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COHEN & STEERS REALTY INCOME FUND, INC.
October 15, 1996
To Our Shareholders:
We are pleased to submit to you our report for Cohen & Steers Realty Income
Fund, Inc. for the quarter and nine months ended September 30, 1996. The net
asset value at that date was $9.69. In addition, a regular quarterly dividend of
$0.17 was declared for shareholders of record October 15, 1996 and payable on
October 31, 1996.
INVESTMENT REVIEW
During the quarter, Cohen & Steers Realty Income Fund had a total return
based on income and change in net asset value of 7.3%. This was one of the
Fund's best quarterly returns on both an absolute and relative basis since 1993.
For the nine months ended September 30, 1996, the Funds total return was 17.1%.
This performance was the result of several factors, in our opinion. The market
valuation of REITs has been very attractive for some time, particularly relative
to stocks in general which have been swept upward in a lengthy and strong bull
market. Perhaps more important, however, was that during the abrupt stock market
decline in July REITs produced positive total returns, demonstrating the low
market sensitivity and volatility that are characteristics inherent to this
asset class. While these attributes are not necessarily desirable in a raging
bull market, they are highly sought in periods of market turbulence and
uncertainty. Most recently, REITs have continued to perform well due to the
continued strength of the economy, the benign inflation and interest rate
environment, and what appears to be the accelerating recovery of most real
estate markets.
Two trends accelerated during the quarter and are worthy of discussion.
Leading companies have continued to enjoy ready access to the capital markets
for both debt and equity. This capital has been used to bolster balance sheets
and to finance substantial acquisitions of property portfolios or entire
companies. In addition, the number of REITs in existence continued to shrink due
to merger and acquisition activity among REITs and the absence of initial public
offerings.
REIT Mergers and acquisitions often occur for either strategic or financial
reasons. Strategic reasons may include the desire to achieve greater geographic
reach, greater size which can yield economies of scale, or the acquisition or
enhancement of real estate capabilities (such as development or property
management) that would be more expensive to develop internally. The strongest
financial reason for consolidation is that there are many companies that have
languished in the public market and whose high cost of capital denies them the
ability to operate, finance or acquire property in an efficient manner. Managers
of these companies are finding merit to aligning with larger, more efficient
operators. In some cases a merger may represent the key to survival.
Coincidentally, this is precisely the same reason that private companies, in
growing numbers, are merging into public companies. Similarly, there is a
growing trend toward insurance companies, pension funds and other private
property owners selling their portfolios to larger REITs in exchange for either
cash or shares of the REIT.
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COHEN & STEERS REALTY INCOME FUND, INC.
In the process, acquiring companies are purchasing assets on favorable terms and
real estate ownership is becoming concentrated in the hands of the larger and
better-managed companies. Sellers are achieving liquidity and a more attractive
growth vehicle for ongoing real estate investment.
Whereas the public offering mechanism has provided ample capital for most
companies, there has been an unusually high level of direct placement activity
this year. A growing number of public companies are bypassing the traditional
channels of distribution and selling newly issued shares directly to one or more
institutional investors such as Cohen & Steers. The advantages of these
placements to the issuers are numerous: the cost of issuance is significantly
lower than what is traditionally charged by underwriters; there is minimal
management time lost due to the selling process (there is no 'road show'); there
is minimal disruption to the market for the company's shares before or after the
offering period; and to the extent capital is needed quickly, it may be possible
to raise it with as little as one phone call. Importantly, and almost by
definition, these same factors also benefit both existing shareholders and the
investors purchasing the new shares. Further, limiting the supply of shares for
sale in the open market can have a positive impact on a company's share price,
potentially lowering the cost of capital for future equity financing.
We believe that the institutionalization of the market for REITs has opened
the door to many more direct financing transactions which will serve to
accelerate the growth of the industry. By utilizing 'shelf registrations,' both
the company and the investor can act quickly when investment opportunities are
available. This provides the company with a significant advantage over private
market counterparts that are frequently subject to uncertainty in arranging for
financing. While underwritten offerings will continue to play an important role
in REIT capital-raising, they will be only one of several options available to
the premier publicly owned real estate companies.
