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COHEN & STEERS REALTY SHARES, INC.
April 20, 1999
To Our Shareholders:
We are pleased to submit to you our report for the quarter ended March 31,
1999. The net asset value per share at that date was $36.20. In addition, a
regular quarterly dividend of $0.47 was declared for shareholders of record on
March 23, 1999 and paid on March 24, 1999.
INVESTMENT REVIEW
Simply stated, REITs have remained out of favor so far in 1999. In the
quarter, the Fund had a total return of - 3.4%, based on income and change in
net asset value, which compared favorably to the NAREIT Equity REIT Index total
return of -5.6%. As has been the case since the peak in REIT share prices in
December 1997, earnings and dividends have continued to grow at a steady pace,
causing valuation measures such as price/earnings ratios and dividend yields to
reach extreme levels. For example, at quarter-end the average equity REIT
dividend yield was 8.0%. Relative to the broader stock market averages, which
have been continually rising to record levels, REIT valuations have reached an
unprecedented level on both an absolute and relative basis. And, as shown in the
following chart, the current REIT bear market has now become one of the longest
and deepest in history.
<TABLE>
<CAPTION>
EQUITY REIT PRICE TOTAL DURATION
BEAR MARKET DECLINE RETURN (MONTHS)
- --------------------------------------------------------------------
<S> <C> <C> <C>
9/72 - 12/74 -48.3 % -37.0 % 27
8/79 - 4/80 -15.9 % -11.1 % 8
6/81 - 7/82 -15.8 % -7.1 % 13
2/87 - 10/87 -20.9 % -17.1 % 8
8/89 - 10/90 -34.4 % -24.2 % 14
9/93 - 11/94 -17.5 % -10.9 % 14
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AVERAGE -25.5 % -17.9 % 14
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12/97 - 3/99 -27.6 % -21.3 % 15
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Source: National Association of Real Estate Investment Trusts
</TABLE>
Importantly, the two bear markets that were deeper than the current one
were both accompanied by economic recessions and real estate depressions. Severe
overbuilding, which led to unusually high vacancy rates and bankruptcies,
precipitated the real estate problems in those previous bear markets. In
contrast, the U.S. economy today seems to remain quite strong and real estate
fundamentals are not only extremely healthy but appear to be improving. Fourth
quarter earnings for the REIT industry grew by 15% according to industry
sources, with much of that improvement coming from strong growth in rents. In
addition, recent statistics indicate continued low vacancy rates and a decline
in new construction for every major property type, suggesting that fears of
potential overbuilding are unfounded.
Though we take no solace in negative returns, we are encouraged that our
portfolio strategy of emphasizing what we believe are the largest and strongest
companies is continuing to have a positive effect on relative investment
performance. For the second consecutive quarter, we have outperformed our
benchmark by a substantial margin.
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COHEN & STEERS REALTY SHARES, INC.
INVESTMENT OUTLOOK
It appears to us that the bear market may have ended and that sentiment
towards the REIT sector is beginning to improve. It has been our belief that
there were three factors that precipitated this bear market: fear of an economic
slowdown, fear of price deflation that would reduce real estate values, and a
narrowing of investment opportunities for public real estate companies. The
first two factors appear to have been favorably resolved, while the third
remains unsettled.
The U.S. economy remains quite strong and there seem to be few, if any,
signs of a slowdown. Further, there appears to be little or no reason for either
domestic or foreign monetary authorities to enact policies that would
precipitate an economic slowdown. Our economy has successfully absorbed the
slowdown in most of Asia, Russia, and Latin and South America. There are now
signs that many of these economies have at least bottomed out, if not entered a
recovery phase. The prospect of a stronger world economy, coupled with the
substantial rise in oil prices, wage pressures and other telltale signs of price
inflation, have caused the bond market to fall in 1999, raising yields to a
9-month high. These recent developments, in our view, have begun to nearly
eliminate any lingering fears of widespread price deflation.
The factor relating to the opportunity set available to REITs has not been
resolved, at least not on an industry-wide basis. There are few, if any,
cyclical industries in which the same investment and operational strategy works
at different phases of the cycle. Because we believe the real estate industry
has completed its growth phase and has now entered the equilibrium phase, it is
becoming clear to us that the formula for success in real estate today is quite
different than in most of the 1990's. Changing property dynamics, capital flows
and investor expectations require a complete re-evaluation of how real estate
enterprises should be run. This is summarized in the chart below.
