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CNS > SEC Filings for CNS > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for COHEN & STEERS INC

Form 10-Q for COHEN & STEERS INC


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Set forth on the following pages is management's discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2014 and March 31, 2013. Such information should be read in conjunction with our interim condensed consolidated financial statements along with the notes to the condensed consolidated financial statements included herein. The interim condensed consolidated financial statements of the Company, included herein, are unaudited. When we use the terms "Cohen & Steers," the "Company," "we," "us," and "our," we mean Cohen & Steers, Inc., a Delaware corporation, and its consolidated subsidiaries.

Overview
Founded in 1986, we are a leading global investment manager with a long history of innovation and a focus on real assets, including real estate, infrastructure and commodities. We serve institutional and individual investors around the world.


Assets Under Management
We manage three types of accounts: institutional accounts, open-end mutual funds
and closed-end mutual funds.
The following table sets forth information regarding the net flows and
appreciation/(depreciation) of assets under management for the periods presented
(in millions):
                                                Three Months Ended
                                                    March 31,
                                                2014          2013
Institutional Accounts
Assets under management, beginning of period $  22,926     $ 24,850
Inflows                                            432          246
Outflows                                          (652 )       (590 )
Net outflows                                      (220 )       (344 )
Market appreciation                              1,773        1,575
Total increase                                   1,553        1,231
Assets under management, end of period       $  24,479     $ 26,081
Average assets under management for period   $  23,858     $ 25,372

Open-End Mutual Funds
Assets under management, beginning of period $  14,016     $ 12,962
Inflows                                          1,523        1,508
Outflows                                        (1,419 )       (849 )
Net inflows                                        104          659
Market appreciation                              1,028          826
Total increase                                   1,132        1,485
Assets under management, end of period       $  15,148     $ 14,447
Average assets under management for period   $  14,607     $ 13,788

Closed-End Mutual Funds
Assets under management, beginning of period $   8,965     $  7,985
Inflows                                              -          458
Outflows                                             -            -
Net inflows                                          -          458
Market appreciation                                439          350
Total increase                                     439          808
Assets under management, end of period       $   9,404     $  8,793
Average assets under management for period   $   9,241     $  8,251

Total
Assets under management, beginning of period $  45,907     $ 45,797
Inflows                                          1,955        2,212
Outflows                                        (2,071 )     (1,439 )
Net (outflows) inflows                            (116 )        773
Market appreciation                              3,240        2,751
Total increase                                   3,124        3,524
Assets under management, end of period       $  49,031     $ 49,321
Average assets under management for period   $  47,706     $ 47,411


