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COHEN & STEERS REALTY SHARES, INC.
October 16, 1997
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, 1997. The net
asset value per share at that date was $51.77. In addition, a regular quarterly
dividend of $0.47 was declared for shareholders of record on September 22, 1997
and paid on September 23, 1997.
INVESTMENT REVIEW
Real estate securities recorded exceptional performance in the third
quarter on both an absolute and relative basis. Returns for the quarter exceeded
those of both the stock and bond markets largely because REIT share prices held
up extremely well in August when stocks and bonds both experienced meaningful
price declines. For the quarter and nine-months ended September 30, 1997, the
Fund had a total return, based on income and change in net asset value, of 10.8%
and 18.3%, respectively. As we have mentioned in the past, the low correlation
of REITs to other assets continues to attract a great deal of interest from
investors seeking portfolio diversification. As has been the case for most of
the past two years, the Hotel and Office sectors were once again the best
performing groups. Their returns reflect the extraordinarily positive
supply/demand dynamics that both property types enjoy as well as the substantial
investment opportunities available to the companies focused on them.
Perhaps even more significant than the excellent returns of the past
several months is that a large number of historic events have taken place in the
REIT industry. We believe that these events will affect the industry for a long
time to come. Most importantly, there has been an acceleration in the transfer
of property ownership from private to public hands. Barely a week has gone by
without the announcement of a major, often as much as a $1 billion portfolio
acquisition by a REIT. (For perspective, it is important to bear in mind that
until very recently, few if any REITs held that much property altogether.) These
acquisitions often involve the purchase of or merger with established private
companies. Examples include Cali Realty's $1.2 billion purchase of The Mack
Company and Starwood Lodging's $1.8 billion acquisition of Westin Hotels &
Resorts from a group of prominent private real estate investors. A critical
factor in most of these transactions is that sellers are receiving stock in
exchange for their equity interest, thereby becoming major shareholders of the
combined company.
Headline news was made from the largest combination of public real estate
companies ever announced; Equity Office Properties (EOP), with a $7 billion
market capitalization, agreed to acquire Beacon Properties for $3 billion in
stock. This combination appears to make a great deal of sense due to a number of
healthy strategic and financial underpinnings. This acquisition will enable EOP
to accelerate its strategy of building a nationwide office franchise while
eliminating a strong competitor in the process. Like most mergers, there are
significant economies of scale and reductions in overhead that will be realized.
Additionally, Beacon has a substantial investment pipeline and the merged
company will have cross-marketing and ancillary revenue opportunities. After a
brief period of uncertainty, the market's reaction to the merger has been very
positive -- setting the stage for several more such strategic mergers in the
future.
In a year where a record amount of equity capital has already been raised
for REITs, the second largest REIT IPO occurred when Boston Properties went
public, raising $900 million. Equity Office also came public, raising 'only'
$600 million; but following its merger with Beacon, EOP will become the largest
publicly-traded real estate company. Interestingly, Equity Office had originally
been formed entirely with institutional capital, whose investors agreed to
accept publicly-traded shares in exchange for their private interests. In the
near future we expect to see several more institutional advisers, whose
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COHEN & STEERS REALTY SHARES, INC.
clients' portfolios represent tens of billions of dollars, attempt to securitize
both these portfolios and the value of their management interests. It is notable
that one such plan was derailed when Simon DeBartolo Group purchased Retail
Property Trust, pre-empting this private REIT's plan to merge with two other
private companies and go public. Simon DeBartolo's motivations in this
transaction were largely the same as EOP's with regard to Beacon.
The highly successful initial public offerings of Security Capital Group
and LaSalle Partners also represent important events. While their businesses are
uniquely different, they are the first institutional managers of real estate
assets to come public, a clear endorsement of public market ownership of real
estate investment and management organizations. We understand that other such
property management and investment companies and providers of essential services
to the industry are contemplating public offerings. In short, almost the entire
infrastructure of the real estate industry is in the process of becoming part of
the public market.
So far in 1997, the market capitalization of the universe of the 172 equity
REITs has expanded by 47% to $132 billion, from $90 billion at year-end 1996. In
the same period, the number of companies in existence grew by only six,
indicating that growth has primarily been the result of existing companies
getting substantially larger. The sources of growth have been equity offerings,
issuance of shares in exchange for property, and share price appreciation. These
sources should continue contributing to the industry's growth, in our opinion.
INVESTMENT OUTLOOK
Strong real estate fundamentals, combined with the record acquisitions
taking place in the industry, are enhancing the rate of earnings per share
growth of the major companies. While some of this growth comes from a positive
spread between the company's cost of capital and its return on new investments,
there is more to the story. The greater benefit of many property acquisitions is
the profit that comes from the application of better management and financial
techniques, as well as economies of scale and enhanced revenue opportunities. In
addition, most REITs are acquiring properties at prices which are lower than
replacement cost and represent good going-in returns. Importantly, these
acquisitions are occurring at a point in the cycle where there are strong
prospects for increasing rental income and rising value.
