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COHEN & STEERS SPECIAL EQUITY FUND, INC.
October 13, 1997
To Our Shareholders:
We are pleased to submit to you the report for Cohen & Steers Special
Equity Fund, Inc. for the quarter ended September 30, 1997. The net asset value
per share at that date was $33.90. Because regular dividends are paid
semi-annually, no dividend was declared for the quarter. The next regular
dividend is scheduled for review by the Board of Directors in December.
INVESTMENT REVIEW
We are pleased to report that during the quarter ended September 30,
1997 -- its first full quarter of operations -- Cohen & Steers Special Equity
Fund had a total return of 24.8%, outperforming by wide margins both the NAREIT
Equity REIT Index (11.8%) and the Standard & Poor's 500 Index (7.5%). Since
commencement of operations on May 8, 1997, the Fund's total return is 36.3%.
We have listed the Fund's holdings in the accompanying Schedule of
Investments by percentage of net assets, rather than by industry or property
sector. Our objective is to present the Fund and its investment strategy in the
way we think about it day-to-day. That is, to invest in a limited number of real
estate companies (preferably no more than twenty) that represent our research
department's best capital appreciation ideas. Accordingly, we do not explicitly
construct the portfolio by establishing target weightings in a given sector.
While we will achieve a prudent level of diversification across industry
segments, we will strive for maximum exposure to the best opportunities. A
by-product of this strategy likely will be a higher turnover rate than that of a
'core' real estate securities investment strategy, which seeks a balance between
current income and capital appreciation.
At quarter end the portfolio was fully invested in twenty-two companies
which, we believe, have compelling growth characteristics: the projected
earnings growth rate for the portfolio is 23%, while the average dividend yield
is 1.7%. By contrast, the average equity REIT has 8-10% earnings growth and a
5.5% dividend yield. The dividend yield of the portfolio is low for two reasons.
First, the Fund is focused on some of the highest growth companies in the real
estate universe. Second, approximately 60% of the Fund's holdings are
C-corporations, which pay little or no dividends and retain their earnings for
reinvestment. The remaining 40% are REITs, or 'paired-share' REITs which enjoy
the tax efficiency of the REIT structure and the operating flexibility of the
C-corporation structure.
INVESTMENT OUTLOOK
The real estate investment environment for the Fund's strategy has been
and, in our opinion, should continue to be favorable. In this environment, we
believe that the leading companies should achieve a high rate of earnings growth
for the foreseeable future. The visibility of earnings growth, combined with a
well-managed monetary policy by the Federal Reserve and declining interest
rates, has enabled investors to pay higher multiples for current earnings. The
combination of improving earnings and multiples has created a favorable
environment for capital appreciation.
Several well established macro-trends provide the underpinnings for the
Fund's strategy. First, real estate fundamentals are strong. The catalysts: a
strong national economy, robust corporate expansion, and a balanced picture
between new construction and demand. In response to these fundamentals, capital
is flowing with increasing velocity, resulting in rising
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
property values and advantageous financing and sale opportunities. Just as
important, the trend toward securitization, or the shift in ownership from
private to public hands, is accelerating. The Fund is well-positioned to benefit
from the following trends:
FRANCHISE VALUES FOR STRATEGICALLY POSITIONED DEVELOPERS ARE INCREASING.
Most real estate markets are now in equilibrium, where rent levels justify
construction. Significant value can be created through the development
process when new properties can be built at yields that exceed those paid
by buyers of stabilized property. As development opportunities increase,
land values increase rapidly. The Fund owns four companies which have
unique development capabilities and low cost land positions. Forest City
Enterprises has a strong franchise in complicated urban developments.
Catellus Development is a leading industrial property developer and the
largest private landowner in California. Similarly, St. Joe Corporation is
the largest private landowner in Florida, and has recently hired a new
management team that is implementing a new strategic plan. While not a
developer, Alexander's controls one of the most attractive development
sites in Manhattan, in addition to other retail projects and redevelopment
sites in the New York metropolitan area.
