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COHEN & STEERS
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EQUITY INCOME FUND
QUARTERLY REPORT
SEPTEMBER 30, 1998
<TABLE>
<S> <C>
COHEN & STEERS
EQUITY INCOME FUND First Class Mail
757 THIRD AVENUE U.S. Postage
NEW YORK, NY 10017 PAID
Boston, MA
Permit No. 56712
</TABLE>
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COHEN & STEERS EQUITY INCOME FUND, INC.
October 15, 1998
To Our Shareholders:
We are pleased to submit to you our report for the quarter and nine months
ended September 30, 1998. The net asset values per share at that date were
$10.76, $10.71, and $10.71 for Class A, Class B, and Class C shares,
respectively. Class I shares had a net asset value of $10.77. In addition, a
dividend of $0.17 was declared for shareholders of record on September 23, 1998
and paid on September 24, 1998 to all four classes of shares.
INVESTMENT REVIEW
For the quarter ended September 30, 1998, Cohen & Steers Equity Income Fund
had a total return, based on income and change in net asset value, of -6.8% for
Class A shares (without giving effect to sales loads or contingent deferred
sales charges, if any). Class B and Class C shares both returned -6.9% for the
quarter. Class I shares returned -8.8% for the period July 15 through September
30, 1998. This performance compares favorably to the NAREIT Equity REIT Index
total return of -10.5%. The Fund's total return for the nine months ended was
- -8.7% for Class A shares, materially better than the NAREIT Equity REIT Index
return of -15.0%. The continued strong relative performance of the Fund
validates its strategy of focusing on investments with above-average current
income, valuations that are attractive relative to asset value, and visible and
stable earnings prospects.
Never before has the state of real estate finance deteriorated as quickly
and dramatically as in the latest three-month period. Whereas at mid-year the
equity market was beginning to close to REITs in need of capital, the decline in
REIT share prices in the third quarter completely shut off access to equity
capital for all publicly traded real estate companies. Despite a sharp rally in
mid-September, this year's price decline remains on track to be the worst in
REIT history.
Of greater near-term consequence, however, is the recent shutdown of the
real estate debt markets. It is estimated that somewhere between $30 and $40
billion of mortgage loans and commitments have been made by financial
institutions to real estate developers and owners. These loans, which are now
held on the books of these financial institutions, were expected to be
securitized and sold to investors in the form of commercial mortgage backed
securities ('CMBS'). The recent widening of yield spreads between U.S.
government debt securities and nearly all other debt has left these securities
unsold, and in many instances unsalable. The financial institutions holding this
paper face substantial losses and, moreover, can no longer make any further loan
commitments. Whereas the problems in the equity market primarily affected public
companies, the difficulties in the debt market affect the entire real estate
industry.
As a result, the real estate industry is facing a liquidity crisis that is
typical for this stage of the economic and real estate cycle. Unlike the end of
nearly all other real estate cycles, however, property market conditions are
exceptionally good: vacancy rates are low, rents are rising and new construction
is sufficient only to meet existing strong demand for space -- hardly the
circumstances which should cause investor concern. This has led many in the real
estate industry -- both public and private -- to question the wisdom of the
financial market mechanism.
We believe that the absence of demand for both debt and equity real estate
securities is a reflection of the market's concern with respect to three issues.
First is the future course of the economy. If the weakness in the stock market
and strength of the government bond market signal an economic recession, then
the resulting decline in demand for space would clearly remove the strongest
underpinning of the real estate recovery of the past several years. Second, the
dramatic growth of the real estate equity and debt markets over the past several
years
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COHEN & STEERS EQUITY INCOME FUND, INC.
has raised the specter of potential financial excesses in the real estate
markets; simply put, too much money has been chasing real estate. And third, the
threat of deflationary pressures on the prices of both hard and financial assets
is potentially a devastating one for all investors, particularly those in real
estate.
In contrast to the opinions of many, we believe that the capital markets
have behaved magnificently with respect to real estate. Cutting off funding of
new development before severe over-building could take place, for example, has
dramatically improved the probability of a more mild real estate downturn, if
there is to be one at all. Similarly, the closing of the debt markets is
punishing both those resorting to high leverage as well as their lenders for
imprudent financial practices. Finally, the liquidity squeeze has put an end to
an upward spiral of property prices, which, if allowed to go any further, would
have reached an unsustainable high level.
