By Christopher M. Wright

NAME: Martin Cohen TITLE: Co-Chairman and Co-Chief Executive Officer COMPANY: Cohen & Steers, Inc. BORN: 1948 REAL ESTATE INDUSTRY EXPERIENCE: Cohen received his Bachelor of Science degree from the City College of New York and his M.B.A. from New York University. After a stint as a vice president at Citibank, he was senior vice president of National Securities and Research Corporation, where he co-founded the nation’s first real estate securities mutual fund with Robert Steers in 1985. The two founded Cohen & Steers in 1986. Cohen has served on NAREIT’s Board of Governors and received NAREIT’s Industry Achievement award in 2001.

Since its inception in 1986, Cohen & Steers, Inc. (NYSE: CNS) has recognized the importance of dividends. The firm maintains a strategic focus on some of the highest-yielding equity sectors, specializing in global real estate securities, preferred securities, utilities, value equities and other high-dividend paying common stocks. "Our product is performance," co-Chairman and co-CEO Martin Cohen says. Along with partner Robert Steers, Cohen sits atop the now-public Cohen & Steers, which has more than $21 billion in assets under management. Portfolio recently caught up with Cohen to find out what's behind his company's growth, where he sees the REIT market headed and what he's learned about international real estate investing from running a global money management firm.

Portfolio: Congratulations on Cohen & Steers' first full year and tremendous growth as a public company. Why did you go public?
Cohen: It was a way for us to make our platform a permanent one. That benefits our employees who are equity owners in the firm. It allows us to attract and retain key people. It also provides transparency and clarity for our clients and investors in our funds. Our investors tend to be very long-term oriented and want to see that we have succession planning in place.

Portfolio: How has the business changed since the IPO?
Cohen: We're executing on our many growth plans, an important one of which is to expand internationally. We've acquired 50 percent of Houlihan Rovers, an established international real estate securities manager in Brussels. We've also opened an office to conduct research, trading, and portfolio management in Hong Kong to take advantage of Asian markets.

Portfolio: You are positioning your company as a leading U.S. manager of high-income equity portfolios which includes preferred stocks, utilities and value equities in addition to real estate. Aside from yield, how do you distinguish the best dividend-paying opportunities from the rest?
Cohen: Yield isn't even one of the top three considerations. First, we want to like the business and the business model. Second, we want to see good growth potential. Third, we want to see management that is inclined toward paying dividends and increasing them.

Portfolio: That puts you with James K. Glassman, previously interviewed for this column, who also likes dividend growth because the yield eventually becomes quite high relative to the original investment.
Cohen: Yes, he and I get along very well. We're very much on the same page on that.

Portfolio: Does your view of a REIT change if it has to borrow money or sell assets to pay dividends?
Cohen: Companies borrow money and sell properties all the time. The true measure of future dividend-paying capabilities is what percentage of earnings a company is paying out as dividends. If it is paying out 110 percent of earnings, then that's not a good thing.

Portfolio: Your recent investment strategy has been to diversify beyond just REITs. Why did you take this step and how important will REITs be for your company in the future?
Cohen: REITs will remain the major focus of our company. That is the strength of our franchise. But we saw opportunities that are very closely related to REITs. For instance, international real estate fits perfectly with our domestic REIT business. The utility industry has some characteristics that are very similar to the real estate industry—a high capital component, cash-flow generation and high dividends. It was very logical for us to have an interest in that. We got interested in preferreds because we realized that we owned close to $1 billion in REIT preferreds.

Portfolio: Cohen & Steers has taken some criticism for getting into large-cap value. With so many investment managers in that area, the argument goes that there is no value you can add. How do you respond?
Cohen: When we decided to pursue the large-cap value business, we embarked on a search that ended with us hiring Rick Helm from WM Advisors, one of the few managers who had a very long track record and a five-star Morningstar rating for his funds. We did this in other areas, too, so what we bring to the party is the highest quality people with the most experience and the best track records. I think that does differentiate us from many others out there.