SECURITIZATION IS ACCELERATING AS THE PUBLIC MARKET REPLACES DIRECT
OWNERSHIP AS THE OPTIMAL VEHICLE FOR REAL ESTATE INVESTMENT. Security
Capital Group, a new holding for the Fund, is an owner and 'venture
capitalist' in the creation of focused real estate operating companies.
Security Capital is also a real estate securities investment manager, a
related growth business. It is likely that the international real estate
markets will undergo the same transformation to securitized form as in the
U.S., and Security Capital Group is well-positioned to take a leadership
role in that arena.
REAL ESTATE OWNERSHIP IS CONSOLIDATING INTO THE HANDS OF LOW COST,
DOMINANT OPERATING COMPANIES. This significant trend is partially driven
by the aging of property owners who amassed portfolios in the post-World
War II growth phase of the U.S. These owners need to plan for succession
in their enterprises, as well as the efficient transfer of ownership for
their estates. At the same time, public real estate companies are
redefining the meaning of dominance, in an industry that heretofore has
not been run as 'professionally' as Corporate America is today. An example
of one form of consolidation: Starwood Lodging announced an agreement to
acquire one of the premier lodging companies -- Westin Hotels &
Resorts -- from a private investment fund. The merged Starwood/Westin will
hold a dominant market position in the attractive upscale niche of the
lodging industry, while having sustainable growth potential globally.
SELECTED PROPERTY MARKETS ARE STILL IN THE RECOVERY PHASE. There are
exceptions to the generalization that real estate markets are at
equilibrium. For example, rents and property values in the New York City
office market are accelerating, in response to strong demand and virtually
no new construction. This recovery should be sustained due to the
significant barriers to supply in the form of limited land availability,
rents below levels that justify development, and lengthy zoning and
approvals processes. SL Green Realty, a new holding, is the leading owner-
operator in the Class B segment of the office market, a niche with
significant investment opportunity in a 380 million square foot total
market.
THE REAL ESTATE ENVIRONMENT IS ATTRACTIVE FOR SERVICE COMPANIES. Capital
flows, transaction velocity, and rising cash flows to property owners
present business opportunities for real estate service companies. In
addition, the service
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
sector is consolidating for many of the same reasons that property owners
are consolidating. Roughly one-fifth of the Fund's holdings are service
companies whose revenues are generated from the management, leasing,
franchising, sale, or servicing of real estate. HFS Inc., the largest Fund
holding in the service category, is the leading franchiser or provider of
lodging, real estate brokerage, corporate relocation, and mortgage
underwriting services.
THE PUBLIC REAL ESTATE COMPANY IS EMERGING AS A POWERFUL VEHICLE FOR
ENTREPRENEURIAL MANAGEMENT TEAMS TO CREATE VALUE. The Fund holds three
companies which can best be described as opportunistic real estate
companies. Vornado Realty Trust, Crescent Operating, and Wellsford Real
Properties are pursuing the highest return potential opportunities
regardless of property orientation. This strategy requires a high level of
management expertise in many areas including sourcing, financing,
investing, and structuring.
The Fund is performing up to our high expectations. The macro-trends
outlined in this report are well-defined, sustainable and conducive to new
investment opportunities. At the same time our research analysts are constantly
expanding their universe of companies. We are confident that the Fund can
continue to meet our return expectations.
Sincerely,
/s/ MARTIN COHEN /s/ ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
/s/ JOSEPH M. HARVEY
Director of Research
Cohen & Steers
Capital Management, Inc.
