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COHEN & STEERS
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INSTITUTIONAL REALTY SHARES
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QUARTERLY REPORT
SEPTEMBER 30, 2000
COHEN & STEERS
INSTITUTIONAL REALTY SHARES
757 THIRD AVENUE
NEW YORK, NY 10017
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COHEN & STEERS INSTITUTIONAL REALTY SHARES, INC.
October 20, 2000
To Our Shareholders:
We are pleased to submit to you our report for the quarter ended
September 30, 2000. The net asset value at that date was $30.16. In addition, a
regular quarterly dividend of $0.33 was declared for shareholders of record on
September 21, 2000 and was paid on September 22, 2000.
INVESTMENT REVIEW
For the quarter, Cohen & Steers Institutional Realty Shares had a total
return of, based on income and change in net asset value, 10.9%, which compared
to the NAREIT Equity REIT Index* total return of 7.7%. For the period February
14, 2000 (commencement of operations) through September 30, 2000, the Fund's
total return was 24.4%, compared to the NAREIT Equity REIT Index total return of
22.3%.
It was another extraordinary quarter in what has been an extraordinary year
for the REIT industry. For the first time in many years REITs are outperforming
nearly every market average by an extremely wide margin. We believe that the
major reason for this is that whereas earnings disappointments have become
routine in most areas of corporate America, including the technology sector,
REIT earnings, with very few exceptions, have comfortably exceeded expectations.
We believe these results, which are derived from in-place tenants and rents,
bode well for earnings over the next several quarters and this has encouraged
the entire analyst community to raise estimates of earnings growth rates and net
asset values for most companies. Understandably, this has been a strong catalyst
for rising share prices.
We are pleased with our substantial out-performance in the third quarter.
This was primarily the result of our heavy weighting in the Office sector, which
continues to enjoy the strongest fundamentals and highest earnings growth rate
among all property types. This is particularly true of companies with properties
in major central business districts where, with vacancy rates at all-time low
levels (6.7%, down from 8.9% a year ago) and little new supply on the horizon,
there are shortages of space in some markets and rents are soaring. Also
contributing to our recent results was our position in the quarter's best
performing sector, Health Care, which was up 22%. At long last, positive changes
in the regulatory environment and the resolution of the fate of many weak
operators precipitated greater investor optimism. In the case of the health care
REITs that we own, it became apparent to the investment community that their
dividends were secure, and this enabled the stocks to return to more rational
valuations.
One of the more puzzling aspects of this year's REIT rally is that it has
taken place rather quietly and with only modest inflows into real estate mutual
funds. Net inflows this year have been barely $500 million. While mutual fund
flows are not necessarily related to stock price movement, as evidenced by this
year's performance, it is a valuable indicator of investor psychology. It
appears to us that investors at large either disbelieve the sustainability of
this rally or remain highly distracted with the action of the more volatile
sectors of the market. In addition, it is quite possible that after the two year
bear market of 1998-99, investor confidence in the sector simply has not yet
been restored.
In the quarter, a further shrinkage in the REIT universe took place. Urban
Shopping Centers, Burnham Pacific and First Washington Real Estate proposed to
liquidate or go private, while Grove Property Trust and
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COHEN & STEERS INSTITUTIONAL REALTY SHARES, INC.
Western Properties Trust agreed to be acquired by larger REITs. In addition, a
good number of REIT stock buyback programs continued, albeit at a decelerated
pace. Meanwhile, equity issuance in the quarter was minimal, with only about
$100 million in common stock being publicly offered. In short, by the end of the
third quarter, the supply/demand picture for REIT shares remained quite
positive.
INVESTMENT OUTLOOK
The fourth quarter has started with a great deal of financial market
turbulence and it appears that a host of uncertainties with respect to a
possible economic slowdown, politics and the national election, energy prices,
Mid-East peace, Fed policy and worldwide currency turmoil -- not to mention a
bona fide bear market in the NASDAQ market -- appear to have shaken investor
confidence.
In the final analysis, it is how the resolution of these issues affects the
future course of the economy that will determine the health of real estate
markets and, in turn, what will be the appropriate investment strategy. It
appears to us that the two scenarios that are most likely are: 1) a slowing, but
still positive, rate of economic growth (a 'soft landing'), or 2) an outright
recession whereby the economy suffers an actual decline. From our perspective,
either scenario leads us to very similar and straightforward investment
strategies. For example, in either economic environment it is logical to expect
that rent growth and absorption of space will slow. In some markets, there will
actually be rent declines and increases in vacancy rates. Those property sectors
that are most sensitive to short-term swings in the economy will likely suffer
some difficulty.
