Navigating Volatility with Cohen & Steers REIT & Preferred Income Fund (RNP): A Hybrid Play for Income Investors

The Cohen & Steers REIT & Preferred Income Fund (NYSE: RNP) has emerged as a compelling hybrid investment vehicle for income seekers, blending exposure to real estate investment trusts (REITs) and preferred securities while leveraging a disciplined strategy to amplify returns. With a current distribution rate of 7.75% and a five-year average annual total return of 8.66%, RNP offers a rare combination of income generation and capital appreciation potential—though its success hinges on navigating the tightrope of interest rate risk and market volatility. Here's why income investors should take notice.

A Hybrid Structure for Diversified Income

RNP's core strategy lies in its balanced exposure to two income-generating asset classes: REITs, which provide exposure to real estate valuations and rental income, and preferred securities, which offer fixed-income-like returns with equity-like upside. This dual focus allows the fund to mitigate sector-specific risks. For instance, while rising interest rates can pressure REIT valuations, preferred securities—often tied to corporate credit quality—may stabilize income streams.

The fund's portfolio as of July 2024 revealed a 47.98% allocation to real estate and 48.03% to cyclical sectors, including energy and industrials, while preferred securities accounted for significant fixed-income exposure. This structure not only diversifies risk but also positions RNP to capitalize on sector rotations. For example, during periods of economic expansion, cyclical sectors may outperform, while REITs could benefit from rising occupancy and rent growth.

The Role of Leverage: A Double-Edged Sword

RNP employs 30.55% effective leverage, a moderate level that amplifies returns but also increases volatility. Leverage is a critical tool in low-yield environments, allowing the fund to enhance income streams and NAV growth. However, it comes with risks: rising interest rates or a sharp market downturn could magnify losses.

The fund's 30.55% leverage ratio, as of July 2024, aligns with its managed distribution plan, which allows it to distribute capital gains alongside net investment income. This flexibility has enabled RNP to maintain a steady distribution rate, even during periods when income alone might fall short. For instance, the June 2025 distribution of $0.136 per share included 82.35% from net investment income and 17.65% from capital gains, with year-to-date returns of 3.20% through May 2025.

Resilience Amid Shifting Rates

Interest rate sensitivity is a key consideration for income funds. REITs typically underperform in rising rate environments due to their reliance on debt financing, while preferred securities—often with fixed coupons—can act as a hedge. RNP's diversified approach has historically softened these swings.

The fund's five-year track record of an 8.66% annualized return suggests its hybrid strategy works over time. Even in 2023, when the Federal Reserve aggressively hiked rates, RNP's NAV held up better than pure REIT-focused peers, thanks to its preferred securities buffer.

However, historical data reveals a cautionary note: a backtest of buying RNP on Fed rate hike announcements and holding for 60 days from 2020 to 2025 showed negligible returns. The strategy returned 0.00%, significantly underperforming the benchmark's 108.64% performance during the same period. With a Sharpe ratio of 0.00%, this underscores the importance of broader market context—timing purchases strictly around rate decisions may not align with the fund's structural resilience.

Premium/Discount Dynamics: A Balancing Act

As of July 2024, RNP traded at a 3.36% premium to its NAV, with a 3-month Z-Score of 2.41—a statistical measure indicating its premium is above historical averages. This suggests investor demand remains strong, possibly due to the fund's consistent income profile. However, its 52-week average premium/discount of -2.09% reveals volatility, with shares dipping as low as a 9.76% discount earlier in the period.

Investors should monitor this metric closely. A sustained premium could signal overvaluation, while a sharp discount might present a buying opportunity. RNP's managed distribution plan, which provides steady income even in volatile markets, likely supports its premium in the current environment. Still, the fund's 4.02% total expense ratio—including leverage-related interest costs—means returns must consistently outpace fees to justify the premium.

Risks and Considerations

• Leverage Risks: The 30.55% leverage amplifies both gains and losses. A sudden spike in interest rates could increase borrowing costs, squeezing NAV.
• Distribution Sustainability: While the 7.75% distribution rate is enticing, 10.65% of year-to-date 2025 distributions were classified as return of capital, which reduces shareholders' tax basis. This underscores the need for RNP to generate sufficient income or capital gains to sustain payouts.
• Sector Concentration: Over 96% of the portfolio is allocated to U.S. and international real estate and preferred securities, leaving it exposed to sector-specific downturns.

The Investment Thesis

For income-focused investors willing to tolerate moderate volatility, RNP offers a compelling mix of yield and diversification. Its hybrid structure and disciplined leverage provide a buffer against interest rate fluctuations, while its 5-year performance demonstrates resilience. The current 3.36% premium suggests optimism, but buyers should weigh whether the fund's income profile justifies it.

When to Buy: Consider RNP when its discount widens beyond its historical average, especially if the Fed pauses rate hikes.
When to Avoid: Steer clear if rising rates destabilize REIT valuations or if the fund's return of capital grows disproportionately.

Final Take

Cohen & Steers REIT & Preferred Income Fund is no conservative play—it demands investors understand the risks of leverage and sector concentration. Yet for those seeking high income and exposure to two dynamic asset classes, RNP remains a standout option. Its 7.75% yield and proven track record make it a top contender for portfolios needing steady cash flow, provided investors stay attuned to its premium/discount swings and the broader economic backdrop.

In a market hungry for yield, RNP's hybrid strategy could be the right formula—but only for those ready to accept its volatility as part of the reward.