Please be advised that pursuant to the Prospectus, the Fund will cease
offering its shares to new investors for a period of at least six months when
total net assets reach $150 million.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF % OF
SHARES VALUE NET ASSETS
---------- ------------ ---------------
<S> <C> <C> <C>
EQUITIES
*Security Capital Group -- Class B........................ 214,300 $ 7,366,562 7.21%
Starwood Lodging Trust................................... 126,700 7,277,331 7.12
*HFS...................................................... 94,500 7,034,344 6.88
Forest City Enterprises -- Class A....................... 121,500 6,986,250 6.84
*Catellus Development Corp................................ 290,400 6,025,800 5.90
Vornado Realty Trust..................................... 64,000 5,436,000 5.32
*Crescent Operating....................................... 264,000 5,313,000 5.20
Lennar Corp.............................................. 110,900 4,713,250 4.61
*American Retirement Corp................................. 231,200 4,681,800 4.58
CCA Prison Realty Trust.................................. 118,700 4,480,925 4.38
Apartment Investment & Management Co..................... 117,500 4,244,687 4.15
Public Storage........................................... 142,600 4,224,525 4.13
*Wellsford Real Properties................................ 220,900 3,534,400 3.46
SL Green Realty Corp..................................... 131,700 3,407,738 3.33
Alexander Haagen Properties.............................. 201,600 3,313,800 3.24
*Hospitality Worldwide Services........................... 221,300 2,904,563 2.84
*Cambridge Shopping Centers............................... 247,600 2,730,619 2.67
*Hollywood Park........................................... 134,000 2,537,625 2.48
St. Joe Corp............................................. 24,700 2,445,300 2.39
Asset Investors Corp..................................... 461,100 1,988,494 1.95
*Alexander's.............................................. 23,300 1,916,425 1.88
*BridgeStreet Accommodations.............................. 93,600 1,076,400 1.05
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TOTAL EQUITIES
(Identified cost -- $77,621,925)....... 93,639,838 91.61
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<CAPTION>
PRINCIPAL
AMOUNT
---------
<S> <C> <C> <C>
COMMERICIAL PAPER
Michigan Consolidated Gas Co., 6.00%, 10/1/97............ $3,677,000 3,677,000 3.59
Leggett & Platt, Inc., 6.00%, 10/1/97.................... 3,000,000 3,000,000 2.94
Pacific Mutual, 6.00%, 10/1/97........................... 3,000,000 3,000,000 2.94
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TOTAL COMMERCIAL PAPER
(Identified cost -- $9,677,000)........ 9,677,000 9.47
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TOTAL INVESTMENTS (Identified cost -- $87,298,925)............. 103,316,838 101.08
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LIABILITIES IN EXCESS OF OTHER ASSETS.......................... (1,102,582) (1.08)
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NET ASSETS (Equivalent to $33.90 per share based on
3,014,915 shares of capital stock outstanding).............. $102,214,256 100.00%
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</TABLE>
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*Non-income producing security
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS*
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
-------------------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 5/8/97**.................................... $ 100,000 $25.00
Net investment income...................................... $ 466,494 $ 0.21
Net realized and unrealized gain on investments............ 19,299,419 8.82
Distributions from net investment income................... (212,395) (0.13)
------
Capital stock transactions:
Sold................................................. 85,531,980
Distributions reinvested............................. 197,331
Redeemed............................................. (3,168,573)
-----------
Net increase in net asset value.................................. 102,114,256 8.90
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End of period: 9/30/97........................................... $102,214,256 $33.90
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</TABLE>
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* Financial information included in this report has been taken from the records
of the Fund without examination by independent accountants.
** Commencement of operations.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
OFFICERS AND DIRECTORS
Robert H. Steers
Director and Chairman
Martin Cohen
Director and President
Gregory C. Clark
Director
George Grossman
Director
Jeffrey H. Lynford
Director
Willard H. Smith, Jr.
Director
Elizabeth O. Reagan
Vice President
Adam Derechin
Vice President
KEY INFORMATION
INVESTMENT ADVISER
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, NY 10017
(212) 832-3232
FUND ADMINISTRATOR AND TRANSFER AGENT
Chase Global Funds Services Co.
73 Tremont Street
Boston, MA 02108
(800) 437-9912
CUSTODIAN
The Chase Manhattan Bank, N.A.
3 Chase MetroTech Center
Brooklyn, NY 11245
LEGAL COUNSEL
Dechert Price & Rhoads
30 Rockefeller Plaza
New York, NY 10112
NASDAQ Symbol: CSSPX
Net asset value (NAV) can be found in the daily mutual fund listings in the
financial section of most major newspapers under the Fund's abbreviation
'C&SSpEq'.
This report is authorized for delivery to other than shareholders of Cohen &
Steers Special Equity Fund, Inc. only when accompanied or preceded by the
delivery of a currently effective prospectus setting forth details of the Fund.
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