<PAGE>
<PAGE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
February 3, 1997
To Our Shareholders:
We are pleased to submit to you our annual report for Cohen & Steers Total
Return Realty Fund, Inc. for the year ended December 31, 1996. The net asset
value per share at that date was $16.87. During the fourth quarter three $0.08
per share monthly dividends were declared and paid. In addition, a capital gains
distribution of $0.05 per share was declared for shareholders of record December
27, 1996 and paid on January 17, 1997.
1996 REVIEW
By nearly every measure, 1996 was an exceptional year for REITs on both an
absolute and relative basis. The Fund's total return for 1996 based on income,
realized capital gains and change in net asset value was 34.7%. The 35.3% total
return of equity REITs (as measured by the NAREIT Equity REIT index) was the
best since 1991, the year that the real estate depression hit bottom, causing
REITs to rebound from severely depressed levels. Relative to the stock market,
REITs had their best year since 1984, beating the S&P 500 Index total return of
23.0%. Relative to bonds, REITs had their best year since 1979, surpassing the
Lehman Brothers Government/Corporate Bond Index total return of 2.9%. These
results continue to substantiate the low correlation of returns between REITs
and other asset classes, particularly bonds.
All major property sectors showed outstanding positive returns for the
year, with the Office, Hotel and Regional Mall sectors performing best. The
strong performance of REITs continues to be influenced by the ongoing real
estate recovery and the advantageous position of REITs as property owners,
managers and acquirers. Most important from a capital market perspective was
that these factors translated into strong earnings growth for the major
companies in 1996 and there appears to us to be widespread expectations for
continued strong growth of REIT earnings in 1997.
The rise of REIT share prices is not solely the result of earnings growth,
in our opinion. 1996 was the year in which a substantial shift in sentiment and
opinion about real estate and REITs took place, and we believe this change will
affect the industry for many years. For the first time since the 1980s, real
estate returned to favor among both institutional and individual investors, and
long-term debt and equity capital began to flow freely. This caused property
values to rise across the board, adding another lever to REIT returns by
significantly increasing underlying asset values. This favorable capital market
environment also enabled the top tier companies to raise and efficiently invest
capital. Due to a combination of new issuance and price appreciation, the stock
market capitalization of equity REITs rose
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1
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
by 55% in 1996 to $90 billion. The number of equity REITs declined during the
year by 7% to 166, indicating an acceleration in the consolidation of the
industry and greater concentration of assets among fewer, but in our opinion,
stronger companies. Consequently, REIT valuations ended the year at a higher
level than when the year began. For example, the average REIT dividend yield,
which is the simplest measure of valuation, was 7.4% at the beginning of 1996
and 5.9% at year end.
Last year was also pivotal with regard to the acceptance of the
publicly-traded REIT structure by direct real estate advisors and institutional
real estate consultants. They appeared to have finally come to terms with the
decline in their traditional businesses and nearly all have adopted a real
estate securities effort. We believe that this is primarily the result of their
clients' preference for the liquidity, fair pricing and professional practices
of the leading public real estate companies. With REITs being the most prominent
real estate equity capital raisers and property acquirers in 1996 (as well as
having produced consistently superior investment returns), they can no longer be
dismissed as incidental to the real estate industry. Rather, they have become
the model for creating investor value. For the same reasons, during the year a
large number of private real estate companies merged into public companies and a
great many property owners transferred their ownership interests in exchange for
REIT shares. These are trends which we believe will remain in place for a long
time to come.
1997 OUTLOOK
With real estate fundamentals and the role of REITs firmly in place, we
believe that there are essentially two major issues of concern to investors as
the year progresses. The first is the ability of REITs as a group to sustain the
current higher level of valuation that they now enjoy. The second issue is
determining which companies and property sectors are best positioned to
outperform in 1997. We believe that the current level of REIT valuations is
being affected by the following factors:
REAL ESTATE FUNDAMENTALS REMAIN POSITIVE. In nearly every property sector
and region of the country, the real estate recovery appears to be gathering
momentum. Occupancies and rental rates are rising, and the amount of new
construction is less than the incremental demand for space. Greater confidence
in the stability and growth of real estate, particularly after the depression of
the early 1990s, can account for the higher valuation of real estate companies.
