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COHEN & STEERS
SPECIAL EQUITY FUND
757 THIRD AVENUE
NEW YORK, NY 10017 [LOGO]
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QUARTERLY REPORT
MARCH 31, 1998
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
April 21, 1998
To Our Shareholders:
We are pleased to submit to you our report for Cohen & Steers Special
Equity Fund, Inc. for the quarter ended March 31, 1998. The net asset value per
share on that date was $31.28. Regular dividends are paid semi-annually;
therefore, no dividend was declared for the quarter and the Board of Directors
will review the next dividend in June.
INVESTMENT REVIEW
During the quarter ended March 31, 1998, Cohen & Steers Special Equity Fund
had a total return of -3.0%. By comparison, the NAREIT Equity REIT Index total
return was -0.5% and the Standard & Poor's 500 Index total return was 14.0%.
Since its inception on May 8, 1997 the Fund's total return was 37.4%.
For the quarter, REITs recorded their worst performance relative to stocks
in the twenty-six year history of the NAREIT Equity REIT Index, under-performing
by nearly fifteen percentage points. Although one would expect that the
near-perfect set of economic conditions propelling the stock market -- strong
GDP growth, low unemployment, high consumer confidence, low inflation and low
interest rates -- would have had a similar effect on REITs, total returns were
negative in the first quarter. We believe REITs under-performed for three
reasons: a) concerns about proposed REIT legislation; b) temporary oversupply of
REIT shares; and c) recognition that the aging of the real estate cycle
eventually will lead to slowing REIT earnings growth.
In February the President proposed legislation that would limit certain
REIT activities. The threat of stricter regulation, which was well publicized in
the financial press, caused some investors to sell shares of REITs. Of the three
proposals pertaining to public REITs, the proposal to restrict the activities of
the five 'paired share' REITs has been the focal point of Congress and will
likely be enacted, in our opinion. These unique companies, where a REIT and
separate C-corporation are paired for trading, will not be permitted to make new
acquisitions of certain property types that cannot otherwise be operated by
REITs (such as hotels). We believe the cloud of uncertainty regarding REIT
legislation should dissipate throughout 1998 as investors recognize that
Congress supports the principal tenets of the REIT tax code and that the current
legislative efforts should not impact earnings or growth prospects.
Three of the Fund's twenty-one holdings will be affected by the paired
share legislation: Starwood Hotels and Resorts, Meditrust and Hollywood Park.
Because of its recent acquisitions of Westin and ITT Sheraton, Starwood has a
dominant global lodging franchise and is not reliant upon new acquisitions for
growth. Therefore, we believe Starwood's intrinsic value has not been impacted
by the legislation, and we have increased Starwood to the Fund's largest
position. Meditrust, on the other hand, is building its capabilities in new
sectors such as lodging and golf, and will need to alter its organizational
structure to acquire properties that are not qualified for REIT operation. While
not a paired share REIT, Hollwood Park was in the process of re-establishing its
paired share status and, therefore, will not become the dynamic growth platform
we had expected.
There will be periods of oversupply in REIT shares as public companies,
which currently have a market capitalization approaching $200 billion, finance
the transfer of property ownership within a $3 trillion real estate
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
industry. The first quarter of 1998 was one of those periods, a result of stock
offerings exceeding $5 billion. While the Fund holds many C-corporations, which
have lesser external financing requirements than REITs, the share prices of both
types of companies are valued relative to each other and are subject to the
supply-demand balance in REIT shares.
We believe that the most important factor influencing the REIT market is
the state of the real estate cycle. While real estate fundamentals are very
strong, these trends are fully recognized by industry participants. Accordingly,
property prices are rising and investors are concerned that lower yields will
lead to slower growth through acquisitions. In response to rising prices,
developers are planning new projects to capitalize on tenants' expanding space
needs. Paradoxically, the fact that fundamentals in nearly every property type
justify profitable development is causing anxiety in the public markets.
Although development is among the most profitable real estate activities, it
does not come without the negative side effects of higher risk and, if
over-building occurs, reducing returns to property owners if market rent growth
slows. The market appears to be adjusting share valuations to reflect prospects
for slower growth and higher risk that will accompany the aging of the real
estate cycle.
