Business Context and Reporting Period
Company: Cohen & Steers, Inc. (CNS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2008
Business Overview: CNS is an asset manager specializing in income-oriented equity portfolios, including U.S. and international real estate securities, large-cap value stocks, utilities, and preferred securities. The company operates two primary segments: Asset Management and Investment Banking.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenue | $49,053 | $157,941 |
| Operating Income | $12,571 | $51,432 |
| Net Income (Loss) | $(1,560) | $25,021 |
| Diluted EPS | $(0.04) | $0.59 |
| Cash and Cash Equivalents | $111,224 | $111,224 (Balance Sheet) |
| Operating Cash Flow | N/A | $15,522 |
| Total Assets | $295,727 | $295,727 (Balance Sheet) |
| Total Liabilities | $41,232 | $41,232 (Balance Sheet) |
Assets Under Management (AUM): $24.6 billion as of September 30, 2008, representing a 29% decrease from the prior year due to market depreciation and net outflows.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 29% for the quarter and 27% for the nine-month period compared to 2007. This was driven by lower average AUM and a 98% drop in investment banking fees for the quarter.
- Profitability Impact: The company reported a net loss of $1.6 million for the quarter, compared to net income of $15.9 million in the same period in 2007. For the nine months, net income was $25.0 million, down from $56.8 million in 2007.
- Investment Losses: Non-operating losses were significant, primarily due to a $10.5 million impairment loss on available-for-sale securities, specifically Federal National Mortgage Association (FNMA) preferred securities.
- Expense Reduction: Total operating expenses decreased 22% for the quarter and 15% for the nine months, largely due to reduced distribution fees and lower amortization of deferred commissions.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that AUM has decreased generally in line with market declines, particularly in real estate securities. The company expects some level of de-leveraging in closed-end mutual funds by the end of 2008 to maintain required leverage ratios.
- Liquidity: The company maintains a highly liquid financial condition. Cash and cash equivalents, accounts receivable, and available-for-sale investments comprised 66% of total assets. Management believes it has sufficient liquidity to hold investments with unrealized losses until recovery.
- Investment Banking Volatility: Investment banking revenue is highly dependent on transaction completion timing, resulting in significant volatility (e.g., $116k in Q3 2008 vs. $4.8M in Q3 2007).
- Risk Factors: Key risks include exposure to interest rate changes, currency fluctuations, and the concentration of managed assets in U.S. real estate common stocks (48% of AUM). Declines in these sectors directly reduce fee revenue.
- Dividends: On November 6, 2008, the company declared a quarterly cash dividend of $0.10 per share.
Investor Verification Checklist
- Impairment Details: Verify the specific composition and recovery prospects of the $10.5 million loss on FNMA preferred securities and other available-for-sale investments.
- AUM Trends: Monitor net outflows versus market depreciation to distinguish between client-driven redemptions and market valuation effects.
- De-leveraging Impact: Assess the extent of preferred share redemptions in closed-end funds and the potential impact on future fee revenue.
- Investment Banking Pipeline: Evaluate the pipeline for investment banking transactions to gauge the sustainability of revenue recovery in that segment.
- Regulatory Capital: Confirm continued compliance with SEC Uniform Net Capital Rule 15c3-1, noting the company exceeded requirements by $29.6 million as of September 30, 2008.