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QUARTERLY REPORT
MARCH 31, 1998
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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COHEN & STEERS REALTY SHARES, INC.
April 15, 1998
To Our Shareholders:
We are pleased to submit to you our report for Cohen & Steers Realty
Shares, Inc. for the quarter ended March 31, 1998. The net asset value per share
at that date was $48.95. In addition, a regular quarterly dividend of $0.47 was
declared for shareholders of record on March 23, 1998 and paid on March 24,
1998.
INVESTMENT REVIEW
The first quarter of 1998 was without question one of the most rewarding
for investors at large, yet one of the most challenging ever for owners of REIT
shares. For the quarter ended March 31, 1998, the Fund's total return, based on
income and change in net asset value was -1.49%. The economy continued to defy
consensus expectations of a slowdown, growing steadily while inflation remained
nearly nonexistent. Interest rates remained quite stable, with long-term rates
remaining at their lowest levels in decades. The stock market set record after
record, turning in its best first quarter performance in a decade, with nearly
every sector fully participating.
The real estate recovery continued to gather steam and the fundamentals for
REITs remained strong. Industry participants in general posted healthy earnings
growth for the fourth quarter of 1997 with most reporting positive earning
surprises. There are, as well, expectations of continued strong profit growth
for REITs in the first quarter of 1998 and the remainder of the year. In this
ideal environment, however, REITs as a group managed to decline in price,
despite a sharp rally at the end of March. Lagging the S&P 500 Index by nearly
15 percentage points, REITs underperformed the stock market by the widest margin
ever for a single quarter. In a reversal of recent trends, the worst performing
groups were the Office and Hotel sectors, while the best performers were the
more defensive Apartment and Self Storage sectors.
We believe that the poor performance of REITs on both an absolute and
relative basis can be traced to three conditions that, we also believe, have
been favorably resolved. First, there had been an oversupply of shares created
by a surge of equity offerings by many companies, particularly during January
and February. In the quarter, over $5 billion of new equity was sold. With REITs
having committed to a substantial amount of property acquisitions, their need
for equity capital temporarily exceeded the market's demand, causing a decline
in price. However, that decline brought most stocks down to a level where
managements became unwilling to issue equity due to possible dilution. As a
result, the potential near-term supply of equity offerings diminished
significantly, thereby relieving the pressure on prices.
The second issue relates to the introduction of legislation that would have
potentially curtailed the growth of the REIT industry by making corporate or
property acquisitions more costly. The specter of such potential legislation
understandably made many investors wary of this sector. Fortunately, this
situation was largely resolved when the only measure to reach Congress was one
that will affect so-called 'paired share' REITs. Our current understanding is
that this measure will alter the rules under which they operate and require the
five companies that have this structure to adopt alternative strategies with
respect to the structuring of future acquisitions. We own shares of two such
companies, Meditrust Corp. and Starwood Hotels and Resorts Trust. We consider
them to be excellent values at current prices and are confident that they will
not experience a significant slowing of their growth rates. Most importantly,
the fact that this was the only measure to be seriously considered by Congress
dissipates a cloud of uncertainty that would have overhung the REIT market for
much of 1998.
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COHEN & STEERS REALTY SHARES, INC.
The third and more complex issue is that there has been a change in
sentiment regarding the state of real estate markets in general and the
prospects for continued strong REIT earnings growth. It is clear that property
prices have risen dramatically in recent years as health has finally been
restored to the real estate industry. While most REITs continue to report
outstanding earnings, many markets have reached equilibrium, whereby rent growth
is likely to moderate and new construction is likely to become more pervasive.
In short, looking past what is shaping up to be a very strong year in 1998, the
market appears to be discounting a slowing of the current unsustainable high
rate of earnings growth in 1999 and beyond. This has precipitated a contraction
of earnings multiples for almost all REITs.
