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COHEN & STEERS SPECIAL EQUITY FUND, INC.
April 20, 1999
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, 1999. The net asset value per
share on that date was $19.78. Regular dividends are reviewed semi-annually;
therefore, no dividend was declared for the quarter. The Board of Directors will
review the next regular dividend in June.
INVESTMENT REVIEW
During the quarter ended March 31, 1999, Cohen & Steers Special Equity Fund
had a total return of -5.3%. By comparison, the NAREIT Equity REIT Index total
return was -5.6%.
REITs posted their fifth consecutive quarter of negative returns -- the
first time ever in the history of the NAREIT Equity REIT Index. In late March
REIT share prices re-tested the lows reached in October of 1998, when the equity
markets fell sharply due to fears of recession and a credit crunch. The decline
in REIT share prices, which began in December of 1997, has now persisted for 15
months and has eclipsed the magnitude of the average REIT bear market, as
illustrated in the following table:
<TABLE>
<CAPTION>
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EQUITY REIT PRICE TOTAL DURATION
BEAR MARKET DECLINE RETURN (MONTHS)
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<S> <C> <C> <C>
9/72 - 12/74 -48.3% -37.0% 27
8/79 - 4/80 -15.9% -11.1% 8
6/81 - 7/82 -15.8% -7.1% 13
2/87 - 10/87 -20.9% -17.1% 8
8/89 - 10/90 -34.4% -24.2% 14
9/93 - 11/94 -17.5% -10.9% 14
AVERAGE -25.5% -17.9% 14
12/97 - 3/99 -27.6% -21.3% 15
</TABLE>
Importantly, the two bear markets that were deeper than the current one
were both accompanied by economic recessions and real estate depressions. Severe
overbuilding, which led to unusually high vacancy rates and bankruptcies,
precipitated the real estate problems in those previous bear markets. By
contrast, the U.S. economy today appears quite strong and real estate
fundamentals are not only extremely healthy but appear to be improving. Fourth
quarter earnings for the REIT industry grew by 15% according to industry
sources, with much of that improvement coming from strong growth in rents. In
addition, recent statistics indicate continued low vacancy rates and a decline
in new construction for every major property type, suggesting that fears of
potential overbuilding are unfounded.
Surprisingly, in the first quarter REIT share prices gave back the gains
made in November of 1998. At that time we believed that REIT fundamentals would
benefit from the shut down in real estate capital flows, which would lead to
less competition and less development, and the Federal Reserve's monetary
easing, which would stimulate the economy and demand for space. REIT performance
since then contrasts sharply to the performance of the broader equity indexes,
which have made significant gains since the Federal Reserve began to reduce
interest rates (the Standard & Poor's 500 Index is 39.3% higher than its October
low and the Russell 2000 Index is 30.9% higher).
Because REIT share prices are generally unchanged since October 1998, cash
flow multiples have contracted to record low levels -- 8.5 times forward cash
flow, a result of continued strong cash flow growth. Stock valuations, by
comparison, have expanded from 24.2 times earnings to 30.0 times earnings, as
measured by the S&P 500 Index.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
INVESTMENT OUTLOOK
We believe the single best factor working in favor of REITs, and real
estate in general, is the strength of the U.S. economy. Continued strong
employment growth, productivity gains and consumer confidence have re-ignited
corporate expansion plans that were shelved in the fourth quarter of last year.
In low barrier markets where development has been strong, the resurgence in
demand has forestalled any softening in occupancies or rents. In high barrier
markets where development has been modest, the resurgence in demand has caused
rent growth to accelerate. Looking forward, global GDP growth is expected to
accelerate to 3.2% in 2000, driven in part by recoveries in regions such as Asia
and Latin America. Just about every economic and fiscal indicator points to a
continuance of the favorable conditions for the economy and real estate. Even
the issue of deflation, which hurt REIT share prices last year, has now shifted
at the margin to prospects for rising inflation because global growth is
accelerating and commodity prices seem to have bottomed.
For the time being, the public market and private market differ in their
real estate outlooks. On one hand, the discounts ascribed to public company
share prices have widened, suggesting a higher risk premium for uncertainty
about the future health of rents, occupancies and property values. Because
occupancies are full, incremental demand in most markets should be met with new
supply, which would likely prevent a significant acceleration in fundamentals.
This may account for the sector's inability to attract investors away from other
equity alternatives. Over the past seven years, by contrast, the public market
eagerly financed REIT growth as landlords enjoyed the multiplier effect of both
rising occupancies and rents. In the private market, however, underlying
fundamentals are strong and capital flows are increasing, thereby supporting
transaction activity and property prices. The divergence in views by the public
and private markets has implications for both company business plans and REIT
investment strategies.