OUTLOOK
The strong performance of REITs this year and the heightened level of
investor interest has raised valuations to a level which, for the first time in
over two years, is allowing new companies to come to the market with initial
public offerings. There has already been one successful large offering for an
office REIT in 1996 and we expect several more REIT offerings to come to market
before year end. The strong recovery of shopping center REITs is enabling
several companies to raise equity capital for the first time in two years. If
current valuations hold, we would expect to see IPOs in this property sector, as
well as others, before too long. In short, we expect to experience a near-record
amount of capital-raising for public real estate companies in the next several
months. As we learned in the 1993-94 REIT underwriting cycle, this can have both
positive and negative consequences.
On the positive side, we believe an expansion of the industry is inevitable
due to the establishment of the public market as the primary source of capital
for real estate. Growth in market capitalization, liquidity and choices of
property types and individual companies are, in our opinion, critical to the
continued evolution of this industry. To the extent that the market does not
exercise investment discipline, however, a shake-out resulting in large investor
losses could set the industry back at a crucial point. We are cautiously
optimistic that this will not
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COHEN & STEERS REALTY INCOME FUND, INC.
occur because the industry's infrastructure has vastly changed since 1993-94. We
believe that the number of analysts and the quality of their analysis on both
the investment banking and money management sides have improved dramatically.
The establishment of better industry standards of financial reporting and
disclosure now provides real estate investors with what we perceive to be a flow
of accurate data that is unparalleled in the history of an industry notorious
for its lack of such information. This has served to place a governor on the
flow of capital to various property markets and attenuate the cyclical nature of
the real estate business.
Evidence of this discipline is already abundant. In the apartment sector,
for example, a surge in building permits in a particular market has often had a
negative impact on the share prices of the companies operating in that market.
The resulting increase in the cost of capital has almost instantaneously
discouraged further development, enabling the market to maintain equilibrium.
There has been a similar occurrence in the case of factory outlet centers. When
their share prices declined due to the prospect of overbuilding, all of the
companies' development plans were scaled back considerably. This averted what in
another era would have likely resulted in significant excess capacity. We are
seeing similar signs in the market for assisted living facilities, which until
recently has been a hot investment area that attracted a near-flood of capital.
It is our belief that in the coming months the market will undergo its
strongest test of discipline yet, as the growing demand for shares of
publicly-traded real estate companies will be met with supply from both existing
and new issuers. This is an exciting prospect for us because we foresee many new
investment opportunities. As always, however, we will maintain our strongest
quality and valuation standards, understanding that these are the keys to
superior long-term investment performance.
Sincerely,
<TABLE>
<S> <C>
/s/ Martin Cohen /s/ Robert H. Steers
MARTIN COHEN ROBERT H. STEERS
President Chairman
</TABLE>
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COHEN & STEERS REALTY INCOME FUND, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----------
<S> <C> <C>
EQUITIES 88.88%
APARTMENT/RESIDENTIAL 23.38%
Ambassador Apartment........................................... 30,500 $ 545,187
Amli Residential Properties.................................... 25,500 532,313
Associated Estates Realty Corp................................. 42,900 879,450
Colonial Properties Trust...................................... 43,400 1,139,250
Columbus Realty Trust.......................................... 26,400 537,900
Oasis Residential -- Preferred................................. 1,000 24,000
Pacific Gulf Properties........................................ 47,000 875,375
Summit Properties.............................................. 40,700 803,825
Wellsford Residential Property Trust........................... 53,400 1,174,800
-----------
6,512,100
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HEALTH CARE 11.73%
American Health Properties..................................... 59,500 1,301,562
Health Care REIT............................................... 36,900 857,925
Omega Healthcare Investors..................................... 36,900 1,107,000
-----------
3,266,487
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INDUSTRIAL 3.99%
Eastgroup Properties........................................... 45,100 1,110,588
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OFFICE 4.68%
Cali Realty Corp............................................... 21,200 575,050
Reckson Associates Realty Corp................................. 19,600 727,650
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1,302,700
