REIT Funds: Are They Overpriced? Reviewing Cohen & Steers REIT & Preferred Income Fund

New York, New York – Real estate investors are currently engaged in discussions around closed-end funds that focus on real estate. These funds offer a unique investment opportunity, attracting attention from investors seeking to maximize their capital efficiently. One notable discussion point revolves around the cost of actively managed REIT funds, which often come with higher expense ratios compared to traditional REIT funds, as well as additional leverage expenses. Some investors are opting to bypass these management fees by investing directly in REITs and taking on the responsibility of stock selection.

One of the key attractions of real estate closed-end funds is their ability to provide investors with a consistent monthly income at a higher yield than other similar investment vehicles. In this context, the Cohen & Steers REIT & Preferred Income Fund (NYSE: RNP) stands out as one of the largest closed-end funds in terms of assets under management. This fund combines REIT common and preferred stock, while also integrating derivatives into its leveraged portfolio, including cash secured put options against high-quality REITs. With a diversified portfolio across various REIT sectors and geographies, RNP has demonstrated strong performance over extended periods, outperforming the real estate market over the past decade.

Managed by Cohen & Steers, a New York-based firm specializing in publicly traded real estate and infrastructure investments, RNP has faced challenges related to increasing interest rates impacting the valuation of its portfolio. However, despite these challenges, the fund has maintained its dividend and shows signs of rebounding as investor optimism grows around potential rate cuts in 2024. Additionally, RNP’s investment portfolio consists of a mix of REIT equity, derivatives, and private real estate investments, offering a diversified approach to generating yield.

The fund’s top holdings include major players in the real estate sector such as American Tower Corporation, Prologis, Welltower, Simon Property Group, and Digital Realty Trust, operating in sectors like telecommunications, industrial, and senior housing. RNP’s blend of publicly traded REITs and preferred stock, coupled with investments outside the real estate sector, adds a layer of diversification not commonly found in funds like the Cohen & Steers Quality Income Realty Fund (RQI). With a track record of outperforming its benchmark over different time periods, RNP’s active management strategy has proven effective in delivering consistent returns in the real estate sector.

In terms of generating portfolio yield, closed-end funds like RNP offer investors the potential for consistent income streams, often appealing to demographics such as retirees. By providing shareholders with a regular monthly distribution, RNP effectively mirrors the concept of receiving rent checks in real estate investments. Despite potential risks associated with fluctuating asset performance, RNP’s current distribution yield corresponds to approximately 8%, sourced from a combination of income, capital gain, and return of capital from its assets.

In analyzing RNP’s valuation, investors typically consider various methodologies such as comparing its yield to the ten-year treasury rate and assessing its trading price relative to net asset value. Historical trends suggest that RNP’s yield fluctuates in response to movements in the ten-year treasury yield, with the fund currently trading slightly above net asset value. This premium pricing signifies investor enthusiasm surrounding potential rate cuts and the overall positive outlook for the REIT sector, although it may raise concerns about overvaluation compared to historical levels.

As investors monitor market conditions and the Federal Reserve’s policy decisions, the real estate sector continues to evolve in response to changing economic landscapes. While RNP remains a strong performer managed by industry experts, the fund’s current valuation relative to historical benchmarks may indicate a need for caution. Therefore, a “Hold” rating is reiterated for RNP, emphasizing the importance of prudent investment decision-making in the current market environment.