INVESTMENT OUTLOOK
It is ironic that while the situation confronting investors in REITs is no
different from that which is confronting investors in most other sectors of
corporate America, there have been entirely different stock market consequences.
As the U.S. faces the possibility of a maturing economy and slowing growth, the
message coming from many corporations has been to reduce earnings growth
expectations, dramatically so, in some instances. Yet, the market appears to be
overlooking these lower expectations, sending most stocks, as measured by the
popular market averages, to record highs. The exception to this has been REITs,
which have suffered stock price declines despite the fact that we believe their
growth prospects and earnings visibility are superior to the average non-real
estate company.
While we cannot explain the behavior of the stock market in general, it
appears to us that the market is reflecting concern over several issues facing
the REIT industry today, and has more than adequately discounted them in share
prices. Some of these issues are based on fundamental factors while others are
technical and psychological.
The recovery in property prices clearly requires much more selective and
judicious acquisition policies. Whereas there continue to be a growing number of
acquisition opportunities as the shift from private to public ownership of real
estate accelerates, there is also greater competition not only among REITs but
from a host of private investor groups and popular 'opportunity funds' as well.
Lacking public market discipline and limits on the use of leverage, these
financial buyers may be elevating prices to levels which may not appear to make
near-term economic sense. While many REIT managers feel compelled to maintain
earnings growth through acquisitions, these other entities are under pressure to
quickly deploy substantial amounts of capital they have recently raised from
their investors. In addition, some of these investors, as well as several REITs,
have begun to engage in new development or to look overseas for investment
opportunities, despite the greater risks that these ventures entail. Some
investors are concerned that the adoption of these strategies reflects these
managers' beliefs that the U.S. real estate recovery is reaching a late stage
and that, as a result, such managers are willing to assume greater risk in order
to meet their return objectives.
Another common investor concern is that the voracious appetite for equity
by the REIT industry will cause a persistent overhang of shares that may not be
readily absorbed by the marketplace. The willingness of some REITs to sell
equity upon any sustained rise in their stock price reduces or eliminates
scarcity value with respect to the availability of their shares. A further
source of supply is emanating from founding institutional investors whose
shareholdings in a number of REITs were previously subject to restrictions on
sale. Some of these restrictions are
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COHEN & STEERS REALTY SHARES, INC.
expiring and more and more shares are coming onto the market. This supply is
helping to satisfy underlying demand and is consequently placing a ceiling on
some companies' share prices.
With equity prices languishing, many companies are making greater use of
debt financing. The renewed availability of low cost debt capital from both
financial institutions and the public market is creating a preferred source of
financing for many REITs. For example, many of the prominent companies in the
Regional Mall sector have made substantial and high profile acquisitions within
recent months that have elevated their debt/equity ratios. Although leverage has
been an excellent means of enhancing returns, it does not come without the side
effect of lowering earnings predictability. While it is understandable that
investors are concerned about the risk of increased financial leverage, it must
be noted that the debt levels for the majority of companies in our universe
remains much lower than in past cycles. In addition, the balance sheet
requirements imposed on REITs by the various rating agencies should ensure that
leverage will not become excessive.
In summary, we believe that the contraction in earnings multiples over
recent months is a rational reaction to the advancing age of the real estate
cycle but more than fully discounts most of the issues regarding future
fundamentals. It is for this reason that we have believed for some time that
investors should reduce their total return expectations to a level more in line
with historic averages. Nonetheless, this does not mean that there are not
abundant opportunities to earn adequate and competitive returns. In fact, at
current price levels we believe that REITs are as attractively valued as at any
time since the real estate recovery began. We base this on absolute and relative
earnings multiples and dividend yields. Further, as we have expected for some
time, dividend growth for many REITs is beginning to accelerate due to the
bottoming out of dividend payout ratios.
