Martin Cohen is the dean of real estate investment trusts (REITs). His New York firm, Cohen & Steers Capital Management, manages $5 billion in REIT mutual funds and separate accounts--making him and partner Robert Steers two of the nation's largest REIT investors. Cohen, 52, recently discussed the REIT outlook with Staff Editor Lewis Braham.
Q: Are you concerned that a recession could stymie demand for real estate?
A: Demand would certainly decline. But historically, at this point in the economic cycle, there has been a lot of overbuilding. This is the first cycle that I know of where that hasn't happened. There's no oversupply of real estate in most major cities. Also, if you consider that, with the exception of hotels, most leases are long term--5 to 10 years for offices--then even a slowing economy is not going to have a major impact on REIT earnings. But you need to treat each real estate sector separately.
Q: Which sectors do you favor now?
A: We still like offices, particularly in high barrier-to-entry markets where there's not a lot of building: New York City, Boston, Chicago, Washington, D.C. We also, interestingly, like hotels. One reason is that the supply of hotel rooms is moderating just as the Federal Reserve is easing interest rates. It looks like at some point in the next 12 or 18 months, we'll see stronger economic growth by virtue of the stimulus. And since hotels are the most economically sensitive, I think they'll do very well.
Q: What hotels are you buying?
A: We like FelCor Lodging Trust (FCH) and Host Marriott (HMT), the largest hotel REIT. Our biggest position is Starwood Hotels & Resorts (HOT), which is not a REIT but a hotel operating company. All three have high-quality real estate portfolios, excellent management, and strong balance sheets. Starwood, in particular, has terrific brands and great overseas exposure.
Q: And offices?
A: Clearly, we like Equity Office Properties (EOP), which is the largest office REIT and the largest REIT altogether. We also like Vornado Realty (VNO), the largest office owner in New York City. We've recently developed an affinity for Southern California offices, which are holding up well despite the California energy crisis. Arden Realty (ARI) is the biggest player in that region.
Q: Are there any sectors you're avoiding?
A: We avoid specialty areas such as mini-warehouses, movie theaters, and bowling alleys. These are property types that can get overbuilt pretty quickly.
Q: At the start of 2000, REIT stocks traded at big discounts to their underlying property values. Where are they now?
A: They were trading at about a 20% to 25% discount, on average. They're now trading at about 10%. Historically, their market values have equaled their property values. So they're still attractive from a valuation standpoint.
Q: How safe are REIT dividends now?
A: I just did a little study on that. In 1993, REITs were paying out 86 cents of every dollar in cash flow as dividends. Today, they're paying out 61 cents of every dollar. That means cash flows would have to decline industrywide by 39% before dividends would be affected. That has never happened, even in the 1990-91 real estate depression.
Q: Do you expect dividends to rise soon?
A: You should see a definite acceleration. Boston Properties (BXP), another favorite of ours, just raised its dividend by almost 10%. You'll see a lot more of that.