Real Estate Fund Profits on Urban Stakes
Cohen & Steers Invests in REITs to Share in New York City, D.C. Development
By Daniel Taub
Bloomberg News
Sunday, January 2, 2005; Page F04
Cohen & Steers Realty Shares, the third-best performer among 53 real estate funds, is gaining from investments in Washington, where vacancy rates are the lowest in the United States, and New York City.
The cities are "places where supply is constrained and there is job growth," said James Corl, chief investment officer for real estate securities at Cohen & Steers, in a telephone interview. "That is taking up the existing vacancy and will take rents up most dramatically over the next couple years."
More than 12 percent of the $1.9 billion Realty Shares fund is invested in Boston Properties Inc., owner of more than three dozen buildings in Washington, and Vornado Realty Trust of Manhattan. Realty Shares surged 38 percent this year and has gained for 12 of the 13 years since it was founded, according to data compiled by Bloomberg.
Corl, 38, runs the property fund with Martin Cohen, 56, and Robert Steers, 51, co-founders of New York-based Cohen & Steers, which focuses on income and is the country's largest holder of real estate investment trust (REIT) shares. Chicago-based research firm Morningstar Inc. gives its second-highest rating of four stars to the fund.
Realty Shares' growth may slow in the coming 12 months following a more than 30 percent advance in shares of real estate investment trusts this year, Morningstar analyst Dan McNeela said in an interview.
"Real estate stocks could pull back some just because they've been so strong in recent years," he said. "Investors got a scare in October with the interest-rate rise. That could happen again."
The Federal Reserve has increased its benchmark overnight lending rate five times since June 30, to 2.25 percent from 1 percent, causing speculation that mortgage financings would slow. The rate target will reach 3.5 percent by 2006, according to the median forecast of 61 economists polled by Bloomberg from Dec. 1 to Dec. 8.
Cohen & Steers Realty added 199,400 shares of Boston Properties last quarter, making it the fund's biggest holding. Vornado became its third-largest investment after the purchase of 66,300 shares. The other top holding is ProLogis, an owner of 1,940 distribution centers worldwide, in which the fund owned 3.1 million shares as of Sept. 30, according to Bloomberg data.
The companies meet Corl's expectation that funds from operations, a measure of cash flow used by REITs, will rise by a "double-digit" percentage next year, he said. Their price-to-earnings ratios are lower than that of the benchmark Morgan Stanley Real Estate Investment Trust Index, which has 121 members.
Boston Properties trades at 25.9 times earnings, Vornado at 31.3, and ProLogis at 26.1. The index trades at 41.9, according to Bloomberg data.
The Cohen & Steers fund is focused on cities where an improving economy and limited space for new development likely will boost occupancies. The company's analysts visit properties owned by firms to understand better the real estate's income potential, Corl said.
Vornado has 14.3 million square feet of office space in Manhattan and more than a dozen office properties in the Washington area. Washington's office vacancy rate was 7.5 percent last quarter, and midtown Manhattan's was 11 percent, according to Cushman & Wakefield.
As of Sept. 30, Cohen & Steers was the biggest shareholder in Vornado, which has risen 38 percent this year. Boston Properties and ProLogis have climbed 32 percent each.
Like other property funds, Cohen & Steers has benefited from the overall rise in REIT shares. Real estate mutual funds have had about $10 billion in net deposits this year, the most of any industry after natural resources, which had about $12 billion in inflows as prices rose to record levels, according to research firm Strategic Insight.
Property funds proved resilient to the 2000-03 bear market in stocks and this year's increases in interest rates, the first in four years. Realty Shares' third-quarter report pointed out that faster economic growth resulted in higher occupancy rates, REIT earnings that have exceeded analysts' expectations and a surge in real estate values.
REITs must pass on at least 90 percent of their taxable income to shareholders in the form of cash dividends. The funds date to the 1880s, when investors could avoid double taxation because trusts were not taxed at the corporate level if income was distributed to beneficiaries. Today there are more than 300 publicly traded REITs, with assets of about $300 billion.
Realty Shares has stakes in 46 companies that also include AvalonBay Communities Inc., an owner of apartment buildings; Simon Property Group Inc., the largest U.S. shopping-mall owner; and Archstone-Smith Trust, which owns interests in more than 240 apartment complexes.
The fund has risen at least 20 percent in six of 13 years and has declined only once, in 1998, when it fell 18 percent. Among peers, the fund trails only the ProFunds Real Estate UltraSector ProFund and the Strategic Partners Funds -- Strategic Partners Real Estate Securities Fund Inc. in performance this year, according to Bloomberg data.
Corl, co-manager of the Cohen & Steers fund since July 2003, joined the company in 1997. A graduate of Stanford University and the Wharton School, Corl previously worked for Credit Suisse First Boston, where he helped with the public offerings of Mills Corp. and Reckson Associates Realty Corp. Realty Shares owns shares in both of those REITs.
Cohen and Steers started working together at National Securities and Research Corp., where they organized the first U.S. real estate securities mutual fund in 1985. They founded their company the following year.
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