Cohen & Steers, which was founded in 1986 to manage publicly traded real estate investment trusts, has invested in its first private real estate company.
Although the deal is a small one — a $100 million investment in Lineage Logistics, a temperature-controlled storage company — it’s emblematic of the shifting fortunes and uncertainty that characterize the post-Covid real estate world.
In an interview, Thomas Bohjalian, head of U.S. real estate and senior portfolio manager at Cohen & Steers, said he views private investments as another way for the active manager to add alpha, or excess returns above a benchmark, to its funds and differentiate the firm’s offerings from passive REIT products.
Bohjalian added that in the current stressed economic environment, more opportunities may arise for the firm as private companies look to raise capital and form partnerships for investments. Cohen & Steers made the Lineage investment on behalf of several U.S. mutual funds, but may do similar transactions for institutions in the future.
With the Lineage deal, Bohjalian said the firm was able to get “as much or more” transparency into the underlying business as it would have with a public company.
“We were surprised at how robust the data room was and the level of transparency into financial and future projections,” he said.
Bohjalian thinks the public real estate markets are generally cheap compared with private markets based on what the firm knows about private market valuations.
“There aren’t a tremendous amount of transactions happening today because of Covid, and because of the uncertainty with respect to real estate fundamentals, such as retail and office,” he said
But private real estate companies in some sectors are undervalued.
“When we look at public market peers, we think that Lineage, for example, is cheap,” he said. “That’s the arbitrage that we’re trying to capture over some time horizon.”
Institutional investors have been eyeing a different arbitrage opportunity in real estate: the gap between the valuation of private real estate funds and REITs themselves.
Cohen & Steers looked at about ten different private transactions in the past year.
“I would suspect our so-called batting average will be relatively low,” Bohjalian said. “But I also think that now that we’ve done this, we’ll have more reverse inquiries, because people will understand that we’re doing it as an organization.” In a reverse inquiry, companies call asset managers directly about potential investments.
Although private transactions won’t be a large part of existing funds or strategies, the firm is considering developing a fund that would focus on public and private real estate investments. For now, Cohen & Steers has its limitations when it comes to private deals, however.
“We have a shorter time horizon because we want to have liquidity. So we’re probably not going to be the first round of financing for a business that will take seven years to mature,” Bohjalian said. “If we had a separate vehicle, maybe. But today, we’re thinking about investing where an IPO or some kind of liquidity event will happen roughly in about 18 months.”