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COHEN & STEERS EQUITY INCOME FUND, INC.
April 20, 1999
To Our Shareholders:
We are pleased to submit to you our quarterly report for Cohen & Steers
Equity Income Fund, Inc. for the three months ended March 31, 1999. The net
asset values per share at that date were $9.62, $9.58, and $9.57 for Class A,
Class B, and Class C shares, respectively. Class I shares had a net asset value
of $9.61. In addition, a regular quarterly dividend of $0.17 per share was
declared for shareholders of record on March 23, 1999 and paid on March 24, 1999
to all four classes of shares.
INVESTMENT REVIEW
For the three months ended March 31, 1999, Cohen & Steers Equity Income
Fund had a total return, based on income and change in net asset value, of -5.0%
for Class A shares (without giving effect to sales loads or contingent deferred
sales charges, if any). Class B and C shares returned -5.1% and -4.9%,
respectively, for the quarter (also without giving effect to any sales charge).
Class I shares returned -4.8% for the quarter. The performance compared
favorably to the Fund's benchmark, the NAREIT Equity REIT Index return of -5.6%.
This solid relative performance marks the sixth consecutive quarter (as well as
every quarter since inception) of the Fund outperforming its benchmark. We will
continue to seek continued solid relative performance based on the Fund's
emphasis on above-average current income, consistent earnings growth, and
attractive relative valuation levels.
Simply stated, REITs have remained out of favor so far in 1999. As has been
the case since the peak in REIT share prices in December 1997, earnings and
dividends have continued to grow at a steady pace, causing valuation measures
such as price/earnings ratios and dividend yields to reach extreme levels. For
example, at quarter-end the average equity REIT dividend yield was 8.0%.
Relative to the broader stock market averages, which have been continually
rising to record levels, REIT valuations have reached an unprecedented level on
both an absolute and relative basis. And, as shown in the following chart, the
current REIT bear market has now become one of the longest and deepest in
history.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
EQUITY REIT PRICE TOTAL DURATION
BEAR MARKET DECLINE RETURN (MONTHS)
- ------------------------------------------------------------------------
<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
- ------------------------------------------------------------------------
Source: National Association of Real Estate Investment Trusts
</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. In
contrast, the U.S. economy today seems to remain 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.
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1
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COHEN & STEERS EQUITY INCOME FUND, INC.
INVESTMENT OUTLOOK
It appears to us that the bear market may have ended and that sentiment
towards the REIT sector is beginning to improve. It has been our belief that
there were three factors that precipitated this bear market: fear of an economic
slowdown, fear of price deflation that would reduce real estate values, and a
narrowing of investment opportunities for public real estate companies. The
first two factors appear to have been favorably resolved, while the third
remains unsettled.
The U.S. economy remains quite strong and there seems to be few, if any,
signs of a slowdown. Further, there appears to be little or no reason for either
domestic or foreign monetary authorities to enact policies that would
precipitate an economic slowdown. Our economy has successfully absorbed the
slowdown in most of Asia, Russia, and Latin and South America. There are now
signs that many of these economies have at least bottomed out, if not entered a
recovery phase. The prospect of a stronger world economy, coupled with the
substantial rise in oil prices, wage pressures and other telltale signs of price
inflation, have caused the bond market to fall in 1999, raising yields to a
9-month high. These recent developments in our view have begun to nearly
eliminate any lingering fears of widespread price deflation.
The factor relating to the opportunity set available to REITs has not been
resolved, at least not on an industry-wide basis. There are few, if any,
cyclical industries in which the same investment and operational strategy works
at different phases of the cycle. Because we believe the real estate industry
has completed its growth phase and has now entered the equilibrium phase, it is
becoming clear to us that the formula for success in real estate today is quite
different than in most of the 1990's. Changing property dynamics, capital flows
and investor expectations require a complete re-evaluation of how real estate
enterprises should be run. This is summarized in the chart below.