Assets under management were $49.0 billion at March 31, 2014, a decrease of 1% from $49.3 billion at March 31, 2013. The decrease was due to net outflows of $2.8 billion, including net outflows of $1.9 billion from global/international real estate and $1.5 billion from large cap value, partially offset by net inflows of $429 million into global listed infrastructure and market appreciation of $2.6 billion, including $1.0 billion from U.S. real estate, $638 million from large cap value and $467 million from global listed infrastructure, during the prior twelve month period.
Average assets under management was $47.7 billion for the three months ended March 31, 2014, an increase of 1% from $47.4 billion for the three months ended March 31, 2013.
Institutional accounts
Institutional accounts assets under management were $24.5 billion at March 31, 2014, a decrease of 6% from $26.1 billion at March 31, 2013. The decrease in assets under management was due to net outflows of $3.3 billion, including $1.8 billion from global/international real estate and $1.5 billion from large cap value, partially offset by market appreciation of $1.7 billion, including $669 million from U.S. real estate and $555 million from large cap value, during the prior twelve month period.
Average assets under management for institutional accounts was $23.9 billion for the three months ended March 31, 2014, a decrease of 6% from $25.4 billion for the three months ended March 31, 2013.
Net outflows from institutional accounts were $220 million for the three months ended March 31, 2014, compared with $344 million for the three months ended March 31, 2013. Gross inflows were $432 million for the three months ended March 31, 2014, compared with $246 million for the three months ended March 31, 2013. Gross outflows totaled $652 million for the three months ended March 31, 2014, compared with $590 million for the three months ended March 31, 2013. Market appreciation was $1.8 billion for the three months ended March 31, 2014, compared with $1.6 billion for the three months ended March 31, 2013. Open-end mutual funds
Open-end mutual funds assets under management were $15.1 billion at March 31, 2014, an increase of 5% from $14.4 billion at March 31, 2013. The increase in assets under management was due to market appreciation of $554 million, including $404 million from U.S. real estate, and net inflows of $147 million, including $174 million into preferred securities and $93 million into U.S. real estate, partially offset by net outflows of $134 million from global/international real estate, during the prior twelve month period. Average assets under management for open-end mutual funds was $14.6 billion for the three months ended March 31, 2014, an increase of 6% from $13.8 billion for the three months ended March 31, 2013.
Net inflows for open-end mutual funds were $104 million for the three months ended March 31, 2014, compared with $659 million for the three months ended March 31, 2013. Gross inflows were $1.5 billion for both of the three months ended March 31, 2014 and 2013. Gross outflows totaled $1.4 billion for the three months ended March 31, 2014, compared with $849 million for the three months ended March 31, 2013. Market appreciation was $1.0 billion for the three months ended March 31, 2014, compared with $826 million for the three months ended March 31, 2013.
Closed-end mutual funds
Closed-end mutual funds assets under management were $9.4 billion at March 31, 2014, an increase of 7% from $8.8 billion at March 31, 2013. The increase in assets under management was due to net inflows of $307 million, primarily from additional use of the credit facility and the exercise of the underwriters' over-allotment option for Cohen & Steers MLP Income and Energy Opportunity Fund, Inc. ("MIE") which launched during the first quarter of 2013, and market appreciation of $304 million during the prior twelve month period.
Average assets under management for closed-end mutual funds was $9.2 billion for the three months ended March 31, 2014, an increase of 12% from $8.3 billion for the three months ended March 31, 2013.
Market appreciation was $439 million for the three months ended March 31, 2014, compared with $350 million for the three months ended March 31, 2013.


Results of Operations
Three Months Ended March 31, 2014 Compared with Three Months Ended March 31,
2013
                                                                      Three Months Ended
                                                                          March 31,
(in thousands)                                                     2014                  2013
Results of operations
Total revenue                                               $        72,835         $     72,459
Total expenses                                                      (45,239 )            (51,749 )
Total non-operating income (1)                                        3,181                2,926
Income before provision for income taxes (1)                $        30,777         $     23,636

(1) Includes net income attributable to redeemable noncontrolling interest of $155,000 and $360,000 for the three months ended March 31, 2014 and 2013, respectively.

Revenue
Total revenue increased 1% to $72.8 million for the three months ended March 31, 2014 from $72.5 million for the three months ended March 31, 2013. This increase was primarily attributable to higher investment advisory and administration fees of approximately $2.2 million, resulting from higher average assets under management, partially offset by lower portfolio consulting and other revenue of approximately $1.8 million, attributable to lower average assets under advisement from model-based strategies.
For the three months ended March 31, 2014, total investment advisory and administration revenue from institutional accounts decreased 8% to $19.5 million from $21.3 million for the three months ended March 31, 2013, primarily due to lower average assets under management.
For the three months ended March 31, 2014, total investment advisory and administration revenue from open-end mutual funds increased 6% to $28.6 million from $27.1 million for the three months ended March 31, 2013, primarily attributable to higher average assets under management.
For the three months ended March 31, 2014, total investment advisory and administration revenue from closed-end mutual funds increased 14% to $19.4 million from $17.0 million for the three months ended March 31, 2013, primarily due to higher average assets under management.
For the three months ended March 31, 2014, total portfolio consulting and other revenue decreased 50% to $1.8 million from $3.6 million for the three months ended March 31, 2013, primarily attributable to lower average assets under advisement from model-based strategies.
Expenses
Total operating expenses decreased 13% to $45.2 million for the three months ended March 31, 2014 from $51.7 million for the three months ended March 31, 2013, primarily due to a decrease of $6.8 million in distribution and service fees, partially offset by an increase of $658,000 in employee compensation and benefits.
Distribution and service fee expenses decreased 45% to $8.3 million for the three months ended March 31, 2014 from $15.1 million for the three months ended March 31, 2013. The three months ended March 31, 2013 results included approximately $7.2 million of distribution costs associated with the launch of MIE. After adjusting for these costs, distribution and service fee expenses would have been $7.9 million for the three months ended March 31, 2013. The adjusted increase in distribution and service fee expenses was primarily due to higher average assets under management in our open-end mutual funds. Employee compensation and benefits increased 3% to $24.0 million for the three months ended March 31, 2014 from $23.4 million for the three months ended March 31, 2013, primarily due to higher amortization of restricted stock units of approximately $1.1 million, partially offset by a decrease in production compensation of approximately $569,000.


