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COHEN & STEERS REALTY SHARES, INC.
October 20, 1999
To Our Shareholders:
We are pleased to submit to you our report for the quarter and nine months
ended September 30, 1999. The net asset value at that date was $36.08. In
addition, a regular quarterly dividend of $0.47 was declared for shareholders of
record on September 23, 1999 and paid on September 24, 1999.
INVESTMENT REVIEW
For the three months ended September 30, 1999, Cohen & Steers Realty Shares
had a total return, based on income and change in net asset value, of -9.1%
which compared 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 -1.3%,
compared to the NAREIT Equity REIT Index total return of -3.7%.
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 highly cyclical
pattern to capital raising in the REIT industry: more capital is raised when the
stocks are expensive, and
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COHEN & STEERS REALTY SHARES, INC.
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 SHARES, 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
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COHEN & STEERS REALTY SHARES, INC.
merely own ordinary space. Finally, office space usage is changing as is the
range of services that are required by and 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>
MARTIN COHEN ROBERT H. STEERS
------------ ----------------
MARTIN COHEN ROBERT H. STEERS
President Chairman
</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 SHARES, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------- --------------
<S> <C> <C> <C>
EQUITIES 98.86%
APARTMENT/RESIDENTIAL 16.53%
Apartment Investment & Management
Co. -- Class A........................... 2,816,500 $ 107,731,125
AvalonBay Communities...................... 2,534,400 85,852,800
Charles E. Smith Residential Realty........ 895,600 30,618,325
Essex Property Trust....................... 920,800 32,170,450
--------------
256,372,700
--------------
DIVERSIFIED 15.92%
*Catellus Development Corp. ................ 477,900 5,615,325
*Crescent Operating......................... 301,200 1,233,038
LNR Property Corp. ........................ 2,281,500 46,485,562
Newhall Land & Farming Co. ................ 400,000 9,850,000
*Reckson Services Industries................ 1,612,700 25,500,819
Vornado Realty Trust....................... 4,864,900 158,109,250
--------------
246,793,994
--------------
HEALTH CARE 7.23%
Health Care Property Investors............. 915,200 24,024,000
*Manor Care................................. 1,504,300 25,855,156
Nationwide Health Properties............... 2,458,600 40,874,225
*Ventas..................................... 4,505,900 21,403,025
--------------
112,156,406
--------------
HOTEL 4.99%
Starwood Hotels & Resorts Worldwide........ 3,465,700 77,328,431
--------------
INDUSTRIAL 7.98%
#AMB Property Corp. 144A.................... 17,825 --
AMB Property Corp. ........................ 3,049,500 64,611,281
First Industrial Realty Trust.............. 539,500 13,352,625
ProLogis Trust............................. 2,428,300 45,834,163
--------------
123,798,069
--------------
</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------- --------------
<S> <C> <C> <C>
OFFICE 21.34%
Arden Realty Group......................... 2,826,000 $ 61,465,500
**Brookfield Properties Corp. ............... 1,335,000 15,671,147
Cousins Properties......................... 713,300 24,207,619
Equity Office Properties Trust............. 1,312,500 30,515,625
Highwoods Properties....................... 2,495,800 64,578,825
Mack-Cali Realty Corp. .................... 3,936,500 105,547,406
SL Green Realty Corp. ..................... 1,414,100 28,989,050
--------------
330,975,172
--------------
OFFICE/INDUSTRIAL 12.11%
Prime Group Realty Trust................... 1,391,200 20,868,000
PS Business Parks.......................... 1,034,300 26,891,800
Reckson Associates Realty Corp. ........... 3,344,600 69,609,488
Spieker Properties......................... 2,029,500 70,398,281
--------------
187,767,569
--------------
SELF STORAGE 2.13%
Public Storage............................. 1,312,600 33,061,112
--------------
SHOPPING CENTER 10.63%
COMMUNITY CENTER 4.79%
Developers Diversified Realty Corp. ....... 1,942,100 27,189,400
Kimco Realty Corp. ........................ 1,317,600 47,104,200
--------------
74,293,600
--------------
REGIONAL MALL 5.84%
General Growth Properties.................. 1,335,000 42,052,500
JP Realty.................................. 15,400 263,725
Macerich Co. .............................. 1,606,500 37,150,312
Rouse Co. ................................. 479,500 11,028,500
--------------
90,495,037
--------------
TOTAL SHOPPING CENTER...................... 164,788,637
--------------
TOTAL EQUITIES (Identified
cost -- $1,573,996,544)............ 1,533,042,090
--------------
</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------------- --------------
<S> <C> <C> <C>
COMMERCIAL PAPER 0.79%
Campbell Soup Corp., 5.35%, due 10/1/99
(Identified cost -- $12,218,000)....... $ 12,218,000 $ 12,218,000
--------------
TOTAL INVESTMENTS (Identified
cost -- $1,586,214,544)................... 99.65% 1,545,260,090
OTHER ASSETS IN EXCESS OF LIABILITIES....... 0.35% 5,392,167
------ --------------
NET ASSETS (Equivalent to $36.08 per share
based on 42,980,325 shares of capital
stock outstanding)........................ 100.00% $1,550,652,257
------ --------------
------ --------------
</TABLE>
- ------------
* Non-income producing security.
# As of September 30, 1999, security is restricted and is subject to
registration with the Securities and Exchange Commission. Escrow shares held
by the company's transfer agent. These shares have been valued at $0 market
value due to the uncertainty of the Fund receiving them.
** Brookfield Properties Corp. is a Canadian company listed on the Toronto and
New York Stock Exchanges. The Toronto Stock Exchange is deemed the principal
exchange for valuation purposes. The market value of the Fund's position in
Canadian dollars on September 30, 1999 was $23,028,750 based on an exchange
rate of 0.680 Canadian dollars to 1 U.S. dollar.
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COHEN & STEERS REALTY SHARES, 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............ $1,933,340,179 $37.98
Net investment income.................... $ 60,552,120 $1.38
Net realized and unrealized loss on
investments........................... (88,434,878) (1.87)
Distributions from net investment
income................................ (61,752,326) (1.41)
-----
Capital stock transactions:
Sold............................... 383,506,293
Distributions reinvested........... 51,353,934
Redeemed........................... (727,913,065)
-------------
Net decrease in net asset value............... (382,687,922) (1.90)
-------------- ------
End of period: 9/30/99........................ $1,550,652,257 $36.08
-------------- ------
-------------- ------
</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 SINCE INCEPTION (7/2/91)
- -------- ------------ ------------------------
<S> <C> <C>
- 2.23% 9.15% 11.82%
</TABLE>
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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 and Assistant Treasurer
Lawrence B. Stoller
Assistant Secretary
KEY INFORMATION
INVESTMENT ADVISER
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, NY 10017
(212) 832-3232
FUND SUB-ADMINISTRATOR AND TRANSFER AGENT
Chase Global Funds Services Co.
73 Tremont Street
Boston, MA 02108
(800) 437-9912
CUSTODIAN
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, NY 10081
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
DISTRIBUTOR
Cohen & Steers Securities, Inc.
757 Third Avenue
New York, NY 10017
NASDAQ Symbol: CSRSX
Website: www.cohenandsteers.com
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. Past
performance, of course, is no
guarantee of future results and your
investment may be worth more or less
at the time you sell.
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COHEN & STEERS
--------------
REALTY SHARES
----------------------
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'
