Cohen & Company, Inc. (NYSE:COHN) Q3 2021 Earnings Conference Call November 2, 2021 10:00 AM ET
Lester Brafman - CEO
Joseph Pooler - EVP, CFO & Treasurer
Conference Call Participants
Good morning, ladies and gentlemen, and welcome to Cohen & Company's Third Quarter 2021 Earnings Call. My name is Leo, and I will be your operator for today.
Before we begin, coin and company would like to remind everyone that some of the statements the company makes during this call may contain forward-looking statements under the applicable securities laws. These statements may involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in such forward-looking statements. The forward-looking statements made during this call are made only as of the date of this call, and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances.
Cohen & Company advises you to read the cautionary note regarding forward-looking statements in its earnings release and in its most recent annual report on Form 10-K filed with the SEC.
I would now like to turn the call over to Mr. Lester Brafman, Chief Executive Officer of Cohen & Company.
Thank you, Leo, and thank you, everyone, for joining us for our third quarter 2021 earnings call. With me on the call is Joe Pooler, our CFO.
So our financial results in the third quarter were impacted by significant unrealized negative mark-to-market adjustments in our principal investing portfolio. It is important to note that these investments were created at a de minimis cost and have restrictions on sales, so we'll continue to see some of this volatility going forward. Absent these negative mark-to-market adjustments, our underlying business remains strong. New issue and advisory revenue was $8.8 million in the quarter, including $7.2 million related to the investment banking revenue generated by our new Cohen & Company capital markets platform and $1.6 million related to U.S. and European insurance origination. Our Gestation repo book remained stable at $3.9 billion with related Gestational repo trading revenue approaching a $45 million annual run rate.
In addition, during the quarter, we entered into a joint venture agreement with an institutional investor to invest in CRE loans and B pieces of new issue CRE-CLO transactions.
To that end, we have hired a team of 8 professionals to originate and underwrite mostly multifamily commercial real estate loans. We expect to begin accumulating assets into this joint venture during the fourth quarter.
Going forward, our involvement in the SPAC market as a sponsor, asset manager, investor will result in increased holdings of public equity positions in post-business combination companies as part of our principal investment portfolio, which will be subject to mark-to-market adjustments both up and down. While market fluctuations make create volatility in our reported results, we continue to execute well against our strategic objectives and believe that the initiatives underway in asset management, SPACs, CRE loans and Gestational repo trading will generate long-term value for our shareholders. We remain committed to enhancing shareholder value in the third quarter, continue to pay our recently restated quarterly dividend.
Now I'll turn the call over to Joe through this quarter's financial highlights in more detail.
Thanks, Lester. We'll start with our statement of operations. Our net loss attributable to Cohen & Company Inc. shareholders was $3.4 million for the quarter or $3.46 per fully diluted share compared to net income of $1.7 million for the prior quarter or $1.21 per fully diluted share, and net income of $1.7 million for the prior year quarter or $1.19 per fully diluted share.
Our adjusted pretax loss was $14.9 million for the quarter compared to adjusted pretax income of $3.7 million for the prior quarter, and adjusted pretax income of $3.6 million for the prior year quarter.
Note that adjusted pretax income is not a measure recognized under U.S. GAAP, see our disclosures, calculations and reconciliations surrounding adjusted pretax income in our earnings release.
Third quarter of '21 principal transactions and other revenue was negative $20.7 million, which included negative revenue related to mark-to-market principal transaction losses of $14.3 million on Metromile stock, $3.1 million on Shift Technology stocks and $5.6 million on various pipe investments in other SPAC business combinations.
Note that the $20.7 million of negative principal transactions revenue in the current quarter is offset by a $2.8 million credit recorded in the net income attributable to the nonconvertible noncontrolling interest line item toward the bottom of our P&L.
As Lester noted, our involvement in the SPAC market has resulted in increased holdings of public equity positions in post-business combination companies often restricted, which are subject to market adjustments up and down. Principal transactions revenue includes all gains and losses and income earned on our $51.9 million investment portfolio classified as other investments at fair value on our balance sheet.
The investment portfolio has increased recently due to our SPAC portfolio growing as our SPAC franchise expands. At the end of the quarter, the investment portfolio included $7.9 million of Metromile stock and $12.9 million of Shift stock. Of the $7.9 million Metromile stock, all of it is currently restricted from sale, and of the $12.9 million of Shift stock, $11.1 million is currently restricted from sale.
Net trading revenue came in at $16.6 million in the third quarter, down $1.8 million from the second quarter and down $358,000 from the third quarter of 2020. Our asset management revenue totaled $1.9 million in the quarter, which was comparable to the prior quarter and up $225,000 from the year ago quarter. The increase from the year ago quarter was due to higher revenue from our investment funds, which was partially offset by lower revenue from our managed CDOs.
This reflects the changing mix of the company's assets under management with our SPAC funds, U.S. insurance funds and European insurance funds growing as our managed CDO portfolio shrinks.
Compensation and benefits expense for the third quarter of '21 was $20.6 million, which was up from both the prior quarters. The increases were primarily related to accrued compensation related to the new issue and advisory revenue in the current quarter as well as new hires in the investment banking and commercial real estate groups. Compensation and benefits expense as a percentage of revenue was 51% for the 9 months ended September 30, '21, compared to 57% for the 9 months ended September 30, 2020.
The number of company employees was 115 at the end of the quarter compared to 109 at the end of June 30, 2021, and 87 as of September 30 of the prior year. Net interest expense for the third quarter of '21 was $1.7 million, including $652,000 on our 2 trust preferred debt instruments, $592,000 on our senior notes, $421,000 on our remaining redeemable financial instruments and 67,000 on our credit line.
In the third quarter of '21, we did repay $2.4 million of our outstanding senior notes. Income from equity method affiliates during the third quarter, totaled $2.9 million which was primarily driven by income from our equity method investments in the sponsors of 2 SPACs, which closed their business combinations during the third quarter of '21. The increased value of the founder shares held by the sponsors of the 2 SPACs, of which we are entitled to an allocation of from the sponsors, generated $4.1 million of income from equity method investments for us in the third quarter of '21.
In terms of our balance sheet, at the end of the quarter, total equity was $117.2 million compared to $101.4 million at the end of the year. The nonconvertible noncontrolling interest component of total equity was $7.4 million at the end of the quarter compared to $27.8 million at the end of the year. Thus, the total equity, excluding the nonconvertible noncontrolling interest component was $109.8 million at the end of the quarter, a $36.2 million increase from the $73.6 million at the end of the year.
Consolidated corporate indebtedness was carried at $43.2 million and our redeemable financial instrument was carried at $8 million. We have declared a dividend of $0.25 per share, which will be payable on November 30 of '21 to stockholders of record as of November 16 of '21. The Board of Directors will continue to evaluate the dividend policy each quarter and future decisions regarding dividends may be impacted by quarterly operating results and the company's ongoing capital needs.
With that, I will turn it back over to Lester.
Thank you, Joe. Please direct any off-line investor questions to Joe Pooler at 215-701-8952 or via e-mail to email@example.com. The contact information can also be found at the bottom of our earnings release.
Operator, you can now open the call lines for questions.
All right. Thank you all for joining us today, and we look forward to speaking to you in our next quarterly call. Operator, you can end the call.
Thank you. This does conclude today's conference. You may now disconnect your lines, and everyone, have a great day.