<TABLE>
<CAPTION>
WINNING REAL ESTATE INVESTMENT STRATEGIES
<S> <C>
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GROWTH PHASE EQUILIBRIUM PHASE
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Acquire as many assets as quickly as possible Rationalize assets acquired in the 1990's
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Take advantage of distressed sellers of property Take advantage of overly aggressive property buyers
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Measure success of acquisitions by earnings accretion Assess merit of acquisitions based on return on assets
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Seek external growth through property acquisitions Maximize internal growth by improving profitability
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Raise as much equity as often as possible Do not dilute shareholders by issuing equity
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Utilize high financial leverage Reduce financial leverage
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Form new REITs Consolidate public company universe
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Invest in assets Invest in entities
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</TABLE>
Our investment strategy continues to emphasize companies whose management
teams have recognized the maturity of the cycle and have adopted new strategies
that will enhance shareholder value. During the growth phase of the cycle, the
strategy of acquiring as much property as possible, as quickly as possible and
with whatever means available, was the key to success. There was a large number
of willing sellers at the same time that occupancies, rents and asset values
were all rising very quickly. With stock prices high and financing plentiful,
nearly all acquisitions contributed to per share earnings, further sustaining
lofty share valuations.
In the equilibrium phase of the cycle, property prices are high,
acquisition opportunities are fewer, and competition is much greater,
particularly from private capital sources. In addition, the bear market has
significantly
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2
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COHEN & STEERS REALTY SHARES, INC.
raised the cost of equity capital for REITs, further narrowing their acquisition
and financing opportunities. It is ironic that a seller's market for property
now coincides with a buyer's market for shares of property-owning REITs. As a
result, we believe that a large-scale consolidation of the industry may be at
hand. In recent weeks several proposals to take REITs private have been
announced and it is our understanding that a great many more are currently being
considered. Clearly, if the gap between public and private market values
persists, we believe many REITs will either be taken private or taken over by
other REITs. This activity may prove to be a catalyst for better stock price
performance.
In this environment some exciting strategic opportunities are surfacing
that can materially improve the quality of REIT property portfolios and increase
earnings growth rates. REITs today have an unprecedented opportunity to sell
properties at attractive prices, pruning their portfolios of assets that are
under-performing or that do not fit from a strategic standpoint. The proceeds of
these sales can be used to repay debt, be re-deployed into higher returning
assets, or simply be retained for future opportunities. A large number of REITs
have chosen to repurchase shares; however, this is a strategy which we believe
most often has little merit, given the ongoing capital requirements of the real
estate business. In any case, the combination of asset sales and a slowdown in
the acquisition pace of the industry has materially reduced the amount of
financing required by REITs. The perception that REITs will not be tapping the
equity market on a regular basis will dramatically improve the supply/demand
picture for their shares.
The governance of the public market is having the further effect of
disciplining the management of the REIT industry. Reductions in staff and other
overhead are now commonplace, and efforts to improve profitability of existing
owned assets have become foremost priorities. In conjunction with employing a
higher required rate of return on new investment, industry participants have a
unique opportunity to enjoy a meaningful increase in profitability.
As we have discussed in the past, we believe that the equilibrium phase of
the cycle could last for a very long time due to the public market discipline
that has been imposed on the real estate industry. This leads us to believe that
real estate and REIT returns will generally revert to their historic levels: for
the 20 year period ended March 31, 1999, the NAREIT Equity REIT Index, for
example, had a compound average annual return of 13.6%. While we cannot make
predictions about the Fund's absolute future performance, or its future
performance relative to an index, our goal will continue to be to provide
returns that are in excess of these broad-based indices. There are a host of
companies that have what we believe is above-average growth potential and these
are the mainstays of the Fund's portfolio. In our opinion, the public market
offers the single best real estate investment today.
