Cohen & Steers, Inc. — Q3 2011 Form 10-Q
Business and period: Cohen & Steers manages investment portfolios focused on real estate securities, large-cap value stocks, infrastructure, utilities and preferred securities, alongside alternative strategies. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons are to the corresponding 2010 periods. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $61.6 | $46.4 | $177.8 | $131.9 |
| Operating income | $22.4 | $14.0 | $64.2 | $39.7 |
| Operating margin | 36.4% | 30.1% | 36.1% | 30.1% |
| Income before tax | $17.6 | $18.5 | $61.7 | $47.3 |
| Net income attributable to common shareholders | $9.6 | $13.2 | $38.3 | $33.6 |
| Diluted EPS | $0.22 | $0.30 | $0.87 | $0.78 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $43.8 | $27.1 |
- Q3 revenue grew 33%, mainly on higher average assets under management (AUM); nine-month revenue rose 35%. Investment advisory and administration fees were the principal revenue source.
- Operating expenses rose 21% in Q3 and 23% for the nine months, led by compensation, distribution and service fees, and general and administrative costs. Operating margin improved, but Q3 net income and diluted EPS declined.
- Q3 non-operating results swung to a $4.8 million loss from $4.5 million of income a year earlier. The nine-month comparison was a $2.6 million loss versus $7.6 million of income. Losses on the company’s sponsored real-estate long-short fund investments were a key factor; 2010 included gains from sales of previously impaired securities.
- Effective tax rates were approximately 46% for Q3 and 38% for the nine-month period. The Q3 rate reflected a projected full-year rate increase and a valuation allowance related primarily to seed-investment losses. Management expected the full-year 2011 rate to be about 38%, excluding discrete items.
Financial position, liquidity and AUM
- At September 30, 2011, cash and cash equivalents were $95.2 million, total assets $258.1 million, total liabilities $43.0 million and stockholders’ equity $214.6 million. The filing reports no debt balance. Cash was down from $136.2 million at December 31, 2010.
- Nine-month cash flow: $43.8 million provided by operations, $14.3 million used in investing and $71.1 million used in financing. Financing outflows included $62.6 million of dividends—of which approximately $43.2 million was a special dividend—$6.6 million of share repurchases to satisfy employee tax withholding, and a $3.7 million redemption of noncontrolling interest.
- Management described the financial condition as highly liquid and said operating cash flows should be adequate for anticipated capital needs and obligations. Cash, investments and receivables represented 79% of total assets. About $62.4 million of cash and available-for-sale investments was held by foreign subsidiaries; management intended to permanently reinvest those funds outside the U.S.
- AUM was $38.6 billion at quarter-end, 24% above the year-earlier $31.2 billion. Nine-month net inflows were $8.5 billion, while market depreciation was $4.3 billion. In Q3, $1.5 billion of net inflows was more than offset by $7.2 billion of market depreciation.
Changes, outlook and risks
- Growth in average AUM—up 48% year over year for both the quarter and nine-month period—supported higher fee revenue. Institutional accounts were the largest source of net inflows, primarily through U.S. real-estate strategies.
- The company began consolidating the Global Listed Infrastructure Fund in February 2011 after obtaining majority voting ownership. Its nine-month trading-security loss was $0.5 million. The company also recorded $4.6 million of equity-method losses from its sponsored real-estate long-short funds for the nine months.
- On November 3, 2011, the company declared a $0.15-per-share quarterly dividend, payable December 28, 2011. It also committed to co-invest 5% of capital raised by a sponsored private-equity fund, capped at $25 million; the ultimate amount and timing were not yet known, and the commitment was not recorded at quarter-end.
- A third-party institutional account client represented 17% of nine-month revenue. The company cited ordinary-course legal matters but did not believe any pending matter would have a material adverse effect. It reported no material change to previously disclosed risk factors or market-risk disclosures, and stated disclosure controls were effective.
- Management’s forward-looking statements are subject to risks, including those in its 2010 Form 10-K. No specific revenue or earnings guidance was provided beyond the tax-rate expectation.
Important facts for investors to verify
- Whether AUM inflows continue to offset market-driven declines and how market movements affect fee revenue.
- The valuation and performance of the sponsored long-short funds, and any further effects on non-operating results or tax provisions.
- The $25 million capped co-investment commitment’s eventual funding amount and timing.
- The concentration and retention of the institutional client contributing 17% of nine-month revenue, and the availability of foreign-held liquidity for U.S. needs.
- The sustainability of dividends and cash levels after substantial dividend and other financing outflows.