Nevertheless, at this stage of the economic cycle the current strong health
of the real estate markets is a noteworthy anomaly that must be appreciated. In
periods immediately prior to nearly every economic slowdown in the past, real
estate markets have tended to be substantially overbuilt, with vacancy rates
running at historically high levels, only to go even higher when economic
activity actually slows. Today, in contrast, vacancy rates are hovering at
historically low levels in nearly every property type and geographic region.
Ironically, whereas in prior cycles real estate was a victim of the slowing
economy, in this cycle shortages of space and soaring rents may actually be
impairing the growth of the economy by either imposing limits on, or increasing
the cost of, business expansion. As a result, while a slowdown in economic
growth would clearly not be positive for real estate fundamentals, it may not be
as negative as it has in the past. In fact, compared to other sectors of the
economy, real estate may actually fare quite well and continue to register above
average profit growth.
Other effects of an economic slowdown could actually be positive for REITs.
We would expect to see the cancellation or postponement of most real estate
development activity that can no longer be justified. Yield spreads between
government and corporate debt securities are rising, and this is increasing the
yield on commercial mortgage securities as well. A higher cost of borrowing
further discourages new development by raising required returns. A restrained
development situation should bode well for reduced downward pressure on
occupancies and rents. This is particularly the case in the Office sector where
there is the further protection of long lease terms. Notwithstanding the
bankruptcy of many 'new economy' companies, mainstream class A office users
rarely, if ever, default on their leases. For this reason, we are continuing to
overweight this sector. Similarly, apartment markets in which there are barriers
to entry, such as in the Northeast, remain our favorites due to our expectations
for continued strong demand for rental housing under almost any foreseeable
economic conditions. The same holds true for our holdings in the Health Care
sector. Finally, as we have emphasized for some time, dividend
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COHEN & STEERS INSTITUTIONAL REALTY SHARES, INC.
yield -- the hallmark of REIT investing, since REITs must pay out nearly all of
their earnings as dividends -- is likely to become more desirable as investors'
overall return expectations diminish. Since an economic slowdown should
eventually precipitate strength in the bond market, the resulting lower interest
rate environment may bring increased attention to the merits of diversification
and the role that REITs can play in a portfolio.
On the negative side of the ledger, the Retail sector may still present some
investment risk due its economic sensitivity. While we are under-weighted in
both shopping centers and regional malls we are paying strict attention to
valuations, and are ready to increase our holdings at prices that would appear
to discount investors' worst expectations. One of our overriding concerns,
irrespective of property type or regional orientation, is financial liquidity.
It would be natural to expect a contraction in credit to occur, at least in the
early stages of a slowdown, and certainly for riskier borrowers. Real estate
continues to be viewed as a higher risk proposition, and those companies that
have near-term maturities of debt, or have reached their limits on new
borrowing, are likely to be highly disadvantaged in a more challenging economic
climate. Thus, maintenance of strict discipline and thorough risk analysis
remain paramount in our investment process. We continue to believe that our
'Realty Majors' strategy is the correct one.
We believe that the performance of REITs this year has been a major step
towards the restoration of investor confidence in them. It will still be a slow
process, however, made all the more difficult by the challenges of a less robust
economic environment. We have long argued that the most important byproduct of
the securitization of real estate would be significantly less volatility in real
estate fundamentals and the real estate cycle. Notwithstanding the volatility of
REIT share prices, this has so far been the case. An economic slowdown, should
it occur, would certainly present an important test of this belief. Nonetheless,
if REITs continue to display resilience both from an earnings and stock price
standpoint, as we believe they can, returns should continue to be rewarding.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
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.
* The NAREIT Equity REIT Index is an unmanaged, market capitalization weighted
index of all publicly-traded REITs that invest predominately in the equity
ownership of real estate. The index is designed to reflect the performance of
all publicly-traded REITs as a whole.