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
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------- --------------
<S> <C> <C> <C>
EQUITIES 98.37%
APARTMENT/RESIDENTIAL 14.06%
Apartment Investment & Management Co. -- Class A............. 2,837,000 $ 102,841,250
AvalonBay Communities........................................ 2,534,400 80,150,400
Charles E. Smith Residential Realty.......................... 509,000 15,683,563
Essex Property Trust......................................... 1,194,200 31,198,475
--------------
229,873,688
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DIVERSIFIED 14.81%
*Crescent Operating.......................................... 301,200 1,091,850
LNR Property Corp............................................ 2,331,500 46,047,125
Newhall Land & Farming Co. .................................. 568,700 13,577,712
*Reckson Services Industries................................. 1,612,700 7,257,150
*Vornado Operating Co........................................ 152,200 913,200
Vornado Realty Trust......................................... 5,022,000 173,259,000
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242,146,037
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HEALTH CARE 5.21%
*HCR Manor Care.............................................. 1,285,000 29,314,063
Health Care Property Investors............................... 629,500 18,098,125
Healthcare Realty Trust...................................... 54,100 1,027,900
Nationwide Health Properties................................. 1,934,700 36,759,300
--------------
85,199,388
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HOTEL 8.05%
FelCor Lodging Trust......................................... 344,400 7,985,775
Host Marriott Corp........................................... 59,900 666,388
Marriott International....................................... 508,600 17,101,675
*Promus Hotel Corp........................................... 267,500 9,730,312
Starwood Hotels & Resorts Worldwide.......................... 3,370,300 96,264,194
--------------
131,748,344
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INDUSTRIAL 4.35%
#AMB Property Corp. 144A..................................... 17,825 --
First Industrial Realty Trust................................ 673,600 16,124,300
ProLogis Trust............................................... 2,681,900 54,978,950
--------------
71,103,250
--------------
</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------- --------------
<S> <C> <C> <C>
OFFICE 26.02%
Arden Realty Group........................................... 3,534,100 $ 78,633,725
Cousins Properties........................................... 1,165,100 33,715,081
Crescent Real Estate Equities Co............................. 2,387,200 51,324,800
Equity Office Properties Trust Co............................ 948,900 24,137,644
Highwoods Properties......................................... 3,561,000 83,906,062
Mack-Cali Realty Corp........................................ 4,312,000 126,665,000
SL Green Realty Corp......................................... 1,439,100 27,073,069
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425,455,381
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OFFICE/INDUSTRIAL 11.29%
Prime Group Realty Trust..................................... 1,474,300 19,534,475
PS Business Parks............................................ 1,034,300 22,689,956
Reckson Associates Realty Corp............................... 3,344,600 68,773,338
Spieker Properties........................................... 2,089,500 73,654,875
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184,652,644
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SELF STORAGE 2.12%
Public Storage............................................... 1,387,100 34,677,500
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SHOPPING CENTER 12.46%
COMMUNITY CENTER 5.00%
Developers Diversified Realty Corp........................... 2,352,500 33,670,156
Kimco Realty Corp............................................ 1,303,900 48,081,313
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81,751,469
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REGIONAL MALL 7.46%
General Growth Properties.................................... 1,335,000 43,304,062
JP Realty.................................................... 380,600 7,493,063
Macerich Co.................................................. 1,674,200 37,983,412
Rouse Co..................................................... 712,500 15,808,594
Simon Property Group......................................... 635,500 17,436,531
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122,025,662
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TOTAL SHOPPING CENTER........................................ 203,777,131
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TOTAL EQUITIES (Identified cost -- $1,656,126,556)...... 1,608,633,363
--------------
</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------- --------------
<S> <C> <C> <C>
COMMERCIAL PAPER 1.09%
Premium Financial Corp., 4.85% due 4/1/99 (Identified
cost -- $17,768,000)...................................... $ 17,768,000 $ 17,768,000
--------------
TOTAL INVESTMENTS (Identified cost -- $1,673,894,556)......... 99.46% 1,626,401,363
OTHER ASSETS IN EXCESS OF LIABILITIES......................... 0.54% 8,891,997
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NET ASSETS (Equivalent to $36.20 per share based on 45,173,832
shares of capital stock outstanding)........................ 100.00% $1,635,293,360
------ --------------
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</TABLE>
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* Non-income producing security.
# As of March 31, 1999, security is restricted and is subject to registration
with the Securities and Exchange Commission. Shares are 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.
FINANCIAL HIGHLIGHTS'D'
MARCH 31, 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................................... $ 21,886,703 $ 0.49
Net realized and unrealized loss on investments......... (83,724,246) (1.80)
Distributions from net investment income................ (21,192,936) (0.47)
------
Capital stock transactions:
Sold.............................................. 101,603,117
Distributions reinvested.......................... 17,746,290
Redeemed.......................................... (334,365,747)
---------------
Net decrease in net asset value.............................. (298,046,819) (1.78)
--------------- ------
End of period: 3/31/99....................................... $ 1,635,293,360 $36.20
--------------- ------
--------------- ------
</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.
AVERAGE ANNUAL TOTAL RETURNS
(PERIODS ENDED MARCH 31, 1999)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS SINCE INCEPTION (7/2/91)
- -------- ---------- ------------------------
<S> <C> <C>
- -19.67% 8.55% 12.31%
</TABLE>
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COHEN & STEERS REALTY SHARES, INC.
<TABLE>
<S> <C>
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 SUB-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
The Chase Manhattan Bank
Willard H. Smith, Jr. One Chase Manhattan Plaza
Director New York, NY 10081
Elizabeth O. Reagan LEGAL COUNSEL
Vice President Simpson Thacher & Bartlett
425 Lexington Avenue
Adam Derechin New York, NY 10017
Vice President and Assistant Treasurer
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.
</TABLE>
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7
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COHEN & STEERS
REALTY SHARES
QUARTERLY REPORT
MARCH 31, 1999
COHEN & STEERS
REALTY SHARES
757 THIRD AVENUE
NEW YORK, NY 10017
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First Class Mail
U.S. Postage
PAID
Boston, MA
Permit No. 56712
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STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as..................................... 'D'