OUTLOOK
While concerns about acquisition prices are valid, we believe that the
public market should at least double its share of real estate ownership over
time, and that the financing requirements attendant to that transfer of assets
will lead to many investment opportunities. For example, the downtown Chicago
office market is strengthening quickly, yet is still early in its cycle and is
not dominated by any public company. Prime Group Realty is developing a strong
track record of acquisitions in Chicago, having acquired $320 million in
properties since its initial public offering in November 1997. During the
quarter the Fund participated in a direct placement of unregistered common
shares of Prime Group at what we believe to be an attractive price.
As real estate prices rise, owners will be increasingly willing to sell.
Companies that have strategies to service tenants, build market share, and
reduce operating and capital costs will be able to deploy substantial capital in
property acquisitions at current prices and meet investor return expectations.
Importantly, the recent multiple contraction in the public markets should lead
to stabilization or improvement in property yields, considering that a good
portion of the private buyers, especially the opportunity funds, view the public
market as a desired exit strategy. Of the Fund's holdings that are active
acquirers, most are 'opportunistic' and pursue multiple property type or company
acquisitions, whereby capital is allocated to the best opportunity.
Based on the proposed REIT legislation, the message from Congress is that
REITs should adhere to their intended purpose of income property ownership,
rather than expand into non-rental property activities. Corporate spin-offs by
REITs that segregate non-qualified businesses into separate public companies are
consistent with the legislative philosophy on REITs. We believe these spin-offs
will become more widely used and represent an attractive area of opportunity for
the Fund.
At quarter end the Fund's cash was higher than normal in anticipation of
funding a direct placement of common shares with Omega Worldwide, a newly formed
corporate spin-off from Omega Healthcare Investors, a
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nursing home REIT. Worldwide will pursue healthcare real estate investments
internationally, as well as participate in U.S. investments with Omega
Healthcare Investors where a corporate structure is required. Worldwide owns
interests in $350 million of nursing homes in the United Kingdom -- a fragmented
industry with attractive demographics that is undergoing structural change to
provide better living and medical services.
We believe REIT valuations fully reflect the issues that impacted first
quarter performance. The S&P 500 Index is trading at twice the REIT
price/earnings ratio, the lowest relative valuation for REITs in five years,
while on an absolute basis REITs are trading at 11 times forward earnings -- the
low end of their trading range since the mid-1980s. In response to these
valuation measures we have eliminated positions in several service corporations
such as Cendant, Trammell Crow and Group Maintenance. Proceeds have been used to
increase weightings in REITs such as Crescent Real Estate Equitites and Vornado.
Despite a disappointing first quarter, we believe that the fundamentals for
real estate securities, combined with our investment strategy, will result in
satisfactory investment returns. The Fund's concentrated approach, in
conjunction with a finite level of assets, should result in a portfolio of
compelling opportunities in what is an increasingly competitive real estate
marketplace. In addition, we are confident that we will find value-added
investments such as the direct placements with Omega Worldwide and Prime Group
Realty.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
JOSEPH M. HARVEY
JOSEPH M. HARVEY
Director of Research
Cohen & Steers Capital Management, Inc.