The public market may experience a sustained period whereby the high cost
of equity precludes portfolio growth, despite healthy fundamentals and strong
private market acquisition and development activity. In the 1980's the same
phenomenon occurred and prevented public companies from committing the
investment mistakes that their private market competitors committed. If external
growth opportunities are limited, public companies in our view will be forced to
rely on internal resources to create shareholder value. We believe that the
REITs that will prosper in this environment will sell assets, turn capital more
quickly, raise the hurdle rate on new investments, maximize internal growth,
continue to expand dominant market concentrations, and create ways to exploit
their franchises without investing capital. Companies should also seek to
insulate themselves from low barrier markets and commodity-like assets.
INVESTMENT STRATEGY
We are emphasizing three broad themes that are designed to excel in the
current environment: companies with unique franchises that can grow by internal
means, companies whose share prices will benefit from the discrepancy in private
versus public valuations, and special situations that are asynchronous to the
general property market cycle. In terms of property sectors, we increased our
weightings in the Office, Hotel/Gaming, Health Care, and CMBS (commercial
mortgage-backed securities) sectors in the fourth quarter of 1998. We continue
to believe that in equilibrium these sectors offer the best potential for
capital appreciation. The Fund has no exposure to Retail real estate companies,
whose prospects should continue to be clouded by the competitive threat of
e-Commerce, in our opinion.
The Fund's more significant holdings have, in our opinion, unique franchise
positions and growth prospects within their existing portfolios and business
lines. Examples include Starwood Hotels & Resorts, which has only begun to
exploit new profit opportunities, such as its recently announced frequent guest
program, arising from the combination of the Sheraton and Westin hotel brands.
Alexander's owns one of the most valuable mixed-use development sites located in
New York City, which we believe is currently the best real estate market in the
country. Station Casinos controls nearly 40% of the 'locals' gaming market in
Las Vegas, which has barriers to competition through zoning restrictions, and
has ongoing master-planned expansion opportunities at each of its properties.
LNR
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
Property Corp. is the dominant investor and service provider in the CMBS market,
which has become a significant provider of capital to the real estate industry.
In our opinion, the best real estate investments today exist in the public
market, where the average public company is trading at a 15% discount to real
estate value. This arbitrage is attracting many opportunists, including company
management, real estate opportunity funds, and non-real estate merger and
acquisition firms. Five companies have recently announced transactions that
would create shareholder value either through a liquidation, management buyout,
or third party 'hostile' acquisition. Obviously, these transactions demonstrate
the asset value inherent in real estate companies. In addition, continuance of
this activity will shrink the equity base in the public market and improve the
supply-demand picture for REIT shares.
Regarding our main contrarian theme for 1999, we have been early in
increasing our nursing home sector weighting. Share prices of both nursing home
owners and operators have continued to decline as the industry struggles through
its transition to the new Medicare reimbursement system. There will be winners
in the new system, but the sector's high level of debt has made the transition
very difficult. The financial restructuring that must occur in the nursing home
sector will, in our opinion, create real estate acquisition and finance
opportunities not seen since the Resolution Trust Corporation worked out the
real estate industry in the early 1990's. We continue to believe that several
companies have significant long-term return potential and will selectively add
to our positions, which include HCR Manor Care and Ventas.
Although absolute and relative valuations have been at record low levels
for the past nine months, value has not yet elicited broad investor interest in
REITs. One seemingly natural constituency -- value-oriented equity mutual
funds -- is not positioned to buy REIT shares as value funds contend with
under-performance and fund outflows. We have written that valuations have been
compelling for some time and, at the risk of diluting the message, continue to
believe that these valuations cannot persist indefinitely. For the foreseeable
future, we believe that the factors are in place to drive convergence between
the private and public real estate markets and, at a minimum, opportunistic and
institutional real estate investors will increasingly allocate capital to REITs.
As a result, we believe there is a high probability that public valuations will
rise.
Sincerely,
<TABLE>
<S> <C>
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.