INVESTMENT OUTLOOK
Although REIT investors have clearly suffered short-term pain, the
longer-term outlook has dramatically improved. As we have mentioned in the past,
the valuation level of REITs, by just about every measure, is as attractive as
ever. The decline in prices during the third quarter has only improved that
valuation picture. It is therefore our contention that much of the fundamental
risk facing the industry is already discounted in the currently depressed share
prices. Nonetheless, we believe there may still be some market turbulence before
year-end due to potential further fallout from the credit crunch, particularly
if one or more major financial institutions were to fail or if widespread
concern about an economic slowdown turns into fear of a severe recession. In
addition, there may be tax-loss selling before year-end that could further
depress stock prices. We would view any further weakness in the REIT group,
however, as the final phase of a correction that could lead to a period of
strong and sustainable earnings growth and stock market performance.
The conditions described above have vastly broadened the range of
high-return opportunities available to the leading public real estate companies.
Competition from debt-financed private competitors has been eliminated, while
the property portfolios amassed by many of them will soon be available for
acquisition either through outright sale or by foreclosure due to mortgages in
default. Though not as severe as the conditions that prevailed in the early
1990's, the improved position of many REITs since that period will enable them
to experience substantial growth, just as they did then.
This renewed opportunity set will likely attenuate the widely anticipated
slowdown in profits due to the maturing real estate cycle and the narrowing of
acquisition opportunities. In the environment that we foresee in the next year,
we believe that REITs may reemerge as vehicles that can provide above-average
current income and experience accelerating growth. Further, these conditions
will enhance the position of REITs, as the country's most powerful and efficient
real estate owners and managers.
We suspect that this point of view probably represents a minority opinion.
In addition, the industry continues to face several hurdles that could suppress
investor enthusiasm. Foremost is the continuous need that REITs have for both
equity and debt capital, which regularly seems to place an effective ceiling on
their share prices. In periods such as this past year, capital became
unavailable to REITs not just as a result of a supply-demand imbalance but also
because the market perceived that REITs lacked good investment opportunities. We
believe that just the opposite may occur in the coming months; if the
opportunity set for REITs expands, so will their P/E ratios, and capital
availability will no longer be an issue.
Interestingly, especially at current prices, a slowdown in economic growth
may not have a meaningful impact on REIT share prices for three reasons. First,
REITs are cheaper today than at any time in the past,
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COHEN & STEERS EQUITY INCOME FUND, INC.
including before and during economic recessions. Second, REIT dividends are
extremely secure due to the long-term nature of leases that produce earnings,
the low payout ratios that are prevalent in the industry and the modest use of
leverage. Further, economic weakness appears certain to precipitate further
interest rate declines and in this environment, REITs will be very attractive to
both equity and income-oriented investors alike. And third, worsening economic
conditions will further expand the range of acquisition opportunities available
to REITs, again, just like in the early 1990's.
From an investment strategy standpoint, it is important to note that in the
environment we foresee, not all REITs will emerge as winners. Unfortunately,
there are many companies that used excessive leverage, pursued irrational
business plans and failed to adhere to practices that would have enhanced
shareholder value. The experience of the past year has served to clearly
distinguish companies and management teams that are capable of weathering
economic storms and exercising financial discipline. These are the biggest
potential winners in the real estate industry in the next few years. We have
utilized the recent period of price weakness to increase the Fund's exposure to
companies with these positive attributes while maintaining our current income
discipline.
Perhaps the biggest hurdle that REITs will have to overcome is that they
have performed so poorly recently and have failed to provide the defensive
characteristics that have been their hallmark for many years. Their decline, in
our opinion, had nothing to do with their intrinsic nature, but had everything
to do with the position of the real estate cycle. If we are correct in assuming
that we are about to enter a new phase of that cycle, and that there is the
prospect of renewed growth, investors will regain confidence in the ability of
REITs to provide consistently satisfactory returns going forward.
Sincerely,
<TABLE>
<S> <C> <C>
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
STEVEN R. BROWN
STEVEN R. BROWN
Senior Vice President
Cohen & Steers Capital Management, Inc.
