(left to right) Martin Cohen and Robert Steers, co-chairmen and co-chief executive officers of Cohen & Steers Inc.

Perfect Pair
[November/December 2006]

Martin Cohen and Robert Steers have helped shape the REIT investment market for the past 20 years and are now applying that expertise abroad. What have these REIT investment pioneers planned for the future?

By Charles Keenan
Photographs by John Emerson

Martin Cohen and Robert Steers have taken their well-regarded recipe for successful investing and added new ingredients: a good helping of overseas real estate securities and a dash of additional dividend-rich asset classes. Investors will probably like what they taste. The co-chairmen and chief executive officers of Cohen & Steers, Inc. (NYSE: CSN) have certainly made their mark in the world of REIT investing. Since starting their company 20 years ago, they have grown to become one of the largest investors in the REIT investment universe, amassing assets and steady returns along the way. The basic formula: invest in well-run REITs that have stable cash flow, and therefore, reliable dividends. Most of their REIT funds have outperformed the FTSE NAREIT U.S. Real Estate Index and the Standard & Poor's 500 Index over time. Now Cohen and Steers are bringing their discipline to REITs and other public real estate companies overseas, while also going after other securities that pay dividends, such as preferred stock, utilities and large capitalization value stocks.

Cohen and Steers are well poised for future success. The two met while working at Citibank in the 1980s and joined forces at National Securities and Research Corp. in 1985, organizing and managing the first real estate stock fund. At the time, pension funds and endowments considered investment in public real estate companies "voodoo real estate," Steers recalls.

Bond funds were hot at the time, so the two had difficulty convincing salesmen to market alternative income producing investments such as a real estate mutual fund to institutional investors. A year later, they realized they would be better off running an independent company and beating down doors themselves. They started with sub-advisory contracts from National Securities, and rest is real estate history.

The company obtained its first institutional account in 1987, and by the end of 2003, Cohen & Steers was running five closed-end and four open-end real estate funds. Riding the updraft of real estate appreciation—and greater awareness of REITs by investors—the company went public the next year. Since then, it has launched another 10 funds, bringing its total to 19.

Cohen You are going to see, even without REIT legislation, more companies in Germany, Spain and Italy going public.

Expanding its real estate investment capabilities overseas, Cohen & Steers in December 2004 purchased a 50 percent stake in Houlihan Rovers, a Brussels-based investment manager specializing in non-U.S. real estate securities. Houlihan Rovers gave Cohen & Steers in-depth coverage of markets such as France, Germany, Spain, the Netherlands and the United Kingdom. Cohen & Steers opened an office in Asia in April 2005, and, at press time, was set to open a London location.

No doubt, business is brisk. In August 2006, it launched Cohen & Steers Asia Pacific Realty Shares, its second non-U.S., open-end real estate securities fund. Its first overseas fund, dubbed Cohen & Steers International Realty Fund, debuted March 31, 2005, and had amassed $950 million in assets. All told, inflows have maintained a steady pace, with total assets under management of the firm rising to $23.2 billion as of June 30, 2006, up 17 percent from the same date 12 months earlier. All the good news has translated to big gains for the firm's stock. In the two years since its debut, it has doubled in price, trading in mid-August 2006 at approximately $26 per share.

Portfolio sat down with Martin Cohen and Robert Steers to hear about their early career accomplishments and challenges, the state of the real estate market globally and what's behind their success as co-leaders of the largest manager of REIT mutual fund portfolios.

What prompted you to start your own company?

Steers: With our first fund, we couldn't raise any money. The wholesalers didn't know what to do with it. They would use it to get into offices, but at the time government bond funds were selling like hotcakes. We realized that nobody had done it before, so we had tremendous missionary work to do. We had to focus on this alone. We had to prepare for an extensive amount of education before any significant assets would roll in. We believed that we had to start a firm that didn't need to sell other things as well.

What finally prompted you to go public, especially given the recent increased regulatory environment?