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SELF STORAGE 0.13%
Sovran Self Storage............................................ 1,400 36,750
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SHOPPING CENTER 44.97%
COMMUNITY CENTER 28.06%
Alexander Haagen Properties.................................... 38,900 544,600
Bradley Real Estate............................................ 55,500 901,875
Glimcher Realty Trust.......................................... 77,000 1,511,125
Mid-America Realty Investments................................. 111,200 986,900
Mid-Atlantic Realty Trust...................................... 34,100 332,475
Pennsylvania REIT.............................................. 60,000 1,275,000
Price REIT..................................................... 31,500 992,250
Regency Realty Corp............................................ 36,400 814,450
Sizeler Property Investors..................................... 26,900 242,100
Western Investment Real Estate Trust........................... 17,100 215,887
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7,816,662
-----------
</TABLE>
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COHEN & STEERS REALTY INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----------
<S> <C> <C>
FACTORY OUTLET CENTER 1.99%
Horizon Group.................................................. 13,000 $ 268,125
Tanger Factory Outlet Centers.................................. 11,700 288,113
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556,238
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REGIONAL MALL 14.92%
CBL & Associates Properties.................................... 24,200 556,600
JP Realty...................................................... 43,400 965,650
Simon DeBartolo Group.......................................... 47,400 1,208,700
The Mills Corp................................................. 28,800 568,800
Urban Shopping Centers......................................... 35,100 855,563
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4,155,313
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TOTAL SHOPPING CENTER.......................................... 12,528,213
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TOTAL EQUITIES (Identified cost $21,754,597)............. 24,756,838
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</TABLE>
<TABLE>
<CAPTION>
S&P PRINCIPAL
BOND RATING AMOUNT
- ------------------- ----------
<S> <C> <C> <C> <C>
FIXED INCOME 5.16%
B Oriole Homes, 12.50%, sr. sub. notes 1/15/03................. $1,000,000 950,000
BB - Trizec Finance Ltd., 10.875%, sr. notes 10/15/05............. 450,000 486,562
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TOTAL FIXED INCOME (Identified cost $1,419,049)................. 1,436,562
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TOTAL INVESTMENTS (Identified cost $23,173,646)............................ 94.04% 26,198,400
OTHER ASSETS IN EXCESS OF LIABILITIES........................................5.96% 1,660,872
----- ----------
NET ASSETS (Equivalent to $9.69 per share based on
2,875,689 shares of capital stock outstanding)..........................100.00% $27,854,272
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</TABLE>
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COHEN & STEERS REALTY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS*
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
------------------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/95................................ $24,577,393 $8.59
Net investment income.................................. $1,363,171 $ 0.47
Net realized and unrealized gain on investment......... 2,758,911 0.97
Distributions from net investment income............... (975,308) (0.34)
------
Distributions reinvested..................................... 130,105
----------
Net increase in net asset value.............................. 3,276,879 1.10
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End of period: 9/30/96....................................... $27,854,272 $9.69
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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.
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KEY INFORMATION
For general information
and weekly net asset value
call: 800-437-9912
AMERICAN STOCK EXCHANGE SYMBOL:
The American Stock Exchange Symbol is RIF
REINVESTMENT PLAN
We urge shareholders who want to take advantage of this plan and whose
shares are held in 'Street Name' to consult your broker as soon as possible to
determine if you must change registration into your own name to participate.
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COHEN & STEERS REALTY 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
INVESTMENT ADVISER
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, New York 10017
(212) 832-3232
FUND ADMINISTRATOR AND TRANSFER AGENT
Chase Global Funds Services Co.
73 Tremont Street
Boston, Massachusetts 02108
(800) 437-9912
CUSTODIAN
The Chase Manhattan Bank, N.A.
770 Broadway
New York, New York 10003
LEGAL COUNSEL
Dechert Price & Rhoads
477 Madison Avenue
New York, New York 10022
American Stock Exchange Symbol: RIF
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Fund shares.
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COHEN & STEERS
REALTY INCOME FUND
757 THIRD AVENUE
NEW YORK, NY 10017
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QUARTERLY REPORT
SEPTEMBER 30, 1996