</TABLE>
Cohen & Steers is now 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 EQUITY INCOME FUND, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF DIVIDEND
SHARES VALUE YIELD*
--------- ----------- ---------------
<S> <C> <C> <C> <C>
EQUITIES 95.18%
COMMON STOCK 86.43%
APARTMENT/RESIDENTIAL 9.71%
Apartment Investment & Management Co. -- Class A............ 9,800 $ 369,950 5.96%
Camden Property Trust....................................... 40,200 1,123,087 8.96
Camden Property Trust, 2.25%, Series A (Convertible
Preferred) 56,700 1,424,587 7.23
Charles E. Smith Residential Realty......................... 24,800 753,300 6.85
Summit Properties........................................... 76,000 1,444,000 8.58
-----------
5,114,924
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DIVERSIFIED 3.10%
Pacific Gulf Properties..................................... 81,000 1,630,125 8.35
-----------
HEALTH CARE 16.47%
ElderTrust.................................................. 84,900 1,241,662 9.98
Health Care Property Investors.............................. 50,000 1,650,000 8.00
Healthcare Realty Trust..................................... 63,700 1,624,350 8.24
Meditrust Corp. ............................................ 44,100 752,456 14.42
Nationwide Health Properties................................ 59,300 1,334,250 7.47
Omega Healthcare Investors.................................. 63,300 2,069,119 8.20
-----------
8,671,837
-----------
INDUSTRIAL 2.80%
First Industrial Realty Trust............................... 57,900 1,476,450 8.31
-----------
OFFICE 15.12%
Arden Realty Group.......................................... 58,400 1,303,050 7.53
Brandywine Realty Trust..................................... 47,900 916,087 7.95
Crescent Real Estate Equities Co. .......................... 50,500 1,275,125 8.71
Highwoods Properties........................................ 49,400 1,370,850 7.78
Mack-Cali Realty Corp. ..................................... 43,700 1,311,000 7.33
SL Green Realty Corp. ...................................... 24,400 512,400 6.67
SL Green Realty Corp., 8.00%, Series A (Convertible
Preferred)................................................ 53,100 1,274,400 8.33
-----------
7,962,912
-----------
OFFICE/INDUSTRIAL 6.66%
Prime Group Realty Trust.................................... 30,000 502,500 8.06
Reckson Associates Realty Corp., 7.625%, Series A
(Convertible Preferred)................................... 73,900 1,616,563 8.73
TriNet Corporate Realty Trust............................... 42,500 1,386,563 7.85
-----------
3,505,626
-----------
</TABLE>
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COHEN & STEERS EQUITY INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF DIVIDEND
SHARES VALUE YIELD*
--------- ----------- ---------------
<S> <C> <C> <C> <C>
SHOPPING CENTER 30.05%
COMMUNITY CENTER 14.91%
CenterTrust Retail Properties............................... 84,900 $ 1,103,700 11.08%
Developers Diversified Realty Corp.......................... 29,600 540,200 7.18
Federal Realty Investment Trust............................. 22,200 502,275 7.78
Glimcher Realty Trust....................................... 62,900 1,077,163 11.21
JDN Realty Corp. ........................................... 4,900 112,700 6.26
Pan Pacific Retail Properties............................... 105,800 1,970,525 8.16
Pennsylvania REIT........................................... 69,300 1,420,650 9.17
Saul Centers................................................ 66,000 1,122,000 9.18
-----------
7,849,213
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FACTORY OUTLET CENTER 4.46%
Prime Retail................................................ 144,089 1,413,868 12.03
Prime Retail, 8.50%, Series B (Convertible Preferred)....... 14,100 239,700 12.47
Tanger Factory Outlet Centers............................... 30,500 691,969 10.58
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2,345,537
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REGIONAL MALL 10.68%
CBL & Associates Properties................................. 45,300 1,166,475 7.22
General Growth Properties, 7.25%, Series A (Redeemable
Preferred)................................................ 41,700 1,045,106 7.22
JP Realty................................................... 74,700 1,662,075 8.09
Macerich Co. ............................................... 26,300 706,813 6.85
The Mills Corp. ............................................ 44,900 1,043,925 8.39
-----------
5,624,394
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TOTAL SHOPPING CENTER....................................... 15,819,144
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SPECIALTY 2.52%
Entertainment Properties Trust.............................. 71,600 1,324,600 8.65
-----------
TOTAL COMMON STOCK (Identified cost -- $50,514,310).... 45,505,618
-----------
PREFERRED STOCK 8.75%
Apartment Investment & Management Co., 9.00%, Series C...... 52,000 1,173,250 9.97
Apartment Investment & Management Co., 9.375%, Series G..... 62,400 1,482,000 9.85
Colonial Properties Trust, 8.75%, Series A.................. 30,000 731,250 8.98
Crown American Realty Trust, 11.00%, Series A............... 9,800 484,488 11.13
Liberty Properties Trust, 8.80%, Series A................... 29,600 738,150 8.82
-----------
TOTAL PREFERRED STOCK (Identified
cost -- $4,874,441).................................. 4,609,138
-----------
TOTAL EQUITIES (Identified cost -- $55,388,751)........ 50,114,756
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</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
---------
<S> <C> <C> <C>
COMMERCIAL PAPER 2.93%
Aluminum Company of America, 5.60%, 10/01/98
(Identified cost -- $1,545,000)........................... $1,545,000 1,545,000
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TOTAL INVESTMENTS (Identified cost -- $56,933,751).......... 98.11% 51,659,756
OTHER ASSETS IN EXCESS OF LIABILITIES....................... 1.89% 994,539
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NET ASSETS.................................................. 100.00% $52,654,295
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COHEN & STEERS EQUITY INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<S> <C>
CLASS A
Net Assets.................................................. $34,123,861
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Shares of capital stock outstanding......................... 3,171,452
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Net asset value and redemption value per share'D' $10.76
------
------
Maximum offering price per share ($10.76[div]0.955)'DD'..... $11.27
------
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CLASS B
Net Assets.................................................. $ 9,702,954
-----------
Shares of capital stock outstanding......................... 905,942
-----------
Net asset value and redemption value per share'D'........... $10.71
------
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CLASS C
Net Assets.................................................. $ 8,592,449
-----------
Shares of capital stock outstanding......................... 802,362
-----------
Net asset value and redemption value per share'D'........... $10.71
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CLASS I
Net Assets.................................................. $ 235,031
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Shares of capital stock outstanding......................... 21,828
-----------
Net asset value and redemption value per share'D'........... $10.77
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</TABLE>
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* Dividend yield is computed by dividing the security's current annual
dividend rate by the last sale price on the principal exchange, or market,
on which such security trades.