Importantly, the leading REITs continue to have ample internal growth
prospects as well as plentiful acquisition opportunities. In addition, as active
portfolio managers we have the ability to take advantage of the asynchronous
cycles of different property types and geographic regions of the country. We
continue to believe that the transformation of the real estate industry to one
that is dominated by public companies is still in its infancy, and we believe
the transformation may bring substantial rewards to investors in the leading
companies.
Sincerely,
Martin Cohen Robert H. Steers
MARTIN COHEN ROBERT H. STEERS
President Chairman
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS
MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
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<S> <C> <C>
EQUITIES 95.79%
APARTMENT/RESIDENTIAL 10.30%
Apartment Investment & Management Co. -- Class A............... 2,495,200 $ 96,065,200
Avalon Properties.............................................. 2,722,800 78,961,200
Bay Apartment Communities...................................... 490,000 18,191,250
Charles E. Smith Residential Realty............................ 915,900 30,453,675
Essex Property Trust........................................... 1,274,200 43,720,987
Irvine Apartment Communities................................... 1,006,800 31,714,200
Security Capital Pacific Trust................................. 1,398,000 33,639,375
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332,745,887
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DIVERSIFIED 14.92%
*Catellus Development Corp..................................... 3,550,500 65,906,156
*Crescent Operating............................................ 371,200 7,934,400
LNR Property Corp............................................. 2,327,600 62,263,300
Newhall Land & Farming Company................................ 1,847,500 59,120,000
*Security Capital Group -- Class B............................. 1,086,000 33,394,500
*Security Capital Group -- Class B Warrants (expire 9/18/98)... 181,261 600,427
*Security Capital U.S. Realty.................................. 1,720,700 22,713,240
St. Joe Corp.................................................. 1,390,300 46,748,838
Vornado Realty Trust.......................................... 4,208,200 183,319,712
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482,000,573
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HEALTH CARE 5.73%
Healthcare Realty Trust....................................... 490,400 13,853,800
Meditrust Corp................................................ 3,290,900 101,606,537
*Sunrise Assisted Living....................................... 1,553,500 69,519,125
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184,979,462
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HOTEL 4.89%
*Bristol Hotel Co.............................................. 611,100 16,805,250
Starwood Hotels & Resorts Trust............................... 2,643,000 141,235,313
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158,040,563
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INDUSTRIAL 8.02%
#AMB Property Corp. 144........................................ 388,366 8,619,783
CenterPoint Properties Corp................................... 1,570,600 54,480,188
EastGroup Properties.......................................... 126,600 2,611,125
First Industrial Realty Trust................................. 2,006,500 72,234,000
Meridian Industrial Trust..................................... 866,900 20,805,600
Security Capital Industrial Trust............................. 3,907,200 100,122,000
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258,872,696
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</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
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<S> <C> <C>
OFFICE 19.21%
Arden Realty Group............................................. 3,907,300 $ 111,358,050
Brandywine Realty Trust........................................ 1,905,100 45,365,194
Cousins Properties............................................. 1,499,500 46,297,063
Crescent Real Estate Equities.................................. 3,422,900 123,224,400
Equity Office Properties Trust................................. 1,312,200 40,186,125
Highwoods Properties........................................... 2,483,300 87,691,531
Mack-Cali Realty Corp.......................................... 3,655,800 142,804,688
SL Green Realty Corp........................................... 915,000 23,389,687
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620,316,738
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OFFICE/INDUSTRIAL 10.40%
#PS Business Parks.............................................. 888,172 20,568,950
PS Business Parks.............................................. 265,846 6,347,067
#Prime Group Realty Trust, 144A................................. 1,157,800 22,461,320
Prime Group Realty Trust....................................... 962,400 19,248,000
Reckson Associates Realty Corp................................. 3,359,600 88,609,450
Spieker Properties............................................. 2,535,000 104,568,750
TriNet Corporate Realty Trust.................................. 1,937,200 74,218,975
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336,022,512
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SELF STORAGE 4.21%