Non-operating Income
Non-operating income increased to $3.2 million for the three months ended March 31, 2014 from $2.9 million for the three months ended March 31, 2013, primarily due to higher earnings from our seed investments. Income Taxes
We recorded income tax expense of $11.2 million for the three months ended March 31, 2014, compared with $8.1 million for the three months ended March 31, 2013. The provision for income taxes for the three months ended March 31, 2014 included U.S. federal, state, local and foreign taxes at an approximate effective tax rate of 36.5%. The effective tax rate for the three months ended March 31, 2013 was approximately 35%, which included discrete items, the most significant of which was attributable to the offering costs for MIE. Excluding the discrete items, the effective tax rate for the three months ended March 31, 2013 was approximately 37%. We expect our tax rate for the full year 2014 to approximate 36.5%, excluding discrete items.

Changes in Financial Condition, Liquidity and Capital Resources Our investment advisory business does not require us to maintain significant capital balances. Our current financial condition is highly liquid, with a significant amount of our assets comprised of cash and cash equivalents, securities owned, investments, available-for-sale and accounts receivable. Our cash flows generally result from the operating activities of our business, with investment advisory and administrative fees being the most significant contributor. Cash and cash equivalents, equity method investments, investments, available-for-sale and accounts receivable, excluding investments classified as level 3 in accordance with Accounting Standards Codification (the "Codification") Topic 820, Fair Value Measurement ("ASC 820"), were 76% and 73% of total assets as of March 31, 2014 and December 31, 2013, respectively. Cash and cash equivalents decreased by $2.6 million, excluding the effect of foreign exchange rate changes, for the three months ended March 31, 2014. Net cash used in operating activities was $95,000 for the three months ended March 31, 2014. Net cash of $3.8 million was provided by investing activities, primarily from proceeds from sales of investments, available-for-sale in the amount of $6.6 million, partially offset by purchases of $2.1 million of investments, available-for-sale and purchases of $705,000 of property and equipment. Net cash of $6.3 million was used in financing activities, primarily for repurchases of common stock of $10.6 million to satisfy employee withholding tax obligations on the delivery of restricted stock units, partially offset by excess tax benefits associated with the delivery of restricted stock units of $2.4 million and contributions from redeemable noncontrolling interest of $1.8 million.
Cash and cash equivalents decreased by $14.9 million, excluding the effect of foreign exchange rate changes, for the three months ended March 31, 2013. Net cash used in operating activities was $26.4 million for the three months ended March 31, 2013. Net cash of $157,000 was provided by investing activities, primarily from proceeds from sales of investments, available-for-sale in the amount of $3.5 million, partially offset by purchases of $2.2 million of investments, available-for-sale and purchases of $1.4 million of property and equipment. Net cash of $11.4 million was provided by financing activities, primarily from contributions from redeemable noncontrolling interest of $18.9 million and excess tax benefits associated with the delivery of restricted stock units of $2.0 million, partially offset by repurchases of common stock of $7.8 million to satisfy employee withholding tax obligations on the delivery of restricted stock units and redemptions of redeemable noncontrolling interest of $1.8 million.
It is our policy to continuously monitor and evaluate the adequacy of our capital. We have consistently maintained net capital in excess of the regulatory requirements for our broker/dealer, as prescribed by the Securities and Exchange Commission ("SEC"). At March 31, 2014, we exceeded our minimum regulatory capital requirements by approximately $2.1 million. The SEC's Uniform Net Capital Rule 15c3-1 imposes certain requirements that may have the effect of prohibiting a broker/dealer from distributing or withdrawing capital and requiring prior notice to the SEC for certain withdrawals of capital. Certain of our non-U.S. subsidiaries are regulated outside the U.S. by the Hong Kong Securities and Future Commission and the United Kingdom Financial Conduct Authority. At March 31, 2014, our regulated non-U.S. subsidiaries exceeded their aggregate minimum regulatory requirements by approximately $48.6 million. Effective December 31, 2013, Cohen & Steers Europe SPRL requested, and was granted, a withdrawal of its investment services license with the Belgium Financial Services and Markets Authority. We believe that our cash flows from operations will be more than adequate to meet our anticipated capital requirements and other obligations as they become due.
Included in cash and cash equivalents was approximately $70.6 million held by our foreign subsidiaries as of March 31, 2014. It is our current intention to permanently reinvest funds held by our foreign subsidiaries outside of the U.S. We believe