Cohen: Every private company reaches a point where it needs to decide where it wants to go when it reaches a certain critical mass. Bob and I decided we wanted to continue to grow the company in a world that is competitive with respect to people, and where equity ownership is the key to attracting and retaining people. Having a currency to do that was very important. We've got all the traditional forms of financing available: debt, equity and cash. We also wanted a succession plan in place, and to provide investors abroad with a transparent platform.

Steers Public companies have a discipline imposed on them by their shareholders that has resulted in buying at the right time, selling at the right time.

You have made several moves to expand your company's holdings and sales overseas—why now?

Cohen: The international securitized real estate market is bigger than the market in the United States. There is no reason to believe there isn't as much growth potential outside the United States as there has been within.

Steers: Three or four years ago we saw that the international market was similar to the United States before it took off in the early 1990s. We worked very hard at creating what we think is the largest, most geographically diverse and focused team in the world today. We are dedicated to maintaining that industry-leading organization.

What have been the biggest challenges with overseas expansion?

Cohen: To accommodate that growth as a public company has required a tremendous investment in infrastructure—in both people and locations. We opened offices in Hong Kong, London and Brussels, which were all very significant undertakings. The legal, financial and administrative support for those were major undertakings. I think we can say with confidence at this point that we have succeeded on all of those fronts. Having all these expanded capabilities in place, we now have to sell them. We essentially have completed the build out of our retail and institutional sales forces. Now the jury is out. So far, our inflows are good.

How has expanding internationally changed the way your company operates?

Cohen: We spend more time in Europe and Asia. With our global investment team, someone is always at a time disadvantage with a phone call, so we have learned to maintain flexible hours.

However, thinking globally is a mindset that really is quite different. Because you are looking at many countries, you're looking at different economies, cultures, political systems, etc. It has changed our thinking about how we run our company and what we do. Having a global economic perspective makes us better investors.

We are just one piece of a much lar ger global economy, and we have holdings in many U.S. companies that are investing overseas. They too are seeing opportunities to build and buy buildings, and we have had very substantial investments in them. So we need to know what is happening outside the U.S. just to be better investors in U.S. companies.

How reliant are you on REIT-like structures in expanding your portfolios overseas?

Cohen: The REIT is a great vehicle, and that is certainly spurring interest. But it goes further than that—it is public market real estate companies. You are going to see, even without REIT legislation, more companies in Germany, Spain and Italy going public. The REIT accommodates investors very well, but you don't have to see universal acceptance of REITs by governments for this global securitization wave to continue to grow. The key is accessing capital markets to grow your real estate portfolio.

Cohen & Steers We both gravitate toward getting the job done. Two heads are better than one. We have never had a period where there is a problem we can’t solve.

Your annual report says, "Finding value is the foundation of professional investment management... an ideal way to invest in real estate markets worldwide." How do you find value overseas, given the wide variety of markets?

Cohen: That is one of the biggest challenges—comparing a shopping center in France to an office building in Singapore.

Steers: It starts with having local employees in these markets that understand how to value local real estate. You own real estate for cash flow purposes. Yet you need to have your local presence say, "You don't even want to look over there. This person's not reputable." You need that insider's view. You can't get that by just sitting in New York.

How about U.S. REITs—with all of the price increases, how much more room is there for appreciation?

Cohen: REITs are trading right around net asset value. What people have not realized is that the replacement cost of these properties has soared. Think about copper, lumber, concrete and steel—plus finding good locations, which is almost impossible. The values of these buildings are much greater than they ever were. What you will see, and the part of the puzzle that investors and commentators are missing, is that we are in the rent cycle now when rents are moving up.

In the United States, REITs are frequently losing out to private funds in property bids. What does this mean for REITs' ability to compete?

Steers: I wouldn't call it a disadvantage. Public companies have a discipline imposed on them by their shareholders that has resulted in buying at the right time, selling at the right time. When you say private guys can overpay, or pay higher—the good news is they get the portfolio. The question is, if REITs are not willing to bid as high as they are—since they are required to have rational return expectations that are tied to their cost of capital—then is it really a victory? Some of these private guys are willing to lever things up more than a public company is allowed, but time will tell whether that is a good strategy or not.