<TABLE>
<CAPTION>
WINNING REAL ESTATE INVESTMENT STRATEGIES
<S> <C>
---------------------------------------------------------------------------------------------------------------------
GROWTH PHASE EQUILIBRIUM PHASE
- ---------------------------------------------------------------------------------------------------------------------
Acquire as many assets as quickly as possible Rationalize assets acquired in the 1990's
- ---------------------------------------------------------------------------------------------------------------------
Take advantage of distressed sellers of property Take advantage of overly aggressive property buyers
---------------------------------------------------------------------------------------------------------------------
Measure success of acquisitions by earnings accretion Assess merit of acquisitions based on return on assets
- ---------------------------------------------------------------------------------------------------------------------
Seek external growth through property acquisitions Maximize internal growth by improving profitability
- ---------------------------------------------------------------------------------------------------------------------
Raise as much equity as often as possible Do not dilute shareholders by issuing equity
- ---------------------------------------------------------------------------------------------------------------------
Utilize high financial leverage Reduce financial leverage
---------------------------------------------------------------------------------------------------------------------
Form new REITs Consolidate public company universe
---------------------------------------------------------------------------------------------------------------------
Invest in assets Invest in entities
---------------------------------------------------------------------------------------------------------------------
</TABLE>
Our investment strategy continues to emphasize companies whose management
teams have recognized the maturity of the cycle and have adopted new strategies
that will enhance shareholder value. During the growth phase of the cycle, the
strategy of acquiring as much property as possible, as quickly as possible and
with whatever means available, was the key to success. There was a large number
of willing sellers at the same time that occupancies, rents and asset values
were all rising very quickly. With stock prices high and financing plentiful,
nearly all acquisitions contributed to per share earnings, further sustaining
lofty share valuations.
In the equilibrium phase of the cycle, property prices are high,
acquisition opportunities are fewer, and competition is much greater,
particularly from private capital sources. In addition, the bear market has
significantly raised the cost of equity capital for REITs, further narrowing
their acquisition and financing opportunities. It is ironic that a seller's
market for property now coincides with a buyer's market for shares of
property-owning REITs. As a result,
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2
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COHEN & STEERS EQUITY INCOME FUND, INC.
we believe that a large-scale consolidation of the industry may be at hand. In
recent weeks several proposals to take REITs private have been announced and it
is our understanding that a great many more are currently being considered.
Clearly, if the gap between public and private market values persists, we
believe many REITs will either be taken private or taken over by other REITs.
This activity may prove to be a catalyst for better stock price performance.
In this environment some exciting strategic opportunities are surfacing
that can materially improve the quality of REIT property portfolios and increase
earnings growth rates. REITs today have an unprecedented opportunity to sell
properties at attractive prices, pruning their portfolios of assets that are
under-performing or that do not fit from a strategic standpoint. The proceeds of
these sales can be used to repay debt, be re-deployed into higher returning
assets, or simply be retained for future opportunities. A large number of REITs
have chosen to repurchase shares; however, this is a strategy which we believe
most often has little merit, given the ongoing capital requirements of the real
estate business. In any case, the combination of asset sales and a slowdown in
the acquisition pace of the industry has materially reduced the amount of
financing required by REITs. The perception that REITs will not be tapping the
equity market on a regular basis will dramatically improve the supply/demand
picture for their shares.
The governance of the public market is having the further effect of
disciplining the management of the REIT industry. Reductions in staff and other
overhead are now commonplace, and efforts to improve profitability of existing
owned assets have become foremost priorities. In conjunction with employing a
higher required rate of return on new investment, industry participants have a
unique opportunity to enjoy a meaningful increase in profitability.
As we have discussed in the past, we believe that the equilibrium phase of
the cycle could last for a very long time due to the public market discipline
that has been imposed on the real estate industry. This indicates to us that
real estate and REIT returns will generally revert to their historic levels; for
the 20 year period ended March 31, 1999, the NAREIT Equity REIT Index had a
compound average annual return of 13.6%. While we cannot make predictions about
the Fund's absolute future performance, or its future performance relative to an
index, our goal will continue to be to provide returns that are in excess of
this broad-based index. There are a host of companies that have what we believe
is above-average earnings growth coupled with above-average current income and
these are the mainstays of our portfolio. In our opinion, the public market
offers the single best real estate investment today.
Sincerely,
MARTIN COHEN
President
ROBERT H. STEERS
Chairman
STEVEN R. BROWN
Senior Vice President
Cohen & Steers Capital Management, Inc.
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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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3
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COHEN & STEERS EQUITY INCOME FUND, INC.