'D' Redemption price per share is equal to the net asset value per share less
any applicable contingent deferred sales charge.
'DD' On investments of $100,000 or more, the offering price is reduced.
FINANCIAL HIGHLIGHTS*
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
NET ASSETS PER SHARE
--------------------------------------------------- -----------------------------
CLASS A CLASS B CLASS C CLASS I CLASS A CLASS B CLASS C
----------- ---------- ---------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/97**......... $34,621,545 $0 $0 $0 $ 12.32 $ 12.35 $ 12.31
----------- ---------- ---------- -------- ------- ------- -------
Net investment income............... $ 1,835,601 $ 311,372 $ 277,857 $ 3,040 $ 0.52 $ 0.46 $ 0.45
Net realized and unrealized loss on
investments....................... (5,854,945) (1,186,462) (1,080,709) (20,901) (1.57) (1.59) (1.54)
Distributions from net investment
income............................ (1,800,131) (361,112) (323,328) (3,660) (0.51) (0.51) (0.51)
------- ------- -------
Capital stock transactions:
Sold........................... 23,629,771 11,054,573 10,551,102 253,735
Distributions reinvested....... 792,628 89,701 93,627 3,660
Redeemed....................... (19,100,608) (205,118) (926,100) (843)
----------- ---------- ---------- --------
Net increase (decrease) in net asset
value................................. (497,684) 9,702,954 8,592,449 235,031 (1.56) (1.64) (1.60)
----------- ---------- ---------- -------- ------- ------- -------
End of period: 9/30/98.................. $34,123,861 $9,702,954 $8,592,449 $235,031 $ 10.76 $ 10.71 $ 10.71
----------- ---------- ---------- -------- ------- ------- -------
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<CAPTION>
CLASS I
-------
<S> <C>
NET ASSET VALUE:
Beginning of period: 12/31/97**......... $ 11.99
-------
Net investment income............... $ 0.14
Net realized and unrealized loss on
investments....................... (1.19)
Distributions from net investment
income............................ (0.17)
-------
Capital stock transactions:
Sold...........................
Distributions reinvested.......
Redeemed.......................
Net increase (decrease) in net asset
value................................. (1.22)
-------
End of period: 9/30/98.................. $ 10.77
-------
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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 for Classes B, C and I were January 15, 1998,
January 14, 1998 and July 15, 1998, respectively.
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COHEN & STEERS EQUITY INCOME 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 and
Assistant Treasurer
William Goodwin
Assistant Secretary
KEY INFORMATION
INVESTMENT ADVISER
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, NY 10017
(212) 832-3232
SUB-ADMINISTRATOR AND TRANSFER AGENT
Chase Global Funds Services Co.
73 Tremont Street
Boston, MA 02108
(800) 437-9912
CUSTODIAN
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, NY 10081
LEGAL COUNSEL
Dechert Price & Rhoads
1775 Eye Street, NW
Washington, DC 20006
NASDAQ Symbol: Class A - CSEIX
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
Equity Income Fund, Inc. unless accompanied or preceded by the delivery of a
currently effective prospectus setting forth details of the Fund.
7
STATEMENT OF DIFFERENCES
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The dagger symbol shall be expressed as.................................. 'D'
The double dagger symbol shall be expressed as........................... 'DD'
The division sign shall be expressed as.................................. [div]
