INTERVIEW: REITs' Still-Rosy Outlook by Sandra Ward
Highlighted companies: Cohen & Steers (CNS), Trizec Properties (TRZ), Mills Corporation (MLS), Starwood Hotels & Resorts Worldwide (HOT), Hilton Hotels Corporation (HLT-OLD), Strategic Hotels & Resorts Inc. (BEE)
Summary: Interview of Marty Cohen, Co-CEO of $23 billion investment-services giant Cohen & Steers. The article focuses on Real-Estate Investment Trusts (REITs), one of Cohen & Steers' main empire-building instruments. Over the past two years, REITs have consistently outperformed other sectors. Cohen attributes their current growth to stagnant supply coupled with increased demand, leading to rent and revenue increases (rent increases have a high 'flow-through' to overall profitability, because operating costs don't change substantially with increased rents). Cohen concedes that if the economy slows substantially, real-estate values and profits will likely slow as well. However, he does not see signs of a recession, and believes that current Fed policy improves the probability of a soft landing or continued growth. A slow-but-consistent economy is ideal for REITs, because as long as real-estate fundamentals continue to improve and interest rates remain low, REITs will continue to be a solid investment. Buyouts and takeovers, which have dominated the sector over the past two years, have helped its performance as well. Looking at the world markets, Cohen is bullish on European and Asian REITs, particularly in Hong Kong. On the domestic front, Cohen sees the hotel sector as a standout among the REITs, due to an unprecedented increase in the revenue per available room (revpar).
Quick comment: ETF REIT plays: Cohen & Steers provides the underlying index for the iShares Cohen & Steers Realty Majors ETF (ICF). That, along with iShares Dow Jones US Real Estate (IYR), streetTRACKS DJ Wilshire REIT (RWR), and Vanguard REIT ETF (VNQ) all perform similarly and are viable plays on the US REIT market. As noted in the article, Cohen & Steers stock (CNS) has grown explosively over the past two years, vastly outperforming the REIT ETFs, who themselves have way outdone the major overall indexes (see chart). This illustrates the advantage of investing in a REIT-focused company who continues to seek-out other income-oriented investments like utilities and high-yielding stocks, rather than focusing entirely on one sector. While Cohen makes the case for a 'soft-landing' of the current real-estate slowdown, SeekingAlpha contributor Richard Kang paints a far gloomier picture, asking, "Does a minor soft-landing follow the most extended residential real-estate cycle on record?"
3-yr Chart of Cohen & Steers stock vs. REIT-ETF RWR vs. S&P 500 Index