that our cash and cash equivalents and short term investments held in the U.S. are more than sufficient to cover our working capital needs in the U.S. We periodically commit to fund a portion of the equity in certain of our sponsored investment products. We have committed to co-invest up to $5.1 million alongside Cohen & Steers Global Realty Partners III-TE, L.P. ("GRP-TE"). As of March 31, 2014, we have funded approximately $2.8 million with respect to this commitment. Our co-investment alongside GRP-TE is illiquid and will be invested for up to 12 years through the life of the fund. The actual timing of the funding of this commitment is currently unknown, as the drawdown of our commitment is contingent on the timing of drawdowns by the underlying funds and co-investments in which GRP invests. The unfunded portion of this commitment was not recorded on our condensed consolidated statements of financial condition as of March 31, 2014.
Contractual Obligations and Contingencies We have contractual obligations to make future payments in connection with our non-cancelable operating lease agreements for office space. There were no material capital lease obligations as of March 31, 2014. The following summarizes our contractual obligations as of March 31, 2014 (in thousands):

                                                                            2019
                   2014       2015       2016       2017       2018      and after       Total
Operating leases $ 7,228    $ 9,529    $ 9,278    $ 8,732    $ 8,447    $    47,320    $ 90,534

Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any leasing activities that expose us to any liability that is not reflected in our condensed consolidated financial statements. Critical Accounting Policies and Estimates The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. We believe the estimates used in preparing the condensed consolidated financial statements are reasonable and prudent. Actual results could differ from those estimates.
A thorough understanding of our accounting policies is essential when reviewing our reported results of operations and our financial condition. Management considers the following accounting policies critical to an informed review of our condensed consolidated financial statements. For a summary of these and additional accounting policies, see the notes to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013.
Consolidation
We consolidate operating entities deemed to be voting interest entities if we own a majority of the voting interest. The equity method of accounting is used for investments in non-controlled affiliates in which our ownership ranges from 20 to 50 percent, or in instances in which we are able to exercise significant influence but not control. We also consolidate any variable interest entities ("VIEs") in which we are the primary beneficiary. We record noncontrolling interests in consolidated subsidiaries for which our ownership is less than 100 percent.
A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the group of holders of the equity investment at risk lack certain characteristics of a controlling financial interest. The primary beneficiary is the entity that has the obligation to absorb a majority of the expected losses or the right to receive the majority of the residual returns. Investments and redemptions or amendments to the governing documents of the respective entities could affect an entity's status as a VIE or the determination of the primary beneficiary. We assess whether entities in which we have an interest are VIEs upon initial involvement and at each reporting date. We assess whether we are the primary beneficiary of any VIEs identified by evaluating our economic interests in the entity held either directly by us and our affiliates or indirectly through employees.