On March 6, 1998 the Fund's total net assets exceeded $150 million and,
therefore, in accordance with the prospectus, the Fund ceased offering
shares to new investors. Existing investors will be permitted to invest
new capital in the Fund as well as reinvest dividends and capital gain
distributions. In September, we will evaluate re-opening the Fund to new
investors, which will depend on the Board's assessment of whether the
investment strategy can be implemented with a greater level of assets.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER % OF
OF SHARES VALUE NET ASSETS
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<S> <C> <C> <C>
EQUITIES
Starwood Hotels & Resorts Trust............................ 293,000 $ 15,657,188 10.29%
Forest City Enterprises -- Class A......................... 235,900 13,313,606 8.75
LNR Property Corp. ........................................ 480,800 12,861,400 8.46
Apartment Investment & Management Co. -- Class A........... 259,200 9,979,200 6.56
*Crescent Operating........................................ 385,000 8,229,375 5.41
*American Retirement Corp. ................................ 313,400 7,129,850 4.69
*Security Capital Group -- Class B......................... 224,100 6,891,075 4.53
Vornado Realty Trust....................................... 148,200 6,455,963 4.24
*Catellus Development Corp. ............................... 337,000 6,255,562 4.11
Meditrust Corp. ........................................... 190,900 5,894,038 3.88
St. Joe Corp. ............................................. 166,100 5,585,112 3.67
Crescent Real Estate Equities Co. ......................... 137,400 4,946,400 3.25
SL Green Realty Corp. ..................................... 191,700 4,900,331 3.22
*Alternative Living Services............................... 142,700 4,726,937 3.11
*Hospitality Worldwide Services............................ 476,300 4,673,694 3.07
*Hollywood Park............................................ 359,100 4,219,425 2.77
First Industrial Realty Trust.............................. 110,500 3,978,000 2.62
*Wellsford Real Properties................................. 220,900 3,203,050 2.11
#Prime Group Realty Trust, 144A............................ 122,000 2,366,800 1.56
Prime Group Realty Trust................................... 109,500 2,190,000 1.44
*Alexander's............................................... 23,300 2,182,919 1.44
Alexander Haagen Properties................................ 120,000 2,010,000 1.32
*Security Capital Group -- Class B Warrants (expire
9/18/98)................................................ 144,300 477,994 0.31
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TOTAL EQUITIES (Identified cost -- $134,001,787)..... 138,127,919 90.81
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1998 (UNAUDITED)
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<CAPTION>
PRINCIPAL % OF
AMOUNT VALUE NET ASSETS
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COMMERCIAL PAPER
Leggett & Platt, 5.90%, 4/1/98............................. $3,461,000 $ 3,461,000 2.28%
Premium Finance Loan Owner, 5.90%, 4/1/98.................. 3,500,000 3,500,000 2.30
Republic Funding Corp., 5.90%, 4/1/98...................... 3,500,000 3,500,000 2.30
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TOTAL COMMERCIAL PAPER (Identified
cost -- $10,461,000).............................. 10,461,000 6.88
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TOTAL INVESTMENTS (Identified cost -- $144,462,787).............. 148,588,919 97.69
OTHER ASSETS IN EXCESS OF LIABILITIES............................ 3,514,512 2.31
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NET ASSETS (Equivalent to $31.28 per share based on 4,862,695
shares of capital stock outstanding).......................... $152,103,431 100.00%
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* Non-income producing security.
# As of March 31, 1998, security is restricted and is subject to registration
with the Securities and Exchange Commission.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS*
MARCH 31, 1998 (UNAUDITED)
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<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
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NET ASSET VALUE:
Beginning of period: 12/31/97........................... $135,934,404 $ 32.25
Net investment income................................... $ 513,562 $ 0.10
Net realized and unrealized gain on investments......... (4,529,773) (1.07)
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Capital stock transactions:
Sold.............................................. 31,126,539
Redeemed.......................................... (10,941,301)
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Net increase in net asset value............................... 16,169,027 (0.97)
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End of period: 3/31/98........................................ $152,103,431 $ 31.28
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* Financial information included in this report has been taken from the records
of the Fund without examination by independent accountants.
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OFFICERS AND DIRECTORS KEY INFORMATION
Robert H. Steers INVESTMENT ADVISER
Director and Chairman Cohen & Steers Capital Management, Inc.
757 Third Avenue
Martin Cohen New York, NY 10017
Director and President (212) 832-3232
Gregory C. Clark FUND ADMINISTRATOR AND TRANSFER AGENT
Director Chase Global Funds Services Co.
73 Tremont Street
George Grossman Boston, MA 02108
Director (800) 437-9912
Jeffrey H. Lynford CUSTODIAN
Director The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
Willard H. Smith, Jr. New York, NY 10081
Director
LEGAL COUNSEL
Elizabeth O. Reagan Dechert Price & Rhoads
Vice President 30 Rockefeller Plaza
New York, NY 10112
Adam Derechin NASDAQ Symbol: CSSPX
Vice President and
Assistant Treasurer Net asset value (NAV) can be found in the daily mutual
fund listings in the financial section of most major
newspapers under Cohen & Steers.
This report is authorized for delivery only to
shareholders of Cohen & Steers Special Equity Fund, Inc.
unless accompanied or preceded by the delivery of a
currently effective prospectus setting forth details of
the Fund.
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