Cohen & Steers REIT And Preferred Income Fund: Not Just A Real Estate Offering
Summary RNP is managed by REIT specialist Cohen & Steers. RNP does not, however, have a strict real estate focus. It might be better to look at RNP as a balanced fund of sorts. Cohen & Steers REIT and Preferred Income Fund (NYSE: RNP ) is an interesting animal that tries to combine in one fund two different investment focuses. For investors seeking simplicity, this could be a good option. For those who want more control over their portfolios, you’d be better off buying a real estate investment trust (REIT) fund and a preferred fund separately. Who is Cohen & Steers? I always include a comment about this company’s origin when I write about it because Cohen & Steers isn’t a household name in finance. But it is one if you are remotely connected to the REIT space. That’s because Martin Cohen and Robert Steers were among the first to create a company dedicated to investing in REITs. They basically helped popularize the space for institutional and individual investors. And, more important, the company they created has lots of experience. If you are thinking about outsourcing your REIT investments to anyone, Cohen & Steers should be on your short list. So, from that standpoint, I like anything they do that involves real estate investing. Only half the fund But that’s only half of what Cohen & Steers REIT and Preferred Income Fund does. The other half of the fund invests in preferred shares. While there’s some overlap, since REITs often issue preferred shares, that doesn’t make Cohen & Steers an expert in, say, preferreds issued by insurance companies. That’s not to suggest that they don’t have the ability to do analyze such securities, just that their business has historically been structured around REITs. And this fund, with only about 10% of its preferred portfolio in REIT preferreds, is definitely more than just REITs. But what exactly is in RNP? Roughly 50% of the fund is, indeed, in REITs. The largest holdings are basically top-quality players. It’s fairly diversified across nine major sectors, with offices, apartments, and regional malls accounted for nearly half of its real estate exposure. Nothing exciting here. Preferred stocks and debt make up the rest of the fund. That side is concentrated in four sectors. Banking preferred stocks alone make up nearly 55% of this side of the portfolio. Insurance, real estate, and utility preferreds are the other big areas. This speaks more to the nature of the preferred market than to anything else, since these group of industries tends to make the most use of preferred stock. It’s worth taking note of the real estate sector’s 10% position on this half of the fund, which means that REITs, in some form, make up about 55% of RNP’s overall portfolio. The big takeaway from that is that this is not a pure real estate investment trust fund. It was never intended to be, but you should keep this fact in the back of your mind if you own it and front and center if you are looking for a pure REIT fund. How’s it done? Looking at total return, which includes distributions, RNP’s trailing ten year return through year-end 2014 was roughly 8% based on the share price (a little under 7% based on the CEF’s net asset value) according to Morningstar. That’s not bad for a fund with an income focus and is roughly in line with the S&P 500 Index over that span. That, of course, assumes the reinvestment of dividends. The price of RNP is down roughly 30% over that span if you used the dividends. Note, however, that dividends over the last six years have totaled roughly seven dollars or so. That pretty much makes up for the entire share price decline right there. While it’s true that the shares are worth less, you have been paid reasonably well along the way… With the other four years of dividends providing the bulk of your take-home return over the span. So, overall, this is a fine fund if you want a decently performing REIT and preferred combo offering. But you’ll need to keep another factor in mind. The big problem RNP makes use of leverage. Toward the end of last year, the fund’s leverage was at around 27%. Leverage is a double-edge sword, aiding performance in good markets and exacerbating losses in bad ones. For example, in 2007 the fund’s return was -27%, according to Morningstar. In 2008 it returned -60%. Those are hard losses to watch unfold and include dividend payments. That said, in 2009 RNP was up 90%, including dividends, and in 2010 it advanced another 50%. So while the fund owns what some would consider “safer” investments, this fund is anything but conservative. This is a fact that shouldn’t be taken lightly. Note, too, that the fund’s inherent exposure to financial preferred stocks on the preferred side of the portfolio were a huge drag during the financial-led 2007 to 2009 recession, when the CEF was hard hit in the market. This type of volatility doesn’t make RNP a bad fund, it just means it’s probably not appropriate for conservative investors. Expenses, meanwhile, at around 1.8%, are elevated by the costs of that leverage. Right now the shares trade at about a 12% discount to NAV. That’s roughly in-line with the fund’s five- and 10-year average discounts of roughly 10%, according to the Closed-End Fund Association. So RNP is hardly on sale right now. But you will be picking up a yield of around 6.75%. At the end of the day The question you have to ask is if that amount of income, most of which has recently been dividend income, is worth the share price volatility that Cohen & Steers REIT and Preferred Income Fund can experience. And the fund is really only appropriate if you want a mix of REIT and preferred exposure in one fund. At the end of the day, I’d say this is a specialty fund most appropriate for those with strong stomachs. It would be a good way, for example, to outsource “boring” sectors and asset classes while still staying true to an aggressive overall investment approach.
