Sunday, January 16, 2005

Cohen & Steers into New York, D.C. properties

By Daniel Taub

Bloomberg News/The Seattle Times

Cohen & Steers Realty Shares, the second-best performer among 53 real-estate funds, is gaining from investments in New York City and Washington, D.C., where vacancy rates are the lowest in the U.S.

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. "That ... will take rents up most dramatically over the next couple of years."

More than 12 percent of the $1.9 billion Realty Shares fund is invested in Boston Properties, owner of more than three-dozen buildings in Washington, and Vornado Realty Trust of Manhattan.

Realty Shares surged 38 percent last year through Dec. 28 and has gained for 12 of the 13 years since it was founded, according to data compiled by Bloomberg.

Chicago-based research firm Morningstar gives its second-highest rating of four stars to the fund.

Growth may slow

Realty Shares' growth may slow in the coming 12 months following a more than 30 percent advance in shares of real-estate investment trusts last year, Morningstar analyst Dan McNeela said.

"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 increased its benchmark overnight lending rate five times since June 30 to 2.25 percent from 1 percent.

The rate target will reach 3.5 percent by 2006, according to the median forecast of 61 economists recently polled by Bloomberg.


In addition to shares in Boston Properties and Vornado, the other top holding of Cohen & Steers Realty is ProLogis, an owner of 1,940 distribution centers worldwide. 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.

Realty Shares is focused on cities where an improving economy and limited space for new development likely will boost occupancies. Cohen & Steers' analysts visit properties owned by firms to understand better the real estate's income potential, Corl said.

Real-estate surge

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 in the third quarter, the lowest in the nation, and Midtown Manhattan's was 11 percent, according to Cushman & Wakefield.

Like other property funds, Cohen & Steers has benefited from the overall rise in REIT shares. Real-estate mutual funds had about $10 billion in net deposits last year, the most of any industry after natural resources, which had about $12 billion in inflows as prices rose to records, according to research firm Strategic Insight.


Property funds proved resilient to the 2000-03 bear market in stocks and last year's interest-rate increases, the first in four years. Realty Shares' third-quarter report said faster economic growth resulted in higher occupancy rates, REIT earnings that have beaten 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 weren't 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 Simon Property Group, the largest U.S. shopping-mall owner (and the owner of Northgate Mall in Seattle and Tacoma Mall); and Archstone-Smith Trust, which owns interests in more than 240 apartment complexes.


Realty Shares 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 this past year trailed in performance only ProFunds Real Estate UltraSector ProFund, according to Bloomberg data.