RFI - RFI: 8.5% Yield Virtually No Office REIT Exposure

2023-03-29 13:35:23 ET

Summary

• Cohen & Steers Total Return Realty Fund is a REIT-focused closed-end fund.
• The REIT does not run any leverage and has an enviable track record.
• The fund has a sub 1.5% exposure to Office REITs, a sector that has been battered as of late.
• Interestingly enough, the RFI CEF is trading at a premium when other Cohen & Steers CEFs are trading at a discount.
• The RFI fund is a conservative allocation to a sector that has been negatively impacted by rising rates.

Thesis

Cohen & Steers Total Return Realty Fund ( RFI ) is a closed-end fund, or CEF, focused on REITs. As per its literature:

The investment objective of the Fund is to seek to achieve a high total return through investment in real estate securities. Real estate securities include common stocks, preferred stocks and other equity securities of any market capitalization issued by real estate companies, including real estate investment trusts (REITs) and similar REIT-like entities

REITs as a sector have been heavily impacted by higher rates. RFI is down over -20% on a price basis in the past year, and it should not bottom out until the Fed indicates the rate hike cycle is over.

One of the most battered corners of the REIT sector is constituted by Office REITs. Office vacancies have risen due to the work from home movement and the downward pressure on office valuations due to higher rates. The sector has a high leverage ratio which has decimated some of the common equities in the space such as Vornado ( VNO ) and SL Green ( SLG ), which are both down over -70% in the past year. RFI has virtually no exposure to this sector, with a tiny 1.07% allocation to this space.

We like the Cohen & Steers management because they have proven to be very savvy through the years in their allocation policies, as reflected in their total returns and performance. RFI benefits also from another trend - market de-risking. RFI is a CEF that has no leverage, and has seen capital allocated to it rather than its leveraged Cohen CEF peers. In a down market, leverage magnifies negative returns, hence market participants have shunned some highly leveraged REIT CEFs.

Holdings

The fund holds a portfolio of REITs, with a very low concentration to the battered Office REIT sector:

That is the beauty of buying into a well-run fund - the portfolio manager will ensure it allocates capital to the best sectors, and moves away from problematic sectors.

The top holdings in the fund are:

These are all well-known names in the REIT sector, with no surprises.

Analytics versus Peers

The below table benchmarks the CEF's analytics versus its peers:

We can see the CEF having the lowest beta from the cohort due to its unleveraged nature. The fund also exposes the lowest volatility as observed in its lows standard deviation of 17 versus its peers in the CEF and exchange-traded fund ("ETF") space. Cohen & Steers is a premier manager in the REIT space, and we can see that RFI's total returns do not suffer, even if it does not take any leveraged risk.

The fund benchmarks successfully against all its peers, speaking very well to the fund manager's performance and credit selection ability. At the end of the day, buying into a CEF without leverage is basically underwriting the portfolio managers. An investor is willing to pay a higher expense ratio in order to access a quality platform with proven historical results.

Premium/Discount to NAV

This CEF has a very stable premium/discount to NAV profile:

We can see how in the past two years the fund has held a very tight range from 0% to 8%.

It is interesting to note that RFI is now trading at a premium, when its other CEF peers from Cohen are trading at discounts. We believe the reason behind this occurrence is the lack of leverage exposed by RFI. No leverage makes the fund less risky and volatile, hence capital was moved away from CEFs with leverage to RFI.

One of the cornerstones of risk management is to reduce leverage in a down market. Leverage magnifies returns, both on the upside and on the downside. RFI has therefore benefited from the risk-off environment via allocations to a non-leveraged vehicle.

Conclusion

Cohen & Steers Total Return Realty Fund is a closed-end fund focused on REITs. The CEF has no leverage and is currently trading at a small premium to net asset value. All of the REIT sector has been negatively impacted by rising rates. The most battered sub-sector has been the Office REIT one, with names such as Vornado and SL Green down over -70% in the past year. RFI runs virtually no exposure to the sub-sector, with only a 1.07% allocation. Cohen is a great manager in the space, and has been able to navigate historic trends very well.

We do not think the down move in REITs is done yet, with the Fed still tilting hawkish. Cohen & Steers Total Return Realty Fund is the most conservative allocation in the sector when compared to its peers. The RFI fund has the lowest standard deviation and beta, and has seen cash inflows from some of its leveraged sister funds. We find the RFI CEF to be the most conservative play in the space at this moment.

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