of $1.7 million attributable to common shareholders, compared to net income of $18.1 million in 2008. This was largely due to a $32.3 million pre-tax impairment charge on available-for-sale securities (primarily preferred securities and seed investments).
• Expense Reduction: Total operating expenses decreased 20% to $106.0 million, aided by lower distribution fees, reduced compensation, and the absence of restructuring charges present in 2008.
• Discontinued Operations: The investment banking segment was sold in May 2009. Results from this segment are now classified as discontinued operations, showing a minimal loss of $10,000 in 2009 compared to a $7.0 million loss in 2008.

Outlook, Risks, and Management Commentary

• Market Conditions: Management notes that market conditions currently preclude increasing assets in closed-end mutual funds. The firm expects cash flows from operations to remain the principal source of working capital.
• Impairment Charges: The $32.3 million impairment charge in 2009 significantly impacted earnings. Management stated that remaining unrealized losses on available-for-sale investments are considered temporary, with the intent to hold until recovery.
• Key Risks:
  • Key Personnel: Heavy reliance on co-CEOs Martin Cohen and Robert Steers; their loss would have a material adverse effect.
  • Market Volatility: Revenue is directly tied to the market value of managed assets. Declines in real estate securities prices directly reduce fees.
  • Client Concentration: The three largest separate account relationships represented approximately 13% of total revenue in 2009.
  • Regulatory: Extensive regulation by the SEC, FINRA, and international bodies could increase compliance costs or restrict business activities.
• Dividends: A quarterly cash dividend of $0.10 per share was declared on March 11, 2010.

Investor Verification Checklist

• Impairment Reversal: Verify the trajectory of the $32.3 million impairment charge and the likelihood of recovery for the affected preferred securities and seed investments.
• AUM Sustainability: Assess whether the 64% year-end AUM growth is sustainable given the reliance on market appreciation ($5.7B) versus net inflows ($4.0B).
• Fee Waivers: Review the schedule of expiring fee waivers on closed-end funds, which are set to increase fee revenue in 2010-2012.
• Concentration Risk: Monitor the stability of the top three institutional separate accounts, which comprise a significant portion of revenue.
• Liquidity Position: Confirm that the $153 million cash balance remains sufficient to cover operating expenses and dividend obligations without further equity dilution.