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COHEN & STEERS REALTY SHARES, INC.
October 15, 1996
To Our Shareholders:
We are pleased to submit to you our report for Cohen & Steers Realty
Shares, Inc. for the quarter and nine months ended September 30, 1996. The net
asset value per share at that date was $38.55. In addition, a regular quarterly
dividend of $0.47 was declared for shareholders of record on September 20, 1996
and paid on September 23, 1996.
INVESTMENT REVIEW
During the third quarter, Cohen & Steers Realty Shares had a total return
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
Fund's total return was 15.7%. 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.
Our investment results have been in excess of the major REIT Indexes
primarily due to two strategic decisions made so far this year. First, during
most of the year we maintained an overweighted position in owners of shopping
centers, which have been direct beneficiaries of the strong economy and consumer
spending that has consistently exceeded economists' expectations. As the shares
of these companies rose in price, we selectively trimmed some positions and
added to our holdings of owners of office buildings. These companies have
performed extremely well recently in recognition of the recovering office
markets and the outstanding property acquisitions being made by the leading
companies. For the first time in history, some of the nation's most prestigious
office properties are held in portfolios of publicly owned companies, purchased
at a fraction of their replacement cost.
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. The 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
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COHEN & STEERS REALTY SHARES, INC.
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. 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.
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COHEN & STEERS REALTY SHARES, INC.
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 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 SHARES, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
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<S> <C> <C>
EQUITIES 92.50%
APARTMENT/RESIDENTIAL 18.63%
Associated Estates Realty Corp............................ 305,600 $ 6,264,800
Avalon Properties......................................... 1,995,100 46,386,075
BRE Properties............................................ 63,300 1,266,000
Bay Apartment Communities................................. 546,400 15,572,400
Camden Property Trust..................................... 780,000 19,987,500
Charles E. Smith Residential Realty....................... 509,300 12,286,863
Colonial Properties Trust................................. 1,205,200 31,636,500
Columbus Realty Trust..................................... 516,300 10,519,613
Irvine Apartment Communities.............................. 1,013,900 22,432,537
Merry Land & Investment Co................................ 362,800 7,754,850
Oasis Residential......................................... 344,200 7,529,375
Post Properties........................................... 1,059,500 38,804,187
Summit Properties......................................... 773,900 15,284,525
Sun Communities........................................... 620,400 17,681,400
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253,406,625
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HEALTH CARE 4.85%
Health Care Property Investors............................ 499,500 16,296,187
Health Care REIT.......................................... 839,100 19,509,075
Nationwide Health Properties.............................. 735,900 16,189,800
*Sunrise Assisted Living.................................. 497,700 13,935,600
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65,930,662
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HOTEL 2.39%
*Bristol Hotel Co......................................... 256,700 6,834,638
Patriot American Hospitality.............................. 375,800 12,636,275
Starwood Lodging Trust.................................... 311,000 13,023,125
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32,494,038
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INDUSTRIAL 8.05%
Centerpoint Properties Corp............................... 1,118,400 30,057,000
Security Capital Industrial Trust......................... 422,800 7,716,100
Spieker Properties........................................ 1,795,600 52,745,750
Weeks Corp................................................ 663,200 18,901,200
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109,420,050
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</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
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<S> <C> <C>
OFFICE 22.19%
Beacon Properties Corp.................................... 1,832,800 $ 53,151,200
Cali Realty Corp.......................................... 1,258,300 34,131,387
CarrAmerica Realty Corp................................... 1,797,800 44,945,000
Cousins Properties........................................ 1,583,900 34,845,800
Crescent Real Estate Equities............................. 1,488,800 61,226,900
Highwoods Properties...................................... 1,617,000 49,116,375
Reckson Associates Realty Corp............................ 656,900 24,387,413
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301,804,075
