Michael Edwards
Cohen & Steers REIT & Preferred Income Fund (NYSE:RNP) (“the Fund”) is a closed-end balanced mutual fund (“CEF”). The Fund invests in a combination portfolio of income producing common stock issued by real estate investment trusts (REITs) and preferred and other debt securities. Its balanced portfolio generates a yield between 6 to 8 percent. RNP offers a monthly pay-out which is well supported by a positive price growth. However, 2022 has been extremely poor for RNP as its market price dropped by 17 percent. This might be a good opportunity for investors, as there is a fair chance for RNP to perform well in the short-term as well as in the longer term.
Cohen & Steers Capital Management, Inc.
Cohen & Steers REIT and Preferred Income fund is managed by Cohen & Steers Capital Management, Inc. Founded in 1986, the firm is headquartered in New York City, with offices in London, Dublin, Hong Kong and Tokyo. It is a global investment manager specializing in liquid real assets, including real estate securities, listed infrastructure and natural resource equities, as well as preferred securities and other income solutions. Realizing the needs and popularity of blend funds, it formed RNP on June 27, 2003 and is domiciled in the United States. It was formerly known as Cohen & Steers REIT & Preferred Balanced Income Fund.
RNP’s Portfolio is Well Balanced
Cohen & Steers REIT and Preferred Income Fund has an equity portfolio and a fixed income portfolio. The equity portfolio invests in companies operating in the real estate sector including REITs. Half of the equity portfolio is invested in REITs dealing in infrastructure development, i.e., infrastructure REITs, industrial REITs, self-storage REITs, and data center REITs. Such REITs included American Tower Corporation (AMT), Prologis, Inc. (PLD), Public Storage (PSA), Equinix, Inc. (EQIX), Americold Realty Trust, Inc. (COLD), Crown Castle Inc. (CCI), Duke Realty Corporation (DRE), Extra Space Storage Inc. (EXR), Digital Realty Trust, Inc. (DLR), and Weyerhaeuser Company (WY).
For its fixed income portfolio, the Fund invests in debt and preferred securities of companies operating across diversified sectors. This also includes contingent capital securities (CoCos) and convertible preferred securities, which are types of hybrid preferred securities. Almost 73 percent preferred portfolio is invested in companies from banking and insurance sector. This fixed income portfolio enables RNP to offer a monthly pay-out with a steady yield. During the past 10 years, RNP generated a yield between 6 to 8 percent. As a result of such steady yield, RNP was successful in generating annual average total return in between 6 to 10 percent.
Cohen & Steers REIT and Preferred Income Fund employs fundamental analysis to create its fixed income portfolio with a focus on the issuer’s creditworthiness, corporate and capital structure, placement of the preferred or debt securities within that structure, momentum and other exogenous signals, and their relative values. For its equity portfolio too, it employs fundamental analysis with a focus on growth potential, earnings estimates, and the quality of management. The fund benchmarks its performance against the FTSE NAREIT Equity Index, S&P 500 Index, Merrill Lynch Fixed Rate Preferred Index, and FTSE NAREIT Equity REIT Index.
Benefits of Investing in a Blend of REIT and Preferred Stocks
Historical evidences reveal that real assets have low correlation with other assets, offer a hedge against inflation, can generate operating cash flow, and tend to appreciate in value. Investors can enjoy the benefit of real assets through investment in REITs. On the other hand, preferred stocks guarantee a steady fixed income. Although the persistent inflation, interest rate volatility, and concerns around economic growth have led to repricing of fixed income instruments, certain current market dynamics make preferreds quite attractive. These dynamics come in the form of higher current income levels, healthy issuer fundamentals, and preferreds’ historical tendency to rebound following significant drawdowns. Thus, the blend of REIT and preferred stocks helps RNP diversify its investments, outperform the market during inflationary periods, and generate attractive total returns.
Risks associated with Cohen & Steers REIT and Preferred Income Fund
Cohen & Steers REIT and Preferred Income Fund shares the risk that associated with the direct ownership of real estate companies. Real estate valuations are highly dependent on changing general and local economic, financial, competitive and environmental conditions. On the other hand, the risks of investing in preferred securities are similar to those of investing in bonds, including credit risk and interest-rate risk. Investors also face equity-like risks, such as deferral or omission of distributions, subordination to bonds and higher corporate governance risks with limited voting rights.
As the preferred securities have call options attached, call risk and reinvestment risk are also present. In addition, the fund undertakes the risk of investing in below-investment grade securities and unrated securities. Below-investment grade securities or equivalent unrated securities generally involve greater volatility of price and risk of loss of income and principal, and may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher-grade securities. Most CoCos are considered to be high yield or junk securities and are therefore subject to the risks of investing in below investment-grade securities.
Investment Thesis
RNP’s shares have been in bearish cycles for the past 12 months. In 2022, RNP shares have decreased by 17 percent. It saw an increase in short interest in August. As of August 15th, there was short interest totaling 76,600 shares, an increase of 52 percent from the July 31st total of 50,500 shares. Despite that, RNP’s balanced portfolio has been able to generate a strong and steady yield with a monthly pay-out. A positive trend is expected in the future and that’s why this fund might be a good investment option. Several short-term signals, along with a general good trend, indicate that Cohen & Steers REIT and Preferred Income stock should perform well in the short-term. In the long run, the stock will generate a steady total return if its past history is anything to go by.
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