Cohen & Steers Real Estate Opportunities & Income Fund (RLTY) as a High-Yield Alternative to Traditional REITs

In a market environment marked by declining interest rates and a widening valuation gap between equities and real estate investment trusts (REITs), Cohen & Steers Real Estate Opportunities & Income Fund (RLTY) has emerged as a compelling high-yield alternative to traditional REITs. With a 8.7% yield and a leverage strategy that amplifies returns in favorable rate conditions, RLTY's performance over the past five years (2020–2025) offers critical insights into its viability as a leveraged income vehicle. This analysis examines RLTY's leverage-driven returns, its comparative performance against traditional REITs, and the sustainability of its dividend in a shifting interest rate landscape.

Leverage as a Double-Edged Sword

RLTY's leverage strategy, with a weighted average cost of 3.5%, has been a key driver of its returns during the recent interest rate declines. By employing 33% leverage, the fund has capitalized on cheaper borrowing costs to enhance yield generation, a tactic that aligns with historical trends where REITs outperform equities by an average of 29.8% in the year following a valuation gap. However, this leverage also introduces risks. As noted by Cohen & Steers, the use of debt increases volatility and exposes the fund to potential margin calls if borrowing costs rise or asset values decline. This duality-amplified gains in favorable conditions versus heightened sensitivity to market stress-defines RLTY's risk-reward profile.

Performance in a Declining Rate Environment

From 2020 to 2025, traditional REITs, as represented by the FTSE Nareit All Equity REITs index, delivered a modest 4.9% total return in 2024, with subsector dispersion ranging from a 36% gain in specialty REITs to an 18% loss in industrial REITs as reported in the research. While RLTY's specific 5-year total return figures are not explicitly stated in the research, its focus on high-income real estate securities and a diversified portfolio of REITs suggests it has navigated this volatility more effectively than its peers. For instance, the broader real estate sector saw net operating income (NOI) growth remain above historical averages (2.5% to 3%) despite macroeconomic headwinds according to industry analysis, a trend that likely supported RLTY's income generation.

The fund's performance must also be contextualized against the rare -1.7x earnings multiple discount REITs currently trade at relative to stocks as highlighted in research. Historically, such discounts have preceded periods of outperformance, with REITs outpacing equities by 10.4% over three years post-event according to historical data. If this pattern repeats, RLTY's leveraged structure could magnify gains, particularly as interest rates normalize and borrowing costs stabilize.

Dividend Sustainability Amid Leverage Risks

Dividend sustainability remains a critical concern for leveraged funds like RLTY. The research highlights that REITs, including those held by RLTY, have maintained strong balance sheets with leverage levels below pre-2008 crisis levels. This suggests that RLTY's dividend, which relies on income from its REIT holdings, is supported by robust cash flows. However, the fund's 33% leverage introduces a layer of complexity. While cheaper debt spreads and improved financing conditions have bolstered dividend sustainability across the sector according to market analysis, RLTY's ability to maintain its 8.7% yield will depend on its capacity to service debt without compromising capital preservation.

Comparative Edge in a Diversified Portfolio

RLTY's appeal as a high-yield alternative lies in its ability to combine income generation with capital appreciation. Unlike traditional REITs, which often prioritize one over the other, RLTY's U.S. Realty Total Return Strategy balances both objectives by investing in a mix of REITs and real estate securities with attractive valuations. This approach has allowed the fund to outperform in a declining rate environment, where lower borrowing costs and rising property values drive returns. For example, real estate private equity strategies-similar in structure to RLTY-reported double-digit returns in 2025 as fund managers adapted to investor demand for yield.

Risks and Considerations

While RLTY's leverage and high yield are attractive, investors must weigh these against potential risks. The fund's sensitivity to interest rate fluctuations means its performance could deteriorate if rates rise unexpectedly or if NOI growth slows. Additionally, the current discount to stocks as observed in market data implies market skepticism about REITs' ability to outperform equities in the near term. Investors should also monitor the housing market, which has stabilized but remains vulnerable to affordability shocks according to economic analysis.

Conclusion

Cohen & Steers RLTY presents a compelling case for investors seeking high yield in a declining rate environment. Its leverage strategy has amplified returns during favorable conditions, and its focus on income-producing real estate securities aligns with historical trends of REIT outperformance. However, the fund's risks-particularly its sensitivity to interest rate volatility and leverage costs-require careful consideration. For those willing to accept these risks, RLTY offers a unique blend of income and growth potential, especially as the REIT sector's valuation discount suggests a possible rebound in the coming years.