REIT EARNINGS ARE GROWING AT A SUBSTANTIAL RATE. Wall Street analysts
estimated that average REIT earnings per share growth was approximately 9% in
1996 and expect further growth of 10% in 1997. The growth estimates are
predicated on conservative assumptions regarding occupancies and rental rates
plus the contribution of income both from properties acquired last year and
those that are expected
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2
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
to be acquired this year. Further, based on trends firmly in place, we expect
REIT earnings to grow at a meaningful rate in 1998. This type of growth, in our
opinion, warrants a higher level of valuation than REITs have historically
enjoyed. As investors become more confident in these prospects, REITs
increasingly may be recognized as growth rather than current dividend yield
vehicles. This renders the often-made comparison of REITs to bonds and utility
stocks less meaningful than ever.
REIT DIVIDEND GROWTH SHOULD BEGIN TO ACCELERATE. One important result of
REIT earnings growth is the growth of REIT dividends. While most REITs have been
raising their dividends at least annually, they have done so at a lower rate
than the rate of growth of cash earnings per share, resulting in continually
decreasing payout ratios. This is almost universally viewed by the investment
community as a healthy policy because it permits the company to maintain a
record of dividend growth, while at the same time retain more capital for
reinvestment. Because REITs, by law, must distribute no less than 95% of their
taxable income as dividends, several companies are now unable to reduce their
payout ratios any further. These companies must now increase their dividend at
the identical rate as their income growth. At the current time only a handful of
companies are in this situation but we expect a great many more to reach this
point in 1997 and 1998. When investors apply traditional stock valuation
measures such as dividend discount models, which emphasize dividend yield and
dividend growth, to REITs this group will appear extremely attractive. As this
phenomenon becomes more widely recognized it is likely to enable REITs to
maintain healthy valuations, in our opinion.
THE LEADING REITS HAVE DEMONSTRATED STRONG TRACK RECORDS. The last time
REIT valuations approached these levels was at year-end 1993, a period when most
of today's largest REITs were just coming public. Since that time there have
been very few initial public offerings and investors have had a chance to assess
and differentiate the abilities, dedication and, most importantly, the
performance of all the companies in the industry. Greater investor confidence
has naturally led to higher valuations for those companies that have proven
themselves to be market leaders and has enabled them to routinely issue low-cost
equity. This has also allowed the companies to judiciously access varied forms
of debt financing on economic terms that have enhanced earnings and return on
equity.
REITS HAVE PROVEN THEMSELVES UNDER VARIED FINANCIAL MARKET CONDITIONS.
REITs have outperformed stocks in five of the past six years and have done so
with lower volatility than, and little sensitivity to the broader stock market
movements. This was dramatically illustrated last year when, during periods of
stock and bond market turbulence, REIT prices remained stable or rose. As a
result, REITs have returned to favor among institutions and individuals seeking
portfolio diversification. The ongoing demand for REIT shares is likely to help
maintain the current, or even higher, level of valuation.
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3
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
As we begin the new year our investment strategy generally is one that
emphasizes those companies we expect to achieve above-average growth in earnings
per share, preferably through increases in occupancy and rental rates. Our
largest sector weighting is the Regional Mall sector. To the surprise of many
this group was among the best performers in 1996 and we expect that to be the
case again in 1997. The retail environment today is much improved over the
recent past and regional mall tenants are enjoying solid sales increases. As a
result there are very few tenant bankruptcies and we believe that both
occupancies and rental rates in premier properties will show healthy increases.