Thus it appears that the industry is poised to enjoy substantial and
sustainable growth in terms of both absolute size and per share earnings. While
many nay-sayers have suggested that REITs are becoming too big and are facing
more limited growth prospects as a result, just the opposite has occurred.
Larger REITs have been able to make ever larger acquisitions, build larger and
more efficient organizations, and access lower cost capital in the process. And
the industry appears to have a very long way to go; by most measures, less than
10% of the nation's eligible commercial real estate is publicly owned. The
growing acceptance of the REIT structure makes the eventual securitization of
much of the balance all the more likely. Whereas the largest REITs today barely
qualify as 'mid-cap' companies, we believe that they are well on the way to
becoming large capitalization companies on the scale of some of America's
largest and most prominent industrial and financial organizations.
Despite this positive outlook, investors should be aware of several warning
signs that temper our near-term enthusiasm. As we have discussed in the past,
most property markets are now at or near equilibrium, which indicates to us that
real estate investment returns, on average, are likely to revert to lower levels
than those realized over the past several years. Despite that tempered outlook,
valuations by most measures have risen over the past two years. Illustrative of
this, the NAREIT Equity REIT Index dividend yield at the end of September was
5.45%, the lowest in its 25-year history. We would note, however, that
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COHEN & STEERS REALTY SHARES, INC.
REITs today look totally different from any time in the past and that current
REIT valuation measures relative to both the stock and bond markets remain very
attractive, particularly in light of their growth prospects.
As we have learned in prior periods of improved valuations, REIT
underwriting activity tends to increase dramatically, causing temporary supply
pressures which may suppress prices of existing REITs. We anticipate over $5
billion of such offerings between now and year end. Offsetting this potential
tide of equity issuance is the increasing demand for REIT shares on the part of
a broad base of institutional investors and mutual funds seeking the unique
investment characteristics that REITs offer. Taken in the context of the large
universe of potential buyers, it is quite possible that the supply of equity
could be easily absorbed. This will certainly be an important test of the true
depth of the REIT market.
It is for these reasons that, while we continue to remain fully invested,
we are more narrowly focused on the leading companies which we believe will be
able to multiply their asset bases on a profitable basis over the coming years.
In retrospect, over the past seven years our industry has provided investors
with unprecedented growth and profitability that even the most optimistic could
not have foreseen. Having come this far, we believe that our industry's future
growth prospects are as bright as ever. It is our goal to participate in this
growth in the fullest and most prudent fashion.
Sincerely,
/s/ Martin Cohen /s/ Robert H. Steers
MARTIN COHEN ROBERT H. STEERS
President Chairman
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------- --------------
<S> <C> <C>
EQUITIES 98.19%
APARTMENT/RESIDENTIAL 16.57%
Apartment Investment & Management Co. .................. 1,637,000 $ 59,136,625
Avalon Properties....................................... 2,722,800 81,003,300
BRE Properties.......................................... 1,045,600 29,603,550
Bay Apartment Communities............................... 718,000 28,675,125
Camden Property Trust................................... 766,200 23,464,875
Charles E. Smith Residential Realty..................... 915,900 31,140,600
Colonial Properties Trust............................... 1,712,800 51,169,900
Columbus Realty Trust................................... 777,600 18,808,200
Equity Residential Properties Trust..................... 405,200 22,108,725
Essex Property Trust.................................... 1,335,700 46,499,056
Irvine Apartment Communities............................ 1,231,800 41,111,325
Post Properties......................................... 1,137,900 45,231,525
Security Capital Pacific Trust.......................... 1,185,000 27,847,500
Sun Communities......................................... 1,030,100 36,954,838
--------------
542,755,144
--------------
DIVERSIFIED 10.35%
*Catellus Development Corp.............................. 1,494,100 31,002,575
*Crescent Operating..................................... 382,700 7,701,838
Newhall Land & Farming Company.......................... 1,617,800 39,029,425
*Security Capital Group -- Class B...................... 1,096,200 37,681,875
*Security Capital Group -- Class B Warrants (expires
9/18/98).............................................. 181,262 1,450,099
*Security Capital U.S. Realty........................... 2,738,100 40,797,690
Vornado Realty Trust.................................... 2,135,800 181,409,512
--------------
339,073,014
--------------
HEALTH CARE 2.14%
Healthcare Realty Trust................................. 490,400 13,945,750
*Sunrise Assisted Living................................ 1,553,500 56,120,187
--------------
70,065,937
--------------
HOTEL 3.92%
*Bristol Hotel Co. ..................................... 1,578,100 44,088,169
Starwood Lodging Trust.................................. 1,466,600 84,237,837
--------------
128,326,006
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INDUSTRIAL 5.93%
CenterPoint Properties Corp. ........................... 1,621,500 58,880,719
EastGroup Properties.................................... 814,650 17,820,469
Meridian Industrial Trust............................... 1,006,000 25,778,750
Security Capital Industrial Trust....................... 2,571,700 59,952,756
Weeks Corp.............................................. 966,700 31,659,425
--------------
194,092,119
--------------
</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
