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COHEN & STEERS REALTY INCOME FUND, INC.
October 20, 1999
To Our Shareholders:
We are pleased to submit to you our report for Cohen & Steers Realty Income
Fund for the quarter and nine months ended September 30, 1999. The net asset
value per share at that date was $6.84. In addition, a regular quarterly
dividend of $0.17 per share was declared for shareholders of record
September 28, 1999 and payable on October 15, 1999.
INVESTMENT REVIEW
For the three months ended September 30, 1999, Cohen & Steers Realty Income
Fund had a total return, based on income and change in net asset value, of
- -8.2%. This performance compares to the NAREIT Equity REIT Index total return
of -8.0%. The Fund's total return for the nine months ended September 30, 1999
was -3.1%, compared to the NAREIT Equity REIT Index return of -3.6%. We will
continue to strive for improved performance based on the Fund's emphasis on
above-average current income, consistent earnings growth, and attractive
relative valuation levels.
The past two years have been perhaps the most challenging ever for REIT
investors. Unlike the case with previous bear markets, fundamentals seemingly
have not turned negative -- in fact it appears that fundamentals are more
positive today than at any time in nearly two decades. Vacancy rates are low,
property prices have recovered, the growing U.S. economy continues to support
strong demand for space, and there are only few signs of speculative new
construction. Yet, the shares of REITs are as cheap as ever, based on nearly
every popular valuation measure including price/cash flow multiple, dividend
yield and price in relation to asset value. These seemingly contradictory trends
raise some important questions that we would like to address in this report.
1. JUST WHERE ARE WE IN THE REAL ESTATE CYCLE?
It appears to many that we are at or near the peak of the real estate
cycle. Following the strong recovery of the 1990's, nearly every property type
in nearly every major market appears to be at equilibrium, meaning that supply
and demand for space are about equal. Rental rates, for most major property
types, are at a cyclical high, and property prices are generally close to
replacement cost. This makes new construction feasible. While some exceptions
certainly exist, direct buyers of property today can typically expect returns
that reflect little more than current net rental income plus growth which is
equal to the rate of inflation.
That the cycle is close to its peak may be the most obvious reason for the
market's low valuation of REITs. The strong recovery and sound fundamentals
indicate that the health of the real estate industry could not be better.
Indeed, if we are at a peak in the cycle, the next phase may well be a decline.
Such a decline could be the result of a surge in the supply of space in excess
of demand, a decrease in demand due to an economic slowdown, or a combination of
both. In such an environment, vacancy rates would likely rise, property values
would likely fall and REIT earnings would likely decline. Because the stock
market tends to value peak earnings at low multiples, the result has been the
REIT bear market.
2. IF THE REAL ESTATE CYCLE HAS PEAKED, HOW IS IT POSSIBLE TO MAKE MONEY IN
REITs?
While it may have become more difficult to earn above-average profits in
real estate, we believe that REITs may still reward investors from this point
forward due to several factors. First, based on current valuations, it appears
that REITs already reflect any potential downside in the cycle. Because the
capital markets move in anticipation of events, rather than in reaction, we
would not be surprised to see REITs do better even in the face of flat or
deteriorating fundamentals. Such has indeed been the case in previous real
estate cycles. As shown in the following chart, there is a
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COHEN & STEERS REALTY INCOME FUND, INC.
highly cyclical pattern to capital raising in the REIT industry: more capital is
raised when the stocks are expensive, and less is raised when they are cheap. It
is notable that following the trough in the capital cycle, total returns from
REITs have been exceptional. We believe that we are currently at or near the
trough of the current capital raising cycle. While past performance is no
guarantee of future results, under this scenario there is a strong possibility
that better returns lie ahead.
REIT EQUITY ISSUANCE AND INVESTMENT RETURNS
<TABLE>
<CAPTION>
12-Month
12-Month Total Return.