A new factor this year for the publicly-traded companies is that the private
market values of regional malls have declined to a point at which, in
combination with REITs' lower cost of capital, a considerable acquisition
opportunity has developed. Therefore we expect that regional mall REITs could
experience growth well in excess of consensus expectations, which should lead to
superior investment performance.
At the close of a year of extraordinary investment results such as those
achieved in 1996 it is important to maintain the perspective that real estate
and REITs are not likely to sustain such a high rate of return. However, as we
have discussed, our analysis of the investment environment leads us to the
conclusion that REITs continue to offer potential risk-adjusted returns that are
attractive. Moreover, within the universe of publicly-traded real estate
companies there are many that we believe represent outstanding value and have
superior growth prospects. These companies dominate our portfolio. While this
year may be somewhat more challenging than the last, we are nonetheless
confident in our ability to achieve satisfactory investment results.
Sincerely,
<TABLE>
<S> <C>
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
</TABLE>
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4
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
---------------- -----------
<S> <C> <C>
EQUITIES 105.02%
APARTMENT/RESIDENTIAL 28.06%
Associated Estates Realty Corp........................ 165,300 $ 3,925,875
Avalon Properties..................................... 109,700 3,153,875
Camden Property Trust................................. 126,600 3,623,925
Charles E. Smith Residential Realty................... 89,400 2,614,950
Colonial Properties Trust............................. 127,900 3,884,962
Columbus Realty Trust................................. 105,000 2,388,750
Oasis Residential -- Preferred........................ 210,200 5,438,925
Pacific Gulf Properties............................... 124,000 2,418,000
Summit Properties..................................... 164,700 3,643,988
Wellsford Residential Property Trust.................. 161,700 3,921,225
-----------
35,014,475
-----------
HEALTH CARE 9.15%
American Health Properties............................ 154,900 3,698,237
Health Care REIT...................................... 144,900 3,550,050
National Health Investors............................. 32,300 1,223,363
Omega Healthcare Investors............................ 88,800 2,952,600
-----------
11,424,250
-----------
HOTEL 2.21%
Innkeepers USA Trust.................................. 199,100 2,762,513
-----------
OFFICE 7.35%
Brandywine Realty Trust............................... 100,000 1,950,000
Cali Realty Corp...................................... 83,400 2,574,975
CarrAmerica Realty Corp............................... 158,900 4,647,825
-----------
9,172,800
-----------
OFFICE/INDUSTRIAL 3.76%
Prentiss Properties Trust............................. 78,100 1,952,500
Reckson Associates Realty Corp........................ 64,800 2,737,800
-----------
4,690,300
-----------
SELF STORAGE 1.04%
Sovran Self Storage................................... 41,700 1,303,125
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
---------------- ------------
<S> <C> <C> <C>
SHOPPING CENTER 53.45%
Community Center: 28.32%
Alexander Haagen Properties......................... 85,000 $ 1,253,750
Bradley Real Estate................................. 125,200 2,253,600
Developers Diversified Realty Corp.................. 63,500 2,357,438
Federal Realty Investment Trust..................... 123,100 3,339,087
Glimcher Realty Trust............................... 296,800 6,529,600
Mid-America Realty Investments...................... 128,300 1,218,850
Pennsylvania Real Estate Investment Trust........... 235,700 5,745,187
Price REIT.......................................... 119,700 4,608,450
Regency Realty Corp................................. 97,800 2,567,250
Sizeler Property Investors.......................... 103,800 999,075
Vornado Realty Trust................................ 53,700 2,819,250
Western Investment Real Estate Trust................ 127,200 1,653,600
------------
35,345,137
------------
Factory Outlet: 4.03%
Chelsea GCA Realty.................................. 70,000 2,423,750
Horizon Group....................................... 50,800 1,009,650
Tanger Factory Outlet Centers....................... 58,700 1,592,238
------------
5,025,638
------------
Regional Mall: 21.10%
CBL & Associates Properties......................... 100,400 2,597,850
JP Realty........................................... 132,800 3,436,200
Macerich Company.................................... 150,800 3,939,650
Simon DeBartolo Group............................... 194,500 6,029,500
Taubman Centers..................................... 160,000 2,060,000
The Mills Corp...................................... 148,100 3,535,887
Urban Shopping Centers.............................. 163,200 4,732,800
------------
26,331,887
------------
TOTAL SHOPPING CENTER............................ 66,702,662
------------
TOTAL EQUITIES (Identified
cost -- $108,007,510)......................... 131,070,125