SCHEDULE OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF DIVIDEND
SHARES VALUE YIELD*
--------- ----------- ---------------
<S> <C> <C> <C> <C>
EQUITIES 96.30%
COMMON STOCK 79.23%
APARTMENT/RESIDENTIAL 10.98%
Apartment Investment & Management Co. -- Class A............ 36,600 $ 1,326,750 6.90%
Charles E. Smith Residential Realty......................... 36,000 1,109,250 6.95
Essex Property Trust........................................ 37,000 966,625 7.66
Post Properties............................................. 30,000 1,080,000 7.78
Summit Properties........................................... 80,700 1,346,681 10.01
-----------
5,829,306
-----------
DIVERSIFIED 6.22%
Anthracite Capital.......................................... 233,100 1,748,250 15.47
Pacific Gulf Properties..................................... 86,200 1,551,600 9.56
-----------
3,299,850
-----------
HEALTH CARE 11.01%
ElderTrust.................................................. 67,200 604,800 16.22
Health Care Property Investors.............................. 54,300 1,561,125 9.46
Healthcare Realty Trust..................................... 70,700 1,343,300 11.16
Nationwide Health Properties................................ 78,900 1,499,100 9.47
Ventas...................................................... 139,000 834,000 26.00
-----------
5,842,325
-----------
HOTEL 6.54%
FelCor Lodging Trust........................................ 69,700 1,616,169 9.49
Host Marriott Corp.......................................... 61,300 681,962 7.55
Innkeepers USA.............................................. 125,900 1,172,444 12.03
-----------
3,470,575
-----------
INDUSTRIAL 3.10%
First Industrial Realty Trust............................... 68,800 1,646,900 10.03
-----------
OFFICE 22.69%
Arden Realty Group.......................................... 80,600 1,793,350 8.00
Brandywine Realty Trust..................................... 80,900 1,314,625 9.60
CarrAmerica Realty Corp..................................... 59,800 1,319,338 8.39
Crescent Real Estate Equities Co............................ 73,400 1,578,100 10.23
Highwoods Properties........................................ 75,000 1,767,187 9.17
Mack-Cali Realty Corp....................................... 77,000 2,261,875 7.49
SL Green Realty Corp........................................ 76,100 1,431,631 7.44
Tower Realty Trust.......................................... 30,600 579,488 8.92
-----------
12,045,594
-----------
OFFICE/INDUSTRIAL 4.68%
Liberty Property Trust...................................... 49,600 1,029,200 8.67
Prime Group Realty Trust.................................... 28,600 378,950 10.19
TriNet Corporate Realty Trust............................... 42,500 1,078,437 10.25
-----------
2,486,587
-----------
</TABLE>
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4
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COHEN & STEERS EQUITY INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF DIVIDEND
SHARES VALUE YIELD*
--------- ----------- ---------------
<S> <C> <C> <C> <C>
SHOPPING CENTER 12.33%
COMMUNITY CENTER 5.15%
Developers Diversified Realty Corp.......................... $34,200 $ 489,488 9.78%
Federal Realty Investment Trust............................. 41,800 885,637 8.31
Pan Pacific Retail Properties............................... 53,900 956,725 9.01
Pennsylvania REIT........................................... 21,500 401,781 10.06
-----------
2,733,631
-----------
REGIONAL MALL 7.18%
JP Realty................................................... 74,700 1,470,657 9.45
Macerich Co................................................. 26,300 596,681 8.55
Simon Property Group........................................ 38,700 1,061,831 11.21
The Mills Corp.............................................. 38,100 683,419 7.36
-----------
3,812,588
-----------
TOTAL SHOPPING CENTER....................................... 6,546,219
-----------
SPECIALTY 1.68%
Entertainment Properties Trust.............................. 51,700 891,825 9.74
-----------
TOTAL COMMON STOCK (Identified cost -- $48,565,004).... 42,059,181
-----------
PREFERRED STOCK 17.07%
Apartment Investment & Management Co., 9.00%, Series C...... 52,000 1,144,000 10.23
Apartment Investment & Management Co., 9.375%, Series G..... 62,400 1,431,300 10.20
Camden Property Trust, $2.25, Series A (Convertible)........ 56,700 1,325,362 9.63
Colonial Properties Trust, 8.875%, Series A................. 30,000 675,000 9.73
Crown American Realty Trust, 11.00%, Series A............... 9,800 470,400 11.46
General Growth Properties, 7.25%, Series A (Redeemable)..... 22,000 500,500 7.96
Liberty Properties Trust, 8.80%, Series A................... 29,600 693,750 9.39
Prime Retail, 8.50%, Series B (Convertible)................. 14,100 225,600 13.25
Reckson Associates Realty Corp., 7.625%, Series A
(Convertible)............................................. 73,900 1,505,713 9.37
SL Green Realty Corp., 8.00%, Series A (Convertible)........ 53,100 1,088,550 9.76
-----------
TOTAL PREFERRED STOCK (Identified
cost -- $10,277,225)................................. 9,060,175
-----------
TOTAL EQUITIES (Identified cost -- $58,842,229)........ 51,119,356
-----------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<S> <C> <C> <C>
COMMERCIAL PAPER 2.18%
Premium Financial Corp., 4.85%, due 4/1/99
(Identified cost - $1,160,000)............................ $1,160,000 1,160,000
-----------
TOTAL INVESTMENTS (Identified cost -- $60,002,229).......... 98.48% 52,279,356
OTHER ASSETS IN EXCESS OF LIABILITIES....................... 1.52% 804,979
------- -----------
NET ASSETS.................................................. 100.00% $53,084,335
======= ===========
</TABLE>
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COHEN & STEERS EQUITY INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
CLASS A
Net Assets....................................................................... $28,897,828
-----------
Shares issued and outstanding ($0.001 par value common stock outstanding)........ 3,002,491
-----------
Net asset value and redemption value per share'D'................................ $9.62
Maximum offering price per share ($9.62[div]0.955)'D'D'.......................... $10.07
CLASS B
Net Assets....................................................................... $10,034,261
-----------
Shares issued and outstanding ($0.001 par value common stock outstanding)........ 1,047,841
-----------
Net asset value and redemption value per share'D'................................ $9.58
CLASS C
Net Assets....................................................................... $14,046,588
-----------
Shares issued and outstanding ($0.001 par value common stock outstanding)........ 1,468,529
-----------
Net asset value and redemption value per share'D'................................ $9.57
CLASS I
Net Assets....................................................................... $ 105,658
-----------
Shares issued and outstanding ($0.001 par value common stock outstanding)........ 10,992
-----------
Net asset value and redemption value per share'D'................................ $9.61
</TABLE>
- ------------------------
* 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.
