Cohen & Steers, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The unaudited results are compared with the corresponding 2017 periods; 2017 revenue and expense presentation was recast for adoption of the revenue-recognition standard. Unless noted otherwise, financial amounts below are in millions.
Business context and performance
Cohen & Steers is a global investment manager focused on liquid real assets, preferred securities and other income solutions. Most revenue is fee-based and varies with assets under management (AUM), market movements, client flows and foreign exchange.
AUM was $60.1 billion at September 30, down 2.3% from $61.5 billion a year earlier. For the quarter, total AUM declined $120 million: net outflows of $76 million and distributions of $802 million were partly offset by $758 million of market appreciation. For the first nine months, AUM declined $2.0 billion, including $2.7 billion of distributions; net flows were nearly flat. Quarterly average AUM was $60.4 billion, down 1.4% year over year.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $98.3 | $96.8 | $287.2 | $279.2 |
| Operating expenses | $59.1 | $55.8 | $174.5 | $165.4 |
| Operating income | $39.2 | $41.0 | $112.7 | $113.9 |
| Operating margin | 39.9% | 42.3% | 39.3% | 40.8% |
| Net income attributable to common stockholders | $30.8 | $25.1 | $88.3 | $71.5 |
| Diluted EPS | $0.65 | $0.53 | $1.87 | $1.53 |
| Dividends declared per share during period | $0.33 | $0.28 | $0.99 | $0.84 |
Revenue rose 1.6% in Q3 and 2.9% for 9M, mainly on higher advisory and administration fees. Expenses grew faster—5.9% and 5.5%, respectively—pressuring operating margins. Common-stockholder net income and EPS increased despite lower operating income, primarily reflecting lower effective tax rates: 25.5% versus 41.2% in Q3, and 24.4% versus 38.6% for 9M. The 2018 rates reflect the lower federal statutory rate under the Tax Cuts and Jobs Act.
Non-operating results were weaker: 9M 2018 included $4.7 million of net investment losses, versus $0.7 million of gains in 2017, and net foreign-currency losses of $2.7 million versus $0.6 million. GAAP operating margin declined; management’s non-GAAP adjusted margin was 40.2% versus 41.8% for Q3 and 39.8% versus 40.6% for 9M.
Cash flow, liquidity and capital
- Operating cash flow for 9M was $39.3 million, compared with $10.6 million in 2017.
- Investing cash flow was negative $52.0 million, including $60.7 million of investment purchases, partly offset by $11.1 million of sales proceeds. Purchases included $49.5 million of U.S. Treasury securities.
- Financing cash flow was negative $15.3 million, including $46.3 million of dividends paid and $10.6 million of share repurchases to satisfy employee tax withholding, partly offset by $45.5 million of contributions to consolidated funds.
- Cash and cash equivalents were $164.5 million at September 30, down from $193.5 million at year-end 2017. Reported net liquid assets were $296.7 million, up from $247.7 million.
- The company reported no debt outstanding. Total liabilities were $79.1 million; stockholders’ equity was $324.2 million. The company said operating cash flow and available cash should be adequate for anticipated requirements.
Outlook, risks and unusual items
- No quantified earnings or AUM guidance was provided. Management noted that fee revenue depends on AUM, which is exposed to market appreciation or depreciation, client subscriptions and withdrawals, distributions, and currency movements.
- On November 7, 2018, the board declared a $0.33 quarterly dividend and a $2.50 special dividend per share, payable December 3 to holders of record November 19.
- The company had committed up to $5.1 million to co-invest alongside a sponsored fund; $3.8 million was funded by September 30. The remaining funding timing was unknown and the unfunded amount was not recorded as a liability.
- Contractual obligations totaled $74.2 million, primarily operating leases ($66.4 million). The company expected adoption of the new lease standard in 2019 to add right-of-use assets and lease liabilities to the balance sheet.
- Management reported no pending legal matters expected to have a material adverse effect, no material changes to previously disclosed risk factors or market-risk disclosures, and effective disclosure controls. The filing reported no material off-balance-sheet arrangements.
- Accounting changes affected presentation: adoption of the new revenue standard changed certain revenue and expense amounts from net to gross presentation without a material effect on revenue timing; a financial-instruments standard moved equity-investment fair-value changes into earnings. The company also consolidated a sponsored fund after its ownership interest increased.
Investor verification priorities
- Track AUM flows and distributions, particularly institutional and Japan subadvisory outflows, and the continuing concentration in U.S. real estate strategies.
- Assess whether expense growth and lower operating margins persist, and distinguish GAAP results from management’s non-GAAP adjustments.
- Review the drivers and volatility of seed-investment and foreign-currency results, including the 9M investment loss.
- Confirm the funding and liquidity implications of the co-investment commitment, lease obligations, and the declared special dividend.
- Compare future periods on a consistent basis, accounting for the recast revenue presentation and the changing consolidation of sponsored funds.