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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
April 14, 1997
To Our Shareholders:
We are pleased to submit to you our report for Cohen & Steers Total Return
Realty Fund, Inc. for the period ended March 31, 1997. The net asset value per
share at that date was $16.87. In addition, during the quarter, three $0.08 per
share dividends were declared and paid.
INVESTMENT REVIEW
During the quarter ended March 31, 1997, Cohen & Steers Total Return Realty
Fund had a total return of 1.4%, a performance that was notable in several
respects. These positive returns, following the extraordinary 1996 fourth
quarter surge in prices, surprised many who had been expecting a retreat from
the higher price levels. In addition, REITs achieved positive returns in the
face of rising interest rates and a turbulent stock market environment,
particularly during the month of March. It appears that the increasingly strong
US economy has been the single most important factor influencing both financial
market and REIT performance so far this year. Economic indicators have been
strong all year, pushing the stock market on an upward path until, in March,
fears of rising inflation and a Federal Reserve tightening of monetary policy
caused meaningful weakness in the stock and bond markets. Despite these
crosscurrents, REITs held steady in March and for the quarter as well. In
response to the strong economy, the Hotel and Regional Mall sectors were among
the best performers during the first quarter. In contrast, the Triple Net Lease
and Health Care sectors, both of which are highly sensitive to interest rates,
were among the worst performers.
The resilience of REITs during this period of financial market turbulence,
however, has been tested recently as share prices have undergone a modest
decline since the Federal Reserve increased interest rates on March 25th. We do
not believe that the interest rate increase alone has been the cause of this
decline. This decline was also precipitated by the potential supply/demand
imbalance created by a large bulge in the public offering calendar for REIT
shares; several billion dollars worth of equity offerings were expected to come
to market in April, following a record $5 billion of offerings completed in the
first quarter. Most of these offerings are from office building owners, an area
that has been one of the strongest performers of late. There have also been
several initial public offerings filed which, upon preliminary analysis, appear
to us to be somewhat aggressively priced and poorly structured, a sign that
underwriting and investment discipline may be eroding. This new supply was
brought about by the substantial price appreciation of REITs in general over the
past year, which elevated valuations to levels that enticed issuers all over the
quality spectrum. It was therefore natural for the marketplace to correct this
imbalance by re-pricing many company's shares. We believe that this process is
nearly, if not fully, complete and expect the postponement, cancellation or more
attractive pricing of many equity offerings.
The recent deliberate Fed action has created an atmosphere of greater
uncertainty about the future course of the economy. While we believe the economy
shows few, if any, signs of slowing, it is clear that monetary policy, for the
first time in a year, is aimed at reducing the rate of economic growth. As a
result, portfolio managers in general appear to be undertaking a reevaluation of
the investment merits of various asset classes and industry sectors. Real estate
investors, including us, are doing the same with regard to different property
sectors.
We have maintained very low weightings in the more interest rate sensitive
sectors for some time due to our belief that a strong economy would, at the very
least, prevent interest rates from declining further in this cycle.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
This strategy has enabled us to continue to outperform the real estate
securities averages. Should we sense that the economy is going to enter a severe
slowdown phase, it is likely that we would alter this approach. We do not see
that on the immediate horizon, however, because we believe that the economy is
so strong that several interest rate increases over many months would be
required to cause a material slowing. While less clear, we believe that the Fed
is not likely to act in so restrictive a manner as to precipitate an economic
recession. As a result, we foresee an economic environment that continues to be
characterized by sustainable growth with upward pressure on inflation.
Notwithstanding the pending slowdown in the public offering calendar, the
market capitalization of the equity REIT universe expanded by over 8% during the
first quarter. Further, the pace of acquisitions of properties and companies by
the existing market leaders shows no signs of abating. This affirms our belief
that the transfer of property ownership from private hands to public companies,
so-called 'securitization,' can be expected to continue at a substantial pace
for the foreseeable future.
As the real estate cycle continues to mature, the supply/demand
relationships for most property sectors and regions of the country may now be
approaching equilibrium. By equilibrium, we refer to the situation in which the
economics of new development begin to make sense, thereby creating new supply
that roughly matches incremental demand. For example, demand for space has
driven occupancy and rental rates to levels that are now encouraging new
development of apartment, industrial and office properties in several regions.
Similarly, the supply of capital from both public and private sources has raised
property values to levels at which investors have become willing to finance new
development rather than purchase existing assets. For those few property types
or markets where this has not yet occurred, the forces that we expect will lead
to development are firmly in place.
If we are right about where we are in the real estate cycle, there are two
very important implications. First, real estate returns would be likely to
decline from the high levels that have been enjoyed over the past several years.
This may also affect prospective investment results from REITs, whose returns
may revert to the mid-teens levels that they have historically averaged. The
second implication is that investment success would not be as easy to achieve
due to the more highly competitive environment that now prevails. Consequently,
effective management, though always the most critical factor, would assume even
greater importance than any other investment consideration.
As a result, our strategy continues to emphasize those companies whose
management teams are capable of finding or adding value in almost any economic
or real estate situation. In fact, we believe these companies are the best
positioned to take advantage of opportunities that would materialize in a more
challenging operating environment. We therefore are not concerned about their
ability to continue to enjoy substantial growth and see few, if any, limits to
their prospects for continued success. For this reason, we remain confident that
we will able to continue to achieve satisfactory investment returns.
