Cohen & Steers Heart Commercial Real Estate

An amusing article in the WSJ today discusses the newfound sweeping hope across the REIT space. The hope, by the way, has to do with the recent stock offerings by SPG, AMB and KIM (the last one Zero Hedge had quite a few things to say about). WSJ provides a good assessment of the situation:

Vacancies are still zooming up and property values are still crashing down. But for now, investors seem to have enough confidence in the long-term value of office buildings, warehouses, and shopping malls to provide fresh capital to REITs they think can survive the credit crunch and the recession.

Additionally, the article provides some rose-colored glasses spin courtesy of a fund that is elbow deep in the REIT space:

Cohen & Steers Inc. co-CEO Martin Cohen, an influential REIT investor whose company bought major positions in all three of the recent stock offerings, says he's willing to provide equity to 10 to 20 "realty majors" - the leading companies that will be able to ride out the downturn. The others will have to fend for themselves and about one-third of all REITs, Mr. Cohen estimates, simply won't survive.

Those might become merger or acquisition targets for private funds and healthier REITs. With a shakeout still to come, investors contemplating the sector need to choose carefully.

So we decided to take a closer look at Cohen & Steers' portfolio. And the result: I Am Pumping-My-Book's Smirking Lack Of Surprise: out of the company top 20 position, virtually all holdings are directly related to commercial real estate. The top 5 names held by C&S are the who's who of the SRS: SPG, VNO, PSA, BSP, EQR (source: Thomson One Banker). Our surprise and amusement grew when we ran a year-to-date P&L of C&S top 20 holdings simply based on the company's disclosed December 31 holdings. The result: a loss of of over $1.6 billion on the top 20 holdings which at closing today had a market value of $4.1 billion: a 30% loss over the past 3 months.

Taking a cue from none other than the government's investment advisory book, C&S is more than happy to "invest" whatever cash it may have lying around into its existing holdings, as it really has no other alternatives: booking the positions and converting the unrealized loss to a realized would likely not pass too well with the fund's Limited Partners. Another word for this phenomenon is dollar cost averaging: C&S at this point is hoping that eventually these CRE securities have to go up. A couple more upgrades from ML and others and they may well be on the right track. However, with limited direct options, it is obvious that Mr. Cohen has no other choice but to stand behind his bet and valiantly proclaim that "he's willing to provide equity to 10 to 20 realty majors." In the meantime Zero Hedge is even more valiantly expecting the most recent CRE remittance report and will be happy to disclose just how much of the tide has really turned.

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