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COHEN & STEERS INSTITUTIONAL REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------- ------------
<S> <C> <C>
EQUITIES 96.56%
APARTMENT/RESIDENTIAL 20.34%
Apartment Investment & Management Co. --
Class A..................................... 512,600 $ 23,611,638
Archstone Communities Trust.................... 524,000 12,870,750
AvalonBay Communities.......................... 689,200 32,866,225
Charles E. Smith Residential Realty............ 162,200 7,359,825
Equity Residential Properties Trust............ 718,900 34,507,200
Essex Property Trust........................... 165,700 9,175,638
United Dominion Realty Trust................... 134,900 1,467,038
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121,858,314
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HEALTH CARE 8.95%
Health Care Property Investors................. 628,600 18,622,275
*Manor Care..................................... 660,800 10,366,300
Nationwide Health Properties................... 1,198,700 19,104,281
Ventas......................................... 1,109,900 5,549,500
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53,642,356
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HOTEL 7.33%
Host Marriott Corp............................. 1,000,800 11,259,000
MeriStar Hospitality Corp...................... 225,400 4,564,350
Starwood Hotels & Resorts Worldwide............ 899,000 28,093,750
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43,917,100
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INDUSTRIAL 9.20%
AMB Property Corp.............................. 683,000 16,776,188
First Industrial Realty Trust.................. 196,600 6,045,450
ProLogis Trust................................. 1,359,700 32,292,875
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55,114,513
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</TABLE>
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COHEN & STEERS INSTITUTIONAL REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------- ------------
<S> <C> <C>
OFFICE 30.73%
Arden Realty Group............................. 853,600 $ 22,887,150
Boston Properties.............................. 282,800 12,142,725
**Brookfield Properties Corp..................... 742,700 11,970,274
Cousins Properties............................. 88,200 3,798,112
Crescent Real Estate Equities Co............... 593,100 13,233,544
Equity Office Properties Trust................. 1,479,900 45,969,394
Highwoods Properties........................... 113,400 2,679,075
Mack-Cali Realty Corp.......................... 671,000 18,913,812
SL Green Realty Corp........................... 346,900 9,734,881
Vornado Realty Trust........................... 1,154,100 42,845,962
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184,174,929
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OFFICE/INDUSTRIAL 8.87%
Duke-Weeks Realty Corp......................... 337,500 8,142,188
Kilroy Realty Corp............................. 6,300 168,131
Prime Group Realty Trust....................... 206,400 3,250,800
Reckson Associates Realty Corp................. 790,800 20,165,400
Spieker Properties............................. 372,400 21,436,275
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53,162,794
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REAL ESTATE SERVICES 1.43%
*CAIS Internet.................................. 102,000 497,250
*Crescent Operating............................. 52,100 61,869
*FrontLine Capital Group........................ 487,000 8,005,062
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8,564,181
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SHOPPING CENTER 9.71%
COMMUNITY CENTER 2.64%
Kimco Realty Corp.............................. 374,600 15,826,850
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REGIONAL MALL 7.07%
General Growth Properties...................... 488,000 15,707,500
Macerich Co.................................... 215,100 4,570,875
Rouse Co....................................... 300,300 7,488,731
Simon Property Group........................... 426,900 10,005,469
Taubman Centers................................ 397,500 4,596,094
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42,368,669
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TOTAL SHOPPING CENTER.......................... 58,195,519
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TOTAL EQUITIES (Identified
cost -- $498,688,301)................... 578,629,706
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</TABLE>
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COHEN & STEERS INSTITUTIONAL REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
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<S> <C> <C>
COMMERCIAL PAPER 2.49%
International Lease Finance Corp., 6.51%, due
10/2/00 (Identified cost --
$14,894,306).................................... $14,897,000 $ 14,894,306
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TOTAL INVESTMENTS (Identified cost -- $513,582,607).. 99.05% 593,524,012
OTHER ASSETS IN EXCESS OF LIABILITIES................. 0.95% 5,708,140
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NET ASSETS (Equivalent to $30.16 per share based on
19,865,360 shares of capital stock outstanding)... 100.00% $599,232,152
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</TABLE>
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* Non-income producing security.
** Brookfield Properties Corp. is a Canadian company listed on the Toronto and
New York Stock Exchanges. The Toronto Stock Exchange is deemed the principal
exchange for valuation purposes. The market value of the Fund's position in
Canadian dollars on September 30, 2000 was $18,010,475 based on an exchange
rate of 1 Canadian dollar to 0.66463 U.S. dollars.
FINANCIAL HIGHLIGHTS'D'
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
--------------------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 2/14/00.................. $ 100,000 $25.00
Net investment income..................... $ 15,928,814 $ 0.94
Net realized and unrealized gain on
investments............................. 79,725,724 5.08
Distributions from net investment
income.................................. (14,398,957) (0.86)
------
Capital stock transactions:
Sold................................. 535,060,477
Distributions reinvested............. 7,410,283
Redeemed............................. (24,594,189)
------------
Net increase in net asset value............... 599,132,152 5.16
------------ ------
End of period: 9/30/00........................ $599,232,152 $30.16
------------ ------
------------ ------
</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.
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COHEN & STEERS INSTITUTIONAL REALTY SHARES, 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
Lawrence B. Stoller
Assistant Secretary
KEY INFORMATION
INVESTMENT ADVISER
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, NY 10017
(212) 832-3232
FUND 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
DISTRIBUTOR
Cohen & Steers Securities, Inc.
757 Third Avenue
New York, NY 10017
NASDAQ Symbol: CSRIX
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
Institutional Realty Shares, 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.
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STATEMENT OF DIFFERENCES
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The dagger symbol shall be expressed as.................................... 'D'