Total Equity NAREIT Equity
Date Issuance REIT Index
- ----- ------------ -------------
($ Billions)
<S> <C> <C>
3/90 $ 0.6 2.2%
6/90 0.5 -3.5
9/90 0.3 -20.5
12/90 0.3 -15.4
3/91 0.3 8.1
6/91 0.4 9.1
9/91 0.4 32.8
12/91 0.5 35.7
3/92 0.7 11.3
6/92 0.9 13.3
9/92 0.9 16.3
12/92 1.4 14.6
3/93 2.7 38.5
6/93 4.3 31.0
9/93 8.1 34.1
12/93 13.2 19.7
3/94 14.9 1.7
6/94 16.7 6.6
9/94 15.9 -4.5
12/94 11.1 3.2
3/95 8.9 -0.4
6/95 8.1 3.6
9/95 6.7 10.7
12/95 8.2 15.3
3/96 8.9 18.1
6/96 8.4 16.5
9/96 9.8 18.5
12/96 12.3 35.3
3/97 16.5 33.2
6/97 20.5 33.8
9/97 26.1 40.5
12/97 32.7 20.3
3/98 35.6 18.9
6/98 36.2 8.0
9/98 29.4 -13.5
12/98 21.5 -17.5
3/99 14.0 -21.1
6/99 8.5 -9.0
9/99 8.3 -6.5
12/99 6.2 0.0
</TABLE>
Sources: NAREIT, Cohen & Steers
Perhaps more important is that based on changes in the way real estate is
financed, it is our opinion that there may not be major downside to the cycle
from these levels. On the supply side, there continue to be rolling corrections
in markets where a surge in building has taken place, with financing and
construction almost spontaneously receding when hints of overbuilding surface.
Thus, barring a major economic dislocation which materially reduces the demand
for space, we believe that both real estate and REITs may continue to enjoy
stable fundamentals. Under these assumptions, it is our view that REITs would
provide an attractive dividend yield plus the potential for appreciation that we
feel should be in line with growth of earnings. We believe that companies that
meet our 'Realty Majors' criteria -- strong management, above average size and
scale, sound balance sheet and proprietary market position -- will achieve
growth substantially in excess of the average REIT.
3. WHAT PREVENTS REITS FROM GETTING CHEAPER? WHAT WILL MAKE THEM TURN AROUND?
There is nothing to prevent REITs from getting cheaper, just as there was
nothing to prevent them from getting as cheap as they currently are. However,
with most of the valuation parameters that investors have used in the past --
such as absolute and relative price/cash flow and dividend yield, and share
price to net asset value -- at or near unprecedented levels, it is hard for us
to envision a great deal more downside risk. In many instances, REIT share
prices have reached levels which have already invited takeover or going-private
transactions. We would expect to see a
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COHEN & STEERS REALTY INCOME FUND, INC.
growing amount of this activity if prices stay as low as they are today. Other
potential positive catalysts include rising inflation (because of real estate's
inflation hedge characteristic), a correction in the valuation of the broader
stock market (because of REITs' lack of correlation to other financial assets),
or a change in investment sentiment in favor of current income (due to the
superior current dividend yield of REITs). In any case, because it is nearly
impossible to predict exactly what will spark a move in any group, we believe it
is more constructive to focus on finding the companies with the strongest and
most reliable fundamentals, and own them at today's attractive valuations.
4. IF INTEREST RATES MOVE UP, HOW WILL THAT AFFECT REIT SHARE PRICES? WHAT IF
THE STOCK MARKET DECLINES?
Many investors believe that REITs are highly interest rate sensitive.
However, statistical evidence does not support this. Based on internal and third
party research, the primary driver of REIT share price performance is
expectations with respect to the health of real estate markets. Our analysis of
the seven REIT bear markets since 1972 indicates interest rates rose during four
REIT bear markets while they were flat-to-down in the other three.
Interestingly, in the strong recovery period for REIT share prices following
those bear markets, interest rates rose half of the time and fell half of the
time. Other studies have also shown a low correlation between REIT share price
performance and U.S. Government bond returns. We have found that this holds true
for REIT share price performance in relation to the broader stock market as
well. Correlation studies between REITs and the S&P 500, for example, show a low
and, over recent years, declining correlation. Again, the primary driver of REIT
share price performance appears to be the perception of the supply/demand
fundamentals for commercial real estate, often independent from other factors.
5. WHAT CAN REIT MANAGEMENT DO TO COUNTERACT THE PREVAILING NEGATIVE SENTIMENT?
Since mid-1998 several billion dollars of stock repurchases have been
announced by REITs, representing the largest potential equity shrinkage in
industry history. Whereas stock buybacks theoretically have the effect of
increasing earnings as well as asset value per share, based on recent
performance, this has not had a dramatic effect on share prices. Indeed, several
studies have shown that companies repurchasing their shares don't necessarily
outperform the averages. Unfortunately, share buybacks deplete the company's
financial resources -- just the opposite of what is needed in more challenging
times. Many companies are also examining a change in investment strategy,
ranging from the sale of assets and retirement of debt, to an increase in
investment using increased borrowing. We believe that the proper strategy is to
respect the market's assessment of the cost of capital, invest judiciously, and
maximize profits from properties currently owned. This also requires the
maintenance of a strong balance sheet in order to reduce the company's financial
risk and enable it to take advantage of future opportunities. In short, REIT
management should focus on increasing shareholder value through pursuing actions
they have control over -- share price is not one of them.