Investments
We determine the appropriate classification of our investments at the time of purchase and re-evaluate such determination at each statement of financial condition date.
Securities owned are classified as trading securities, represent securities held within the affiliated funds that we consolidate and are measured at fair value based on quoted market prices, market prices obtained from independent pricing services engaged by management or as determined by our fair valuation committee. Unrealized gains and losses are recorded as gain (loss) from trading securities reported in our condensed consolidated statements of operations.
Investments classified as equity method investments are accounted for using the equity method, under which we recognize our respective share of the investee's net income or loss for the period. As of March 31, 2014, our equity method investments consisted of interests in affiliated funds which measure their underlying investments at fair value and report a net asset value on a recurring basis. The carrying amounts of these investments approximate their fair value. Investments classified as available-for-sale are comprised of equity securities, investment-grade preferred instruments and investments in our sponsored open-end and closed-end mutual funds. These investments are carried at fair value based on quoted market prices or market prices obtained from independent pricing services engaged by management, with unrealized gains and losses, net of tax, reported in accumulated other comprehensive income. We periodically review each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other than temporary. If we believe an impairment of a security position is other than temporary, the loss will be recognized in our condensed consolidated statements of operations. An other than temporary impairment is generally presumed to have occurred if the available-for-sale investment has an unrealized loss continuously for 12 or more months.
From time to time, our consolidated affiliated funds enter into derivative contracts to gain exposure to the underlying commodities markets or to hedge market and credit risks of the underlying portfolios utilizing options, total return swaps, credit default swaps and futures contracts. These instruments are measured at fair value with gains and losses recorded as gain (loss) from trading securities-net in our condensed consolidated statements of operations. The fair values of these instruments are recorded in other assets or other liabilities and accrued expenses in our condensed consolidated statements of financial condition.
Additionally, from time to time, we enter into foreign exchange contracts to hedge our currency exposure related to client receivables. These instruments are measured at fair value with gains and losses recorded in other non-operating income in our condensed consolidated statements of operations. The fair values of these contracts are recorded in other assets or other liabilities and accrued expenses in our condensed consolidated statements of financial condition. Goodwill and Intangible Assets
Goodwill represents the excess of the cost of our investment in the net assets of an acquired company over the fair value of the underlying identifiable net assets at the date of acquisition. Goodwill and indefinite lived intangible assets are not amortized but are tested at least annually for impairment by comparing the fair value to their carrying amounts. Finite lived intangible assets are amortized over their useful lives and are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We determined that the fair values of our goodwill and indefinite lived intangible assets substantially exceeded their carrying values as a result of the most recent impairment test performed as of November 30, 2013.
Stock-based Compensation
We recognize compensation expense for the grant-date fair value of awards of equity instruments granted to employees. This expense is recognized over the period during which employees are required to provide service. We also estimate forfeitures.
Income Taxes
We record the current and deferred tax consequences of all transactions that have been recognized in the condensed consolidated financial statements in accordance with the provisions of the enacted tax laws. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future years. Deferred tax liabilities are recognized for temporary differences that will result in taxable income in future years. We record a valuation allowance,


when necessary, to reduce deferred tax assets to an amount that more likely than not will be realized. The effective tax rate for interim periods represents our best estimate of the effective tax rate expected to be applied to the full fiscal year.
Recently Issued Accounting Pronouncements In April 2014, the Financial Accounting Standards Board ("FASB") issued new guidance which changed the requirements for reporting discontinued operations. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This new guidance will be effective for the first quarter of our 2015 fiscal year. The adoption of this new guidance will not have a material impact on our condensed consolidated financial statements. In March 2014, the FASB issued new guidance to make certain technical corrections to the FASB Accounting Standards Codification ("Codification") Master Glossary. The amendments affect various Codification topics and include . . .

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