'D'D' On investments of $100,000 or more, the offering price is reduced.
FINANCIAL HIGHLIGHTS*
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
NET ASSETS PER SHARE
----------------------------------------------------- ------------------
CLASS A CLASS B CLASS C CLASS I CLASS A CLASS B
----------- ----------- ----------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/98............... $31,581,190 $10,114,434 $13,159,302 $283,166 $10.31 $10.27
----------- ----------- ----------- -------- ------- -------
Net investment income................... $ 568,861 $ 177,100 $ 242,614 $ 3,567 $ 0.19 $ 0.17
Net realized and unrealized loss on
investments........................... (2,075,996) (699,572) (942,734) (17,579) (0.71 ) (0.69)
Distributions from net investment
income................................ (500,070) (174,981) (243,810) (1,846) (0.17 ) (0.17)
------- -------
Capital stock transactions:
Sold................................ 3,216,924 1,034,027 2,873,253 --
Distributions reinvested............ 139,915 12,375 18,911 1,232
Redeemed............................ (4,032,996) (429,122) (1,060,948) (162,882)
----------- ----------- ----------- --------
Net increase/(decrease) in net asset
value..................................... (2,683,362) (80,173) 887,286 (177,508) (0.69) (0.69)
----------- ----------- ----------- -------- ------- -------
End of period: 3/31/99...................... $28,897,828 $10,034,261 $14,046,588 $105,658 $ 9.62 $ 9.58
----------- ----------- ----------- -------- ------- -------
----------- ----------- ----------- -------- ------- -------
<CAPTION>
CLASS C CLASS I
------- -------
<S> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/98............... $10.26 $ 10.28
------- -------
Net investment income................... $ 0.17 $ 0.33
Net realized and unrealized loss on
investments........................... (0.69) (0.83)
Distributions from net investment
income................................ (0.17) (0.17)
------- -------
Capital stock transactions:
Sold................................
Distributions reinvested............
Redeemed............................
Net increase/(decrease) in net asset
value..................................... (0.69) (0.67)
------- -------
End of period: 3/31/99...................... $ 9.57 $ 9.61
------- -------
------- -------
</TABLE>
- ------------------------
* Financial information included in this report has been taken from the
records of the Fund without examination by independent accountants.
TOTAL RETURNS -- CLASS A
(PERIODS ENDED MARCH 31, 1999) (UNAUDITED)
<TABLE>
<CAPTION>
SINCE INCEPTION (9/2/97)
ONE YEAR (ANNUALIZED)
- ----------------------------- -----------------------------
INCLUDING EXCLUDING INCLUDING EXCLUDING
SALES CHARGE SALES CHARGE SALES CHARGE SALES CHARGE
- ------------ ------------ ------------ ------------
<S> <C> <C> <C>
-19.65% -15.86% -7.21% -4.47%
</TABLE>
Returns on the Fund's other share classes will vary because of differing
expense ratios and sales charges.
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6
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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
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
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
NASDAQ Symbol: Class A - CSEIX
Class B - CSBIX
Class C - CSCIX
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. Past
performance is of course no guarantee of future results and your investment
may be worth more or less at the time you sell.
7
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COHEN & STEERS
--------------
Equity Income Fund
- ---------------------------------
- ---------------------------------
QUARTERLY REPORT
MARCH 31, 1999
COHEN & STEERS
EQUITY INCOME FUND
757 THIRD AVENUE
NEW YORK, NY 10017
- ----------------
First Class Mail
U.S. Postage
PAID
Boston, MA
Permit No. 56712
STATEMENT OF DIFFERENCES
------------------------
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]