6. HOW WILL THE GROWTH OF THE INTERNET AFFECT REAL ESTATE MARKETS?
So far, the only tangible effect of the Internet on REITs has been the
diversion of capital away from REIT stocks and into Internet stocks. This,
however, is in the process of changing. Internet retailing is making many
inroads that will surely have an impact on some sectors of the shopping center
industry. Our view is that the apparel-oriented regional malls will be less
affected than centers that sell more commodity-like consumer products. There are
also changing patterns of distribution that are having an impact on warehouse
and industrial facilities: companies that have strong relationships with
manufacturers and Internet-based retailers are better positioned to benefit than
those that merely own ordinary space. Finally, office space usage is changing as
is the range of services that are required by and
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COHEN & STEERS REALTY INCOME FUND, INC.
can be offered to office tenants. High speed telecommunication and Internet
access, for example, is becoming a new profit center for office building owners.
7. IS THIS THE END OF REAL ESTATE SECURITIZATION?
We believe that real estate securitization remains in the early phase of a
long-term expansion. Our view is that current low valuation level of REITs is a
cyclical issue, not a change in the secular dynamics driving real estate
finance. The benefits of securitization to both issuers and investors remain in
place. They include liquidity, real-time pricing, professional management,
improved disclosure and alignment of shareholder and management interests. The
real estate securities market also offers investors a means to create a real
estate portfolio best suited to their needs. Debt securitization continues to be
active, with over $60 billion of real estate debt securities expected to be
issued this year. Growth in real estate equity securitization has been modest
this year, reflective of difficult equity markets and a high cost of capital.
This decline in equity issuance, however, represents the public markets acting
as a governing influence on capital flows to real estate.
8. WHY OWN REITs ANYWAY?
Despite the under-performance of REITs relative to financial assets over
the past two years we believe there remain many benefits to owning REITs in a
diversified portfolio. Over the long-term, REITs have provided investors with
competitive returns, high current income and a low correlation to other assets.
In any particular period, there is an asset class or investment discipline that
is out of favor; this does not mean that the investment case has been
discredited. On the contrary, these tend to be the ideal times to make
investments. As always, a well-diversified portfolio should maintain exposure to
a variety of investments in order to balance risk and return.
As we have mentioned, REIT share prices today are at unprecedented low
valuation levels. While we believe that most REITs bottomed earlier in the year,
we recognize that we cannot make that statement with certainty; surely, recent
performance is testing our conviction. What we do feel certain about is that we
are nowhere near a top. As a result, we continue to believe that REITs are a far
better alternative to direct real estate, and a worthy constituent of any
diversified portfolio.
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 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 REALTY INCOME FUND, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----------
<S> <C> <C> <C>
EQUITIES 100.47%
COMMON STOCK 79.36%
APARTMENT/RESIDENTIAL 2.46%
Apartment Investment & Management Co. --
Class A............................................. 5,500 $ 210,375
Summit Properties................................... 14,800 295,075
-----------
505,450
-----------
DIVERSIFIED 1.72%
Anthracite Capital.................................. 51,300 352,688
-----------
HEALTH CARE 15.57%
ElderTrust.......................................... 26,800 207,700
Health Care Property Investors...................... 33,600 882,000
Healthcare Realty Trust............................. 21,700 405,519
Nationwide Health Properties........................ 54,200 901,075
Omega Healthcare Investors.......................... 25,500 535,500
*Ventas.............................................. 56,700 269,325
-----------
3,201,119
-----------
HOTEL 3.62%
FelCor Lodging Trust................................ 18,700 327,250
MeriStar Hospitality Corp........................... 27,400 417,850
-----------
745,100
-----------
INDUSTRIAL 8.29%
AMB Property Corp................................... 5,900 125,006
First Industrial Realty Trust....................... 29,900 740,025
Pacific Gulf Properties............................. 42,100 839,369
-----------
1,704,400
-----------
OFFICE 21.61%
Arden Realty Group.................................. 24,700 537,225
Brandywine Realty Trust............................. 49,200 799,500
CarrAmerica Realty Corp............................. 24,700 541,856
Crescent Real Estate Equities Co.................... 45,000 810,000
Highwoods Properties................................ 35,300 913,387
Mack-Cali Realty Corp............................... 31,400 841,913
-----------
