PLDGP - RLTY: A Lower-Risk Real Estate Fund, But At A High Price

2025-03-03 06:49:12 ET

Summary

• The Cohen & Steers Real Estate Opportunities and Income Fund offers an 8.30% yield, higher than any of the index funds tracking the sector.
• Active management allows the fund to avoid struggling real estate companies, providing a more secure income stream compared to passive index funds.
• The fund is not a pure play real estate fund as some of its peers, and it has a lower yield than its peers.
• Despite its advantages, the fund's current valuation is unattractive compared to historical averages and peers, suggesting potential investors wait for a better price.
• The fund's high expense ratio, primarily due to leverage costs, makes it relatively expensive compared to similar funds in the sector.

The Cohen & Steers Real Estate Opportunities and Income Fund ( RLTY ) is a closed-end fund that invests in the real estate sector, particularly in real estate investment trusts. The real estate sector has been one of the more troubled ones over the past few years, as high vacancy rates have reduced the incomes of many commercial properties, while high mortgage rates have raised the debt service costs of many properties. After all, unlike most residential mortgages in the United States, many commercial mortgages are floating rate. This means that higher interest rates raise the cost of owning a property and might directly reduce its cash flow. When combined with rising vacancies that reduce the rental revenue from a property, it is easy to see why this would be a problem. However, it is worth noting that not all real estate sectors have been suffering from high vacancy rates. For example, data center owners such as Digital Realty Trust ( DLR ) or Equinix ( EQIX ) continue to have very strong occupancy and revenue figures. As we can see here, Equinix has actually delivered revenue growth in each of the past ten years:

(all figures in millions of U.S. dollars)

This is much better than what some other real estate investment trusts have achieved. As Simon Bowler of Second Market Capital points out :

Bankruptcy filings increased month-over-month again in November and more than doubled from November 2023. 2024 has had more bankruptcies YTD than there were in the first 11 months of any other year since 2010.

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