------------- --------------
OFFICE 24.24%
<S> <C> <C>
Arden Realty Group...................................... 3,058,500 $ 95,960,438
Beacon Properties Corp. ................................ 2,216,100 101,525,081
Boston Properties....................................... 880,500 28,891,406
Brandywine Realty Trust................................. 1,368,700 32,763,256
Cali Realty Corp........................................ 3,152,200 131,210,325
CarrAmerica Realty Corp................................. 2,242,100 71,747,200
Cousins Properties...................................... 1,564,500 46,837,219
Crescent Real Estate Equities........................... 3,826,400 153,534,300
Equity Office Properties Trust.......................... 618,600 20,993,737
Highwoods Properties.................................... 2,552,100 90,280,538
SL Green Realty Corp. .................................. 777,100 20,107,462
--------------
793,850,962
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OFFICE/INDUSTRIAL 7.54%
Reckson Associates Realty Corp. ........................ 2,831,200 75,380,700
Spieker Properties...................................... 3,230,500 131,037,156
TriNet Corporate Realty Trust........................... 1,149,500 40,376,188
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246,794,044
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SELF STORAGE 3.71%
Public Storage.......................................... 4,099,400 121,444,725
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SHOPPING CENTER 23.79%
COMMUNITY CENTER: 6.34%
Developers Diversified Realty Corp...................... 2,191,700 87,668,000
Federal Realty Investment Trust......................... 432,800 10,901,150
Kimco Realty Corp. ..................................... 1,906,900 66,383,956
Regency Realty Corp. ................................... 912,400 24,406,700
Weingarten Realty Investors............................. 459,400 18,347,288
--------------
207,707,094
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FACTORY OUTLET CENTER: 0.92%
Chelsea GCA Realty...................................... 724,400 30,243,700
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REGIONAL MALL: 16.53%
CBL & Associates Properties............................. 1,340,600 34,771,813
General Growth Properties............................... 2,954,300 109,309,100
JP Realty............................................... 1,101,900 28,167,319
Macerich Co............................................. 1,913,800 55,260,975
Rouse Co................................................ 4,780,800 148,204,800
Simon DeBartolo Group................................... 2,385,900 78,734,700
Taubman Centers......................................... 1,608,000 20,602,500
The Mills Corp. ........................................ 1,293,800 33,396,212
Urban Shopping Centers.................................. 1,030,300 32,969,600
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541,417,019
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TOTAL SHOPPING CENTER................................. 779,367,813
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TOTAL EQUITIES (Identified
cost -- $2,470,662,554)....................... 3,215,769,764
--------------
</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- --------------
COMMERCIAL PAPER 3.43%
<S> <C> <C>
Dillard's, Inc., 6.00%, 10/1/97......................... $ 9,931,000 $ 9,931,000
Leggett & Platt, Inc., 6.00%, 10/1/97................... 53,100,000 53,100,000
Michigan Consolidated Gas Co., 6.00%, 10/1/97........... 22,248,000 22,248,000
Pacific Mutual, 6.00%, 10/1/97.......................... 17,000,000 17,000,000
Phelps Dodge Corp., 6.00%, 10/1/97...................... 10,000,000 10,000,000
--------------
TOTAL COMMERCIAL PAPER (Identified
cost -- $112,279,000).............................. 112,279,000
--------------
TOTAL INVESTMENTS (Identified cost -- $2,582,941,554)............. 101.62% 3,328,048,764
LIABILITIES IN EXCESS OF OTHER ASSETS............................. (1.62)% (52,895,048)
---------------- --------------
NET ASSETS (Equivalent to $51.77 per share based on 63,264,848
shares of capital stock outstanding)............................ 100.00% $3,275,153,716
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</TABLE>
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* Non-income producing security.
FINANCIAL HIGHLIGHTS`D'
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
------------------------------- ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/96........................................ $2,036,378,585 $45.09
Net investment income........................................... $ 80,288,823 $ 1.32
Net realized and unrealized gain on investments................. 408,430,705 6.77
Distributions from net investment income........................ (85,824,505) (1.41)
------
Capital stock transactions:
Sold....................................................... 1,662,578,898
Distributions reinvested................................... 73,775,754
Redeemed................................................... (900,474,544)
-------------
Net increase in net asset value...................................... 1,238,775,131 6.68
-------------- ------
End of period: 9/30/97............................................... $3,275,153,716 $51.77
-------------- ------
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</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 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
KEY INFORMATION
INVESTMENT ADVISER
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, NY 10017
(212) 832-3232
FUND ADMINISTRATOR AND TRANSFER AGENT
Chase Global Funds Services Co.
73 Tremont Street
Boston, MA 02108
(800) 437-9912
CUSTODIAN
The Chase Manhattan Bank, N.A.
3 Chase MetroTech Center
Brooklyn, NY 11245
LEGAL COUNSEL
Dechert Price & Rhoads
30 Rockefeller Plaza
New York, NY 10112
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.
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[COHEN & STEERS LOGO]
QUARTERLY REPORT
SEPTEMBER 30, 1997
COHEN & STEERS
REALTY SHARES
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'