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SELF STORAGE 4.63%
Public Storage............................................ 2,784,800 63,006,100
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SHOPPING CENTER 31.76%
COMMUNITY CENTER 16.40%
Developers Diversified Realty Corp........................ 1,213,900 38,996,538
Federal Realty Investment Trust........................... 1,480,100 34,782,350
Glimcher Realty Trust..................................... 1,085,200 21,297,050
Kimco Realty Corp......................................... 1,543,700 45,925,075
Price REIT................................................ 363,900 11,462,850
Regency Realty Corp....................................... 216,500 4,844,187
Vornado Realty Trust...................................... 1,188,000 48,114,000
Weingarten Realty Investors............................... 454,000 17,592,500
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223,014,550
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FACTORY OUTLET CENTER 2.20%
Chelsea GCA Realty........................................ 688,800 21,094,500
Tanger Factory Outlet Centers............................. 356,200 8,771,425
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29,865,925
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REGIONAL MALL 13.16%
CBL & Associates Properties............................... 964,500 22,183,500
JP Realty................................................. 895,800 19,931,550
Macerich Co............................................... 1,220,700 27,313,163
Rouse Co.................................................. 1,635,300 42,517,800
Simon DeBartolo Group..................................... 1,839,800 46,914,900
The Mills Corp............................................ 1,025,000 20,243,750
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179,104,663
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TOTAL SHOPPING CENTER..................................... 431,985,138
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TOTAL EQUITIES (Identified cost $1,112,994,051)..... 1,258,046,688
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</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
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<S> <C> <C> <C>
COMMERCIAL PAPER 7.43%
Merrill Lynch, 5.35%, 10/1/96
(Identified cost $101,003,000)...................... $101,003,000 $ 101,003,000
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TOTAL INVESTMENTS (Identified cost $1,213,997,051)........ 99.93% 1,359,049,688
OTHER ASSETS IN EXCESS OF LIABILITIES..................... 0.07% 990,170
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NET ASSETS (Equivalent to $38.55 per share based on
35,283,025 shares of capital stock outstanding)........ 100.00% $1,360,039,858
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</TABLE>
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* Non-income producing.
FINANCIAL HIGHLIGHTS*
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
----------------------------- ---------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/95........................ $ 793,084,074 $ 34.62
Net investment income.......................... $ 40,043,609 $ 1.38
Net realized and unrealized gain on
investments................................. 115,486,069 3.96
Distributions from net investment income....... (41,232,022) (1.41)
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Capital stock transactions:
Sold........................................... 620,366,128
Distributions reinvested....................... 34,803,455
Redeemed....................................... (202,511,455)
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Net increase in net asset value...................... 566,955,784 3.93
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End of period: 9/30/96............................... $1,360,039,858 $ 38.55
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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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COHEN & STEERS REALTY SHARES, INC.
<TABLE>
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OFFICERS AND DIRECTORS KEY INFORMATION
Robert H. Steers INVESTMENT ADVISER
Director and Chairman Cohen & Steers Capital Management, Inc.
Martin Cohen 757 Third Avenue
Director and President New York, NY 10017
Gregory C. Clark (212) 832-3232
Director FUND ADMINISTRATOR AND TRANSFER AGENT
George Grossman Chase Global Funds Services Co.
Director 73 Tremont Street
Jeffrey H. Lynford Boston, MA 02108
Director (800) 437-9912
Willard H. Smith, Jr. CUSTODIAN
Director The Chase Manhattan Bank, N.A.
Elizabeth O. Reagan 770 Broadway
Vice President New York, NY 10003
LEGAL COUNSEL
Dechert Price & Rhoads
477 Madison Avenue
New York, NY 10022
NASDAQ Symbol: CSRSX
Net asset value (NAV) can be found in the daily mutual
fund listings in the financial section of most major
newspapers under the Fund's abbreviation 'C&SRlty'.
This report is authorized for delivery to other than
shareholders of Cohen & Steers Realty Shares, Inc. only
when accompanied or preceded by the delivery of a
currently effective prospectus setting forth details of
the Fund.
</TABLE>
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COHEN & STEERS
REALTY SHARES
757 THIRD AVENUE
NEW YORK, NY 10017
First Class Mail
U.S. Postage
PAID
Boston, MA
Permit No. 56712
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QUARTERLY REPORT
SEPTEMBER 30, 1996