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 TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------- ------------
<S> <C> <C>
EQUITIES 103.75%
APARTMENT/RESIDENTIAL 26.32%
Associated Estates Realty Corp......................... 139,700 $ 3,125,788
Avalon Properties...................................... 109,700 3,016,750
Camden Property Trust.................................. 126,600 3,449,850
Charles E. Smith Residential Realty.................... 139,100 3,773,087
Colonial Properties Trust.............................. 127,900 3,709,100
Columbus Realty Trust.................................. 105,000 2,113,125
Oasis Residential -- Preferred......................... 210,200 5,649,125
Summit Properties...................................... 164,700 3,335,175
Wellsford Residential Property Trust................... 161,700 4,689,300
------------
32,861,300
------------
DIVERSIFIED 2.16%
Pacific Gulf Properties................................ 124,000 2,697,000
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HEALTH CARE 9.76%
American Health Properties............................. 154,900 3,814,413
Health Care REIT....................................... 159,600 3,790,500
Healthcare Realty Trust................................ 22,400 613,200
National Health Investors.............................. 32,300 1,199,137
Omega Healthcare Investors............................. 88,800 2,775,000
------------
12,192,250
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HOTEL 5.69%
Innkeepers USA Trust................................... 199,100 2,911,838
Sunstone Hotel......................................... 319,200 4,189,500
------------
7,101,338
------------
INDUSTRIAL 2.06%
Eastgroup Properties................................... 92,500 2,566,875
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OFFICE 6.75%
Brandywine Realty Trust................................ 100,000 2,025,000
Cali Realty Corp....................................... 83,400 2,668,800
CarrAmerica Realty Corp................................ 121,400 3,733,050
------------
8,426,850
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OFFICE/INDUSTRIAL 6.07%
Kilroy Realty.......................................... 38,400 1,022,400
Prentiss Properties Trust.............................. 78,100 1,981,787
Reckson Associates Realty Corp......................... 41,500 1,914,188
TriNet Corporate Realty Trust.......................... 84,100 2,659,663
------------
7,578,038
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SELF STORAGE 1.03%
Sovran Self Storage.................................... 41,700 1,282,275
------------
</TABLE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------- ------------
<S> <C> <C>
SHOPPING CENTER 43.91%
COMMUNITY CENTER 22.91%
Alexander Haagen Properties............................ 85,000 $ 1,179,375
Bradley Real Estate.................................... 125,200 2,394,450
Developers Diversified Realty Corp..................... 37,700 1,423,175
Federal Realty Investment Trust........................ 123,100 3,169,825
Glimcher Realty Trust.................................. 271,800 5,198,175
Mid-America Realty Investments......................... 128,300 1,266,962
Pennsylvania Real Estate Investment Trust.............. 214,700 4,535,538
Price REIT............................................. 67,400 2,493,800
Regency Realty Corp.................................... 60,100 1,607,675
Sizeler Property Investors............................. 103,800 1,076,925
Vornado Realty Trust................................... 40,000 2,670,000
Western Investment Real Estate Trust................... 127,200 1,590,000
------------
28,605,900
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FACTORY OUTLET 3.55%
Chelsea GCA Realty..................................... 70,000 2,511,250
Horizon Group.......................................... 29,300 377,237
Tanger Factory Outlet Centers.......................... 58,700 1,540,875
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4,429,362
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REGIONAL MALL 17.45%
CBL & Associates Properties............................ 100,400 2,459,800
JP Realty.............................................. 120,300 3,187,950
Macerich Company....................................... 137,900 3,861,200
Simon DeBartolo Group.................................. 114,900 3,475,725
Taubman Centers........................................ 160,000 2,080,000
The Mills Corp......................................... 153,300 3,870,825
Urban Shopping Centers................................. 94,900 2,847,000
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21,782,500
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TOTAL SHOPPING CENTER.................................. 54,817,762
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TOTAL INVESTMENTS IN EQUITIES (Identified cost
$109,933,505)........................................... 103.75% 129,523,688
LIABILITIES IN EXCESS OF OTHER ASSETS..................... (3.75%) (4,676,705)
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NET ASSETS (Equivalent to $16.87 per share based on
7,399,100 shares of capital stock outstanding).......... 100.00% $124,846,983
------- ------------
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</TABLE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
FINANCIAL HIGHLIGHTS*
MARCH 31, 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........................... $124,806,122 $ 16.87
Net investment income............................. $ 1,846,121 $ 0.25
Net realized and unrealized losses from security
transactions................................... (29,534) (0.01)
Dividends to shareholders............................... (1,775,726) (0.24)
----------- -------
Net increase in net asset value......................... 40,861 0.00
------------ -------
End of period: 3/31/97.................................. $124,846,983 $ 16.87
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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.
<TABLE>
<S> <C>
KEY INFORMATION REINVESTMENT PLAN
We urge shareholders who want to take advantage of
For general information and weekly net this plan and whose shares are held in 'Street Name'
asset value call: 800-543-6217 to consult your broker as soon as possible to
determine if you must change registration into your
NEW YORK STOCK EXCHANGE SYMBOL: own name to participate.
The New York Stock Exchange Symbol is RFI
</TABLE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
OFFICERS AND DIRECTORS
Robert H. Steers
Director and Chairman
Martin Cohen
Director and President
Gregory C. Clark
Director
Jeffrey H. Lynford
Director
Willard H. Smith Jr.
Director
Elizabeth O. Reagan
Vice President
INVESTMENT ADVISER
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, NY 10017
(212) 832-3232
FUND ADMINISTRATOR
Princeton Administrators, L.P.
P.O. Box 9095
Princeton, NJ 08543-9095
1-800-543-6217
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
LEGAL COUNSEL
Dechert Price & Rhoads
30 Rockefeller Plaza
New York, NY 10112
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Fund shares.
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COHEN & STEERS
TOTAL RETURN REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
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QUARTERLY REPORT
MARCH 31, 1997
