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WALL STREET, CALIFORNIA | MANAGER'S FORUM

For Land's Sake

A Realty Fund That Got In on the Ground Floor

May 06, 1997

Successful real estate investing is about being in the right place--literally--at the right time. Martin Cohen and Robert Steers got in on the ground floor of the real estate investment trust boom of the 1990s, and they have the numbers to prove it.

Their Cohen & Steers Realty Shares mutual fund gained 139% in the five years ended March 31, by far the best performance of the six real estate funds in existence for that period. What's more, the fund's gain was well above the 89% rise in the average general U.S. stock fund in that period.

The Cohen & Steers fund invests primarily in shares of REITs, companies that own and manage portfolios of property. REITs offer not only high dividend yields (they pass through to shareholders most of their rental income) but also the chance for capital gains if their properties rise in value over time.

Cohen, 48, and Steers, 44, met while working as stock analysts at Citibank during the 1970s, then got reacquainted at National Securities Research in the early 1980s. Their 11-year-old New York-based management company now directs $4.5 billion in total assets.

They were interviewed by Russ Wiles, a mutual funds columnist for The Times.

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Times: You created one of the first investment firms to specialize in real estate stocks. What prompted you to focus on this area?

Cohen: In 1986, we perceived this would be an area of growing interest, as a result of changing tax laws, an exceptional record for public real estate companies and dissatisfaction among many institutions in the way they had been owning real estate. So we took the plunge and started our own firm.

We didn't know at the time that we would encounter a stock market crash, a real estate depression and a war over the next 10 years. We had assets under management and we were profitable from day one, but it took several years for this area to really blossom.

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Times: What do you look for in a REIT?

Cohen: Strong management--the key to making money in any investment. We also look for a strong balance sheet and a business plan that's sound and achievable.

Steers: What differentiates us from our mutual fund competitors is that we have six seasoned analysts in addition to Marty and myself following real estate companies. These stocks are somewhat different because you have to visit many properties to identify the right companies. Hundreds of thousands of properties are publicly owned. It's a labor-intensive endeavor. Experience in analyzing real estate companies gives us a leg up on our competitors.

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Times: You have often stressed the importance of being in the right REIT sectors at a given moment. Can you explain your sector strategy?

Cohen: We think sector selection is important. Just like the portfolio manager of a more generalized stock fund would emphasize certain industries, we're keen on certain property types.

The real estate markets in this country are not homogenous. Half the task involves understanding economic trends and how they affect different property types. The other half is picking the right companies in the best-positioned groups.

Steers: Our largest weightings today are in office properties and regional malls. Though they have performed well over the past 18 months, we think they continue to have strong fundamentals and attractive valuations.

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Times: Why are office property REITs so attractive?

Steers: In most regions of the country, office properties were the most overbuilt and the last to recover [in the late 1980s and early 1990s]. Now most markets either are in equilibrium or are approaching a shortage scenario for office space that's being reflected in strongly rising rents. Across the range of property types, the office sector has the most exciting three-year growth outlook as occupancies continue to increase.

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Times: What are some of the individual REITs you like best right now?

Cohen: Cali Realty [$30.75 on Monday, New York Stock Exchange], one of our larger holdings, exemplifies what we look for. The company has strong management, with a property focus on the office sector in the Northeast, especially in New Jersey. They're buying properties at below-replacement costs, generating returns that are greater than their cost of capital, so their earnings are growing as a result of these acquisitions.

Cali has grown from roughly $500 million in properties to almost $2 billion over the past three years. But they're expanding on a rational basis, in a low-risk manner.

Another company is the Rouse Co. [$28, NYSE], one of the largest owners and operators of regional malls. Last year they acquired the Howard Hughes real estate portfolio--a combination of office, industrial, retail and residential properties, all of which were purchased at a reasonable price and on reasonable terms. These properties are generating a tremendous amount of cash for the company.

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