</TABLE>
Cohen & Steers is online at WWW.COHENANDSTEERS.COM. Visit our website for
daily NAVs, portfolio information, performance information, recent news
articles, literature and insights on the REIT market.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER % OF
OF SHARES VALUE NET ASSETS
---------- ----------- ----------
<S> <C> <C> <C>
EQUITIES
Starwood Hotels & Resorts Worldwide......................... 160,600 $ 4,587,137 10.75%
*Alexander's................................................. 62,200 4,214,050 9.88
LNR Property Corp........................................... 210,800 4,163,300 9.76
Vornado Realty Trust........................................ 93,700 3,232,650 7.58
*HCR Manor Care.............................................. 129,900 2,963,344 6.95
*Station Casinos............................................. 209,800 2,674,950 6.27
SL Green Realty Corp........................................ 119,500 2,248,094 5.27
**Brookfield Properties Corp.................................. 189,900 2,234,413 5.24
Mack-Cali Realty Corp....................................... 74,700 2,194,312 5.14
*Alternative Living Services................................. 91,900 1,838,000 4.31
*Crescent Operating.......................................... 454,700 1,648,288 3.86
Forest City Enterprises -- Class A.......................... 61,900 1,497,206 3.51
*Assisted Living Concepts.................................... 413,200 1,472,025 3.45
Crescent Real Estate Equities Co............................ 67,000 1,440,500 3.37
*Promus Hotel Corp........................................... 36,300 1,320,413 3.09
*Reckson Services Industries................................. 290,100 1,305,450 3.06
Ventas...................................................... 194,900 1,169,400 2.74
*Trammell Crow Co............................................ 58,300 1,078,550 2.53
Apartment Investment & Management Co. -- Class A............ 27,100 982,375 2.30
*Omega Worldwide............................................. 253,200 949,500 2.23
*American Retirement Corp.................................... 49,800 715,875 1.68
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TOTAL EQUITIES (Identified cost -- $56,344,442)....... 43,929,832 102.97
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</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C> <C>
COMMERCIAL PAPER
Premium Financial Corp., 4.85%, due 4/1/99.................. $1,333,000 1,333,000 3.12
Volkswagen America Corp., 4.85%, due 4/1/99................. 1,332,000 1,332,000 3.12
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TOTAL COMMERCIAL PAPER
(Identified cost -- $2,665,000).................... 2,665,000 6.24
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TOTAL INVESTMENTS (Identified cost -- $59,009,442)................ 46,594,832 109.21
LIABILITIES IN EXCESS OF OTHER ASSETS............................. (3,928,508) (9.21)
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NET ASSETS (Equivalent to $19.78 per share based on 2,157,056
shares of capital stock outstanding)........................... $42,666,324 100.00%
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</TABLE>
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* Non-income producing security.
** Brookfield Properties Corp. is a Canadian company listed on the Toronto Stock
Exchange. The market value of the Fund's position in Canadian dollars on
March 31, 1999 was $3,380,220 based on a Canadian dollar exchange rate on
March 31, 1999 of 0.661 to 1 U.S. dollar.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS'D'
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
--------------------------- ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/98.................................. $ 55,159,202 $20.88
Net investment income.................................... $ 106,978 $ 0.05
Net realized and unrealized loss on investments.......... (2,670,821) (1.15)
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Capital stock transactions:
Sold............................................... 1,439,796
Redeemed........................................... (11,368,831)
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Net decrease in net asset value................................ (12,492,878) (1.10)
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End of period: 3/31/99......................................... $ 42,666,324 $19.78
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</TABLE>
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'D' Financial information included in this report has been taken from the
records of the Fund without examination by independent accountants.
TOTAL RETURNS
(PERIODS ENDED MARCH 31, 1999)
<TABLE>
<CAPTION>
SINCE INCEPTION (5/8/97)
ONE YEAR (ANNUALIZED)
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<S> <C>
-35.37% -6.07%
</TABLE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
<TABLE>
<S> <C>
OFFICERS AND DIRECTORS KEY INFORMATION
Robert H. Steers INVESTMENT ADVISER
Director and Chairman Cohen & Steers Capital Management, Inc.
Martin Cohen 757 Third Avenue
Director and President New York, NY 10017
Gregory C. Clark (212) 832-3232
Director FUND ADMINISTRATOR AND TRANSFER AGENT
George Grossman Chase Global Funds Services Co.
Director 73 Tremont Street
Jeffrey H. Lynford Boston, MA 02108
Director (800) 437-9912
Willard H. Smith, Jr. CUSTODIAN
Director The Chase Manhattan Bank, N.A.
Elizabeth O. Reagan One Chase Manhattan Plaza
Vice President New York, NY 10081
Adam Derechin LEGAL COUNSEL
Vice President and Assistant Treasurer Simpson Thatcher & Bartlett
425 Lexington Avenue
New York, NY 10017
NASDAQ Symbol: CSSPX
Website: www.cohenandsteers.com
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. Past performance of course is no guarantee of
future results and your investment may be worth more or
less at the time you sell.
</TABLE>
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COHEN & STEERS First Class Mail
SPECIAL EQUITY FUND U.S. POSTAGE
757 THIRD AVENUE PAID
NEW YORK, NY 10017 Boston, MA
Permit No. 56712
</TABLE>
COHEN & STEERS
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SPECIAL EQUITY FUND
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QUARTERLY REPORT
MARCH 31,1999
STATEMENT OF DIFFERENCES
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The dagger symbol shall be expressed as................................ 'D'