Portfolio: Your company offers both open-end and closed-end mutual funds. What are the pluses and minuses of each with respect to real estate investing?
Cohen: Open-end funds are clearly an easy-entry, easy-exit method of investing. Closed-end funds offer some interesting features that are positive. Because it's closed, the management is not influenced by inflows and outflows, which can be very volatile and have important consequences, like capital gains when there are redemptions or buying assets at high prices because you get subscriptions.

In addition, you have the ability to leverage in a closed-end fund. Leverage increases risk but it can enhance returns, particularly in the REIT area where leverage has been very positive for closed-end funds.

Also, many investors are investing for yield and, because we can borrow or employ leverage at a very low rate—we get a triple-A rating on preferred stock that we issue—we get a very positive spread between what we pay for money and what we can earn on it. That enhances income and total return.

Portfolio: What are you hearing from investors regarding REITs?
Cohen: A lot of people are confusing the residential single-family home market with commercial real estate. I always have to remind them that there really is not a strong relationship between the two.

The second thing people are concerned about are REIT share prices because REITs have gone up five or six years in a row now and the question is whether they can continue to outperform.

The third question I get is whether commercial real estate prices are inflated. Cap rates are lower than they've been in some time and it seems like property values have risen pretty dramatically. All of which is true, but one has to make a judgment on a case-by-case basis as to whether the valuation of a security is higher than it should be.

Portfolio: What do you tell investors about the chances for REITs to continue outperforming?
Cohen: I can't tell you what the stock market is going to do, but I can tell you that the long-term rational return expectation for REITs is 9 percent to 12 percent a year, including dividends. We've had years substantially above that and a number of years below it, but that's a rational expectation for the asset class for long-term holding periods of three, five, 10 or 20 years.

Portfolio: What messages or characteristics are bringing new, non-dedicated capital into real estate securities?
Cohen: REITs are a good investment for people who are looking for income as the primary source of return, for diversification—it's an asset class that's lowly correlated with other asset classes—or for good total return potential.

Portfolio: Are there any tax rules or other barriers you see restricting investment in real estate securities?
Cohen: The withholding tax on dividends—something we don't have here in the U.S.—is an impediment in some countries. We're hopeful that real estate securities will be tax-free in the future.

Portfolio: Cohen & Steers launched two international real estate funds in 2005, the open-end International Realty Fund and the closed-end Worldwide Realty Income Fund. Why would investors choose one over the other?
Cohen: The Worldwide Fund is a well-balanced portfolio, with an allocation to the U.S. as well, that offers global exposure. If someone wants to invest only outside the U.S., then the International Fund is a good vehicle for that purpose.

Portfolio: What do these funds offer that your competitors' funds do not?
Cohen: The Worldwide Fund offers a dividend yield that's well above most other funds. On the open-end International Fund, we have a management team of seasoned professionals and an ability to coordinate a global effort that's as good as or better than anyone else's out there. Our results speak for themselves.

Portfolio: What other observations have you made about international real estate that would benefit investors?
Cohen: We are now in a world where there's pretty much a free flow of capital from continent to continent and country to country. This gives investors the ability to invest in companies outside their own country and companies the ability to access capital worldwide. The worldwide flow of capital benefits both investors and the companies they invest in.

The best way for investors to gain exposure to a particular country or region is through the local property market. Investing in Sony will not give you much exposure to Japan, or Nestlé to Switzerland or DaimlerChrysler to Germany. But if you purchase shares of companies that have property investments directly in those countries, you would definitely be participating in those economies.

Portfolio: Real estate as the best way to place a country bet, interesting.
Cohen: Also, many investors want international diversification which real estate provides because economies and property markets run in different cycles in different countries.

Lastly, a lot of investors want to diversify out of the U.S. dollar, for whatever reason. Having access to non-dollar-denominated securities in real estate is appealing to many people.

The worldwide appetite for REITs is really quite impressive. It's fascinating. It has happened so quickly. What's happening in the international arena looks like a replay of the U.S. market of the 1990s when real estate securitization took hold and grew substantially. We're watching that happen now at a much faster rate internationally.