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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
October 16, 1997
To Our Shareholders:
We are pleased to submit to you our report for Cohen & Steers Total Return
Realty Fund, Inc. for the quarter and nine months ended September 30, 1997. The
net asset value per share at that date was $19.15. In addition, during the
quarter, three $0.08 per share monthly dividends were declared and paid.
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 9.5%
and 18.26%, 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. These include the largest merger of two public REITs, Equity
Office Properties and Beacon Properties; and the second largest REIT initial
public offering, Boston Properties, which raised $900 million. Most importantly,
however, it that 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 established private companies being purchased by or
merged into REITs. 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.
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
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
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 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 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 TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
----------- -----------
<S> <C> <C>
EQUITIES 98.58%
APARTMENT/RESIDENTIAL 19.10%
Associated Estates Realty Corp............................. 139,700 $ 3,352,800
Avalon Properties.......................................... 89,200 2,653,700
Camden Property Trust...................................... 30,200 924,875
Charles E. Smith Residential Realty........................ 139,100 4,729,400
Colonial Properties Trust.................................. 123,500 3,689,563
Columbus Realty Trust...................................... 104,100 2,517,919
Oasis Residential -- Preferred............................. 210,200 5,596,575
Summit Properties.......................................... 164,700 3,602,812
-----------
27,067,644
-----------
DIVERSIFIED 6.49%
CCA Prison Realty Trust.................................... 86,700 3,272,925
Pacific Gulf Properties.................................... 172,200 4,089,750
Santa Anita Realty Enterprises............................. 54,400 1,836,000
-----------
9,198,675
-----------
HEALTH CARE 10.78%
American Health Properties................................. 154,900 3,795,050
Health Care REIT........................................... 140,700 3,869,250
Healthcare Realty Trust.................................... 28,200 801,938
Meditrust Corp............................................. 56,700 2,353,050
National Health Investors.................................. 32,300 1,255,662
Omega Healthcare Investors................................. 88,800 3,196,800
-----------
15,271,750
-----------
HOTEL 3.49%
Innkeepers USA Trust....................................... 141,900 2,438,906
Sunstone Hotel............................................. 141,900 2,500,988
-----------
4,939,894
-----------
INDUSTRIAL 2.14%
EastGroup Properties....................................... 138,750 3,035,156
-----------
OFFICE 9.18%
Alexandria Real Estate Equities............................ 125,900 3,596,019
Brandywine Realty Trust.................................... 100,000 2,393,750
Cali Realty Corp........................................... 83,400 3,471,525
CarrAmerica Realty Corp.................................... 85,100 2,723,200
SL Green Realty Corp....................................... 32,000 828,000
-----------
13,012,494
-----------
</TABLE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
----------- -----------
OFFICE/INDUSTRIAL 3.65%
<S> <C> <C>
Reckson Associates Realty Corp............................. 83,000 $ 2,209,875
TriNet Corporate Realty Trust.............................. 84,100 2,954,012
-----------
5,163,887
-----------
SELF STORAGE 0.93%
Sovran Self Storage........................................ 41,700 1,313,550
-----------
SHOPPING CENTER 42.82%
COMMUNITY CENTER: 23.02%
Alexander Haagen Properties................................ 201,600 3,313,800
Bradley Real Estate........................................ 125,200 2,629,200
Burnham Pacific Properties................................. 201,000 2,977,313
Glimcher Realty Trust...................................... 271,800 6,234,412
Mid-America Realty Investments............................. 128,300 1,363,188
Pan Pacific Retail Properties.............................. 53,500 1,093,406
Pennsylvania Real Estate Investment Trust.................. 214,700 5,488,269
Price REIT................................................. 67,400 2,708,637
Regency Realty Corp........................................ 56,600 1,514,050
Saul Centers............................................... 124,500 2,381,063
Sizeler Property Investors................................. 103,800 1,200,188
Western Investment Real Estate Trust....................... 127,200 1,717,200
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32,620,726
-----------
FACTORY OUTLET: 5.32%
Horizon Group.............................................. 474,000 5,717,625
Tanger Factory Outlet Centers.............................. 61,600 1,813,350
-----------
7,530,975
-----------
</TABLE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
--------- ------------
<S> <C> <C> <C>
REGIONAL MALL: 14.48%
CBL & Associates Properties................................. 69,100 $ 1,792,281
Crown American Realty Trust- Preferred...................... 87,900 4,702,650
JP Realty................................................... 88,500 2,262,281
Macerich Company............................................ 89,300 2,578,537
Simon DeBartolo Group....................................... 84,000 2,772,000
Taubman Centers............................................. 63,700 816,156
The Mills Corp.............................................. 106,300 2,743,869
Urban Shopping Centers...................................... 89,200 2,854,400
------------
20,522,174
------------
TOTAL SHOPPING CENTER.................................... 60,673,875
------------
TOTAL EQUITIES (Identified cost -- $111,031,215)... 139,676,925
------------
<CAPTION>
Principal
Amount
<S> <C> <C> <C>
COMMERCIAL PAPER 1.53%
Associates Corp., 6.25%, 10/01/97
(Identified cost -- $2,169,060)......................... 2$,169,000 2,169,000
------------
TOTAL INVESTMENTS (Identified cost -- $113,200,275).............. 100.11% 141,845,925
LIABILITIES IN EXCESS OF OTHER ASSETS............................ (0.11%) (154,846)
------ ------------
NET ASSETS (Equivalent to $19.15 per share based on 7,399,100
shares of capital stock outstanding).......................... 100.00% $141,691,079
------ ------------
------ ------------
</TABLE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
FINANCIAL HIGHLIGHTS*
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.................................... $124,806,122 $16.87
Net investment income...................................... $ 5,911,611 $ 0.80
Net realized and unrealized gains from security
transactions............................................ 16,300,500 2.20
Dividends to shareholders........................................ (5,327,154) (0.72)
----------- ------
Net increase in net asset value.................................. 16,884,957 2.28
------------ ------
End of period: 9/30/97........................................... $141,691,079 $19.15
------------ ------
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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.
KEY INFORMATION
For general information and weekly net asset value call: (800) 543-6217
NEW YORK STOCK EXCHANGE SYMBOL: RFI
REINVESTMENT PLAN
We urge shareholders who want to take advantage of this plan and whose
shares are held in 'Street Name' to consult your broker as soon as possible to
determine if you must change registration into your own name to participate.
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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
Adam Derechin
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
(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 LOGO]
QUARTERLY REPORT
SEPTEMBER 30, 1997
COHEN & STEERS
REALTY INCOME FUND
757 THIRD AVENUE
NEW YORK, NY 10017
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