Your annual report also notes, "We continued to diversify the assets that we manage. Our non-U.S. REIT assets increased 30 percent to $6.2 billion last year, representing 30.2 percent of your assets under management at year-end." Why diversify now?

Steers: It's like a lot of things that we have done over the years. Since starting our company, a lot of the best things we have done were born out of opportunity. We didn't do them all at once, we did them sequentially. It took a lot of time because we had such stiff criteria for the quality of the team and track records that came with them.

In terms of asset classes outside of real estate, why did you choose to pursue dividend-oriented equities such as preferred stock, utilities, and large-cap value?

Steers: We asked ourselves what other investment strategies have similar investment characteristics and lend themselves to our analysis. You have got a growing income stream. The certainty of those positive returns is relatively high. Five years ago, we saw the traditional market buckets—such as large cap growth—were on the wane and dividend oriented strategies were coming into favor. It's demographics, the low return environment and the change in the tax code. With REITs, more than 70 percent of our returns over the past 20 years—returns in the mid-teens—are just collecting dividends and reinvesting them. These types of strategies are going to be in big demand for a decade probably.

How do you succeed in today's real estate investment market, especially when stock premiums are relatively high?

Steers: Everything we have added is based on the premise that there's over-capacity of virtually every type of investment product. Unless you have a true value add, and you have consistent, substantial alpha generation, then you don't have anything. In the 1980s and 1990s, there were plenty of powerful organizations that raised a lot of money with mediocre product. We believe that going forward, good distribution is not going to compensate for bad product. All the people we brought on, covering utilities, large cap value, or Europe—had a five-star type of performance, in the top quartile. That has been our litmus test.

What was the investing climate like when you managed the first real estate mutual fund at National Securities two decades ago? How was the market different then?

Cohen: Pension funds and institutions were buying buildings, and individuals were buying limited partnerships. So REITs and public real estate companies really didn't make a lot of sense to them.

Steers: Other than Marty and I, nobody really knew what a real estate mutual fund was—or cared about it. What we found was that National Securities had 10 or 11 wholesalers, and our first REIT fund was a retail product. They loved having a product that nobody else had because it got them in doors they couldn't get into. However, once they were in, it was labor intensive. No one had ever talked about it, especially in real estate circles. You were laughed out of the room.

There also was resistance by endowments and pension funds. They had created large staffs to do direct property investment, so our concept threatened job security. If securitization replaces direct property because the returns are higher, then you don't need to have a staff.

What events in your career shaped your investing philosophy of today?

Cohen: I went to business school and was lucky enough to get a job at Citibank as a securities analyst. I didn't know anything about real estate. But as I learned about the industry, I saw it as a very interesting asset class because of the cash flow characteristics. I found it strange that people shied away from REITs because they thought REITs were too complicated and hard to understand. I thought just the opposite. They were easy to understand. It's a building and it's got a balance sheet that's got debt and equity and there's cash flow.

Steers: At Citibank, I started out as a securities analyst, and I was following GE and Westinghouse and was more growth-stock oriented. At National, I was managing the growth money there, and when the new company took over, they made me chief investment officer. I had seen the work that Marty had been doing and started the bank's first commingled fund to invest in real estate stocks. My experience was more macro.

How do you find the right talent, especially those who culturally fit in your organization?

Cohen: The single thing we have spent the most time on is interviewing potential employees. You have to meet people and you have to spend time with them. It's a people business. You just can't pick them off the shelf; you have got to get to know them.

No doubt it's unusual to see a co-CEO arrangement work so well as yours. What is the secret to your success?

Cohen: We both gravitate toward getting the job done. Two heads are better than one. We have never had a period where there is a problem we can't solve. One of us might not be able to solve it, but the two of us together have been able to do that.

Steers: I think both of us have the same high standards and values. We respect each other. Everything we do here is built on disagreeing and on give and take. We need the right chemistry. We've all got egos, so check them at the door when you walk into the investment committee meeting. You respect each other enough to agree to an outcome that everyone can live with.