Public Storage................................................. 4,405,800 136,029,075
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SHOPPING CENTER 18.11%
COMMUNITY CENTER 5.95%
Developers Diversified Realty Corp............................. 2,324,700 95,022,113
Kimco Realty Corp.............................................. 2,743,100 97,037,162
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192,059,275
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FACTORY OUTLET CENTER 0.32%
Chelsea GCA Realty............................................. 278,600 10,308,200
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REGIONAL MALL 11.84%
CBL & Associates Properties.................................... 334,600 8,197,700
General Growth Properties...................................... 2,898,200 106,871,125
JP Realty...................................................... 1,021,800 25,928,175
Macerich Co.................................................... 1,853,800 55,150,550
</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
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REGIONAL MALL (continued)
Rouse Co....................................................... 4,455,900 $ 140,360,850
Simon DeBartolo Group.......................................... 515,000 17,638,750
Urban Shopping Centers......................................... 858,700 28,337,100
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382,484,250
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TOTAL SHOPPING CENTER.......................................... 584,851,725
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TOTAL EQUITIES (Identified cost -- $2,554,029,210)........ 3,093,859,231
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</TABLE>
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PRINCIPAL
AMOUNT
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COMMERCIAL PAPER 3.35%
Leggett & Platt, 5.90%, 4/1/98.................................. $87,356,000 87,356,000
Premium Finance Loan Owner, 5.52%, 4/2/98....................... 20,844,000 20,840,804
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TOTAL COMMERCIAL PAPER (Identified
cost -- $108,196,804)................................ 108,196,804
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TOTAL INVESTMENTS (Identified cost -- $2,662,226,014)............ 99.14% 3,202,056,035
OTHER ASSETS IN EXCESS OF LIABILITIES............................ 0.86% 27,864,795
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NET ASSETS (Equivalent to $48.95 per share based on 65,983,240
shares of capital stock outstanding)........................... 100.00% $3,229,920,830
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</TABLE>
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* Non-income producing security.
# As of March 31, 1998, security is restricted and is subject to registration
with the Securities and Exchange Commission.
FINANCIAL HIGHLIGHTS'D'
MARCH 31, 1998 (UNAUDITED)
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<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
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<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/97....................................... $3,432,994,822 $50.18
Net investment income.......................................... $ 23,817,472 $ 0.36
Net realized and unrealized loss on investments................ (80,549,441) (1.12)
Distributions from net investment income....................... (30,969,681) (0.47)
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Capital stock transactions:
Sold...................................................... 337,981,639
Distributions reinvested.................................. 25,972,804
Redeemed.................................................. (479,326,785)
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Net decrease in net asset value..................................... (203,073,992) (1.23)
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End of period: 3/31/98.............................................. $3,229,920,830 $48.95
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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.
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OFFICERS AND DIRECTORS KEY INFORMATION
Robert H. Steers INVESTMENT ADVISER
Director and Chairman Cohen & Steers Capital Management, Inc.
757 Third Avenue
Martin Cohen New York, NY 10017
Director and President (212) 832-3232
Gregory C. Clark
Director FUND ADMINISTRATOR AND TRANSFER AGENT
Chase Global Funds Services Co.
George Grossman 73 Tremont Street
Director Boston, MA 02108
(800) 437-9912
Jeffrey H. Lynford
Director
CUSTODIAN
Willard H. Smith, Jr. The Chase Manhattan Bank, N.A.
Director New York, NY 10081
Elizabeth O. Reagan
Vice President LEGAL COUNSEL
Dechert Price & Rhoad
Adam Derechin 30 Rockefeller Plaza
Vice President and New York, NY 10112
Assistant Treasurer
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 Cohen & Steers.
This report is authorized for delivery only to
shareholders of Cohen & Steers Realty Shares, Inc. unless
accompanied or preceded by the delivery of a currently
effective prospectus setting forth details of the Fund.
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STATEMENT OF DIFFERENCES
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The dagger symbol shall be expressed as............................... 'D'