4,443,881
-----------
OFFICE/INDUSTRIAL 6.71%
Liberty Property Trust.............................. 32,200 730,537
Prime Group Realty Trust............................ 29,800 447,000
Reckson Associates Realty Corp. -- Class B.......... 9,208 201,425
-----------
1,378,962
-----------
</TABLE>
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COHEN & STEERS REALTY INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----------
<S> <C> <C> <C>
SHOPPING CENTER 18.06%
COMMUNITY CENTER 9.62%
Developers Diversified Realty Corp.................. 36,400 $ 509,600
Pan Pacific Retail Properties....................... 29,600 505,050
Phillips International Realty Corp.................. 43,100 678,825
Regency Realty Corp................................. 13,500 283,500
-----------
1,976,975
-----------
REGIONAL MALL 8.44%
JP Realty........................................... 36,500 625,063
Macerich Co......................................... 18,200 420,875
Simon Property Group................................ 17,100 383,681
Taubman Centers..................................... 26,600 305,900
-----------
1,735,519
-----------
TOTAL SHOPPING CENTER............................... 3,712,494
-----------
SPECIALTY 1.32%
Entertainment Properties Trust...................... 18,600 272,025
-----------
TOTAL COMMON STOCK (Identified
cost -- $18,660,283) 16,316,119
-----------
PREFERRED STOCK 21.11%
Apartment Investment & Management Co., 9.00%,
Series C.......................................... 29,000 607,187
Apartment Investment & Management Co., 9.375%,
Series G.......................................... 37,600 850,700
Bradley Real Estate, 8.40%, Series A
(Convertible)..................................... 29,734 678,307
Camden Property Trust, $2.25, Series A
(Convertible)..................................... 18,600 448,725
Crown American Realty Trust, 11.00%, Series A....... 11,100 457,875
Prime Retail, 8.50%, Series B (Convertible)......... 23,940 333,664
Reckson Associates Realty Corp., 7.625%,
Series A (Convertible)............................ 15,900 320,981
SL Green Realty Corp., 8.00%, Series A
(Convertible)..................................... 28,700 643,956
-----------
TOTAL PREFERRED STOCK (Identified
cost -- $4,768,650).......................... 4,341,395
-----------
TOTAL EQUITIES (Identified
cost -- $23,428,933)......................... 20,657,514
-----------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<S> <C> <C> <C>
COMMERCIAL PAPER % 1.00
Leggett & Platt, 5.35%, due 10/1/99
(Identified cost -- $206,000).......................... $206,000 206,000
-----------
TOTAL INVESTMENTS (Identified cost -- $23,634,933).... 101.47% 20,863,514
LIABILITIES IN EXCESS OF OTHER ASSETS................. (1.47)% (301,448)
------ -----------
NET ASSETS (Equivalent to $6.84 per share based on
3,004,977 shares of capital stock outstanding)...... 100.00% $20,562,066
====== ===========
</TABLE>
- ------------------------
*Non-income producing security.
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COHEN & STEERS REALTY INCOME FUND, INC.
FINANCIAL HIGHLIGHTS'D'
SEPTEMBER 30, 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.................... $22,244,049 $ 7.56
Net investment income....................... $ 1,306,025 $ 0.44
Net realized and unrealized loss on
investments............................... (1,972,988) (0.65)
Distributions from net investment income.... (1,529,217) (0.51)
------
Distributions reinvested.................... 514,197
-----------
Net decrease in net asset value.................. (1,681,983) (0.72)
----------- ------
End of period: 9/30/99........................... $20,562,066 $ 6.84
----------- ------
----------- ------
</TABLE>
- ------------------------
'D'Financial information included in this report has been taken from the records
of the Fund without examination by independent accountants.
AVERAGE ANNUAL TOTAL RETURNS*
(PERIODS ENDED SEPTEMBER 30, 1999)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS TEN YEARS
- -------- ------------ ------------
<S> <C> <C>
-6.01% 8.76% 9.43%
</TABLE>
- ------------------------
* Based on net asset value.
KEY INFORMATION
For general information and weekly
net asset value call 800-437-9912
American Stock Exchange Symbol: 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
Adam Derechin
Vice President and Assistant Treasurer
Lawrence B. Stoller
Assistant Secretary
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.
One Chase Manhattan Plaza
New York, New York 10081
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
American Stock Exchange Symbol: RIF
Website: www.cohenandsteers.com
This report is for shareholder information. This is not
a prospectus intended for use in the purchase or sale
of Fund shares. Past performance is, of course, no
guarantee of future results and your investment may
be worth more or less at the time you sell.
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8
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COHEN & STEERS
-----------------
REALTY INCOME FUND
----------------------
QUARTERLY REPORT
SEPTEMBER 30, 1999
COHEN & STEERS
REALTY SHARES
757 THIRD AVENUE
NEW YORK, NY 10017
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as.................................... 'D'