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PAR
AMOUNT VALUE
---------------- ------------
<S> <C> <C> <C>
CORPORATE BOND 1.60%
Trizec Finance, Ltd. 10.875% 10/15/05
(Identified cost -- $1,786,518).................. $1,800,000 $ 1,995,750
------------
TOTAL INVESTMENTS (Identified cost -- $109,794,028)..... 106.62% 133,065,875
LIABILITIES IN EXCESS OF OTHER ASSETS................... (6.62%) (8,259,753)
------- ------------
NET ASSETS (Equivalent to $16.87 per share
based on 7,399,100 shares of capital
stock outstanding)....................... 100.00% $124,806,122
------- ------------
------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
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7
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (Identified cost -- $109,794,028) (Note 1)............... $133,065,875
Dividends receivable......................................................................... 821,448
Interest receivable.......................................................................... 41,946
Unamortized organization costs and other assets (Note 1)..................................... 31,268
------------
Total Assets........................................................................... 133,960,537
------------
LIABILITIES:
Loan payable (Notes 1 and 7)................................................................. 8,464,636
Payable for dividends declared............................................................... 498,447
Investment advisory fees payable (Note 2).................................................... 69,255
Interest payable (Notes 1 and 7)............................................................. 41,259
Administrative fees payable (Note 2)......................................................... 19,787
Accrued expenses and other liabilities....................................................... 61,031
------------
Total Liabilities...................................................................... 9,154,415
------------
NET ASSETS applicable to 7,399,100 shares of $.001 par value common stock outstanding (Note 4)..... $124,806,122
------------
------------
NET ASSET VALUE PER SHARE:
($124,806,122[div]7,399,100 shares of common stock outstanding)................................. $ 16.87
------------
------------
MARKET PRICE PER SHARE:............................................................................ $ 16.50
------------
------------
MARKET PRICE PREMIUM (DISCOUNT) TO NET ASSET VALUE PER SHARE....................................... (2.19%)
------------
------------
NET ASSETS consist of:
Paid-in capital (Notes 1 and 4).............................................................. $ 97,386,653
Net unrealized appreciation on investments................................................... 23,271,847
Accumulated net realized gain on investments sold............................................ 4,147,622
------------
$124,806,122
------------
------------
</TABLE>
See notes to financial statements.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Investment Income (Note 1):
Dividend income............................................................................... $ 8,459,566
Interest income............................................................................... 267,073
------------
Total Income............................................................................ 8,726,639
------------
Expenses:
Investment advisory fees (Note 2)............................................................. 730,662
Administrative fees (Note 2).................................................................. 208,762
Transfer agent fees........................................................................... 60,718
Interest expense (Notes 1 and 7).............................................................. 59,718
Professional fees............................................................................. 48,026
Custodian fees................................................................................ 39,221
Directors' fees and expenses (Note 2)......................................................... 29,858
Reports to shareholders....................................................................... 28,971
Registration fees............................................................................. 16,170
Amortization of organization expenses (Note 1)................................................ 12,839
Insurance..................................................................................... 10,407
Miscellaneous................................................................................. 6,780
------------
Total Expenses.......................................................................... 1,252,132
Reduction of Expenses (Note 6).......................................................... (44,874)
------------
Net Expenses............................................................................ 1,207,258
------------
Net Investment Income............................................................................... 7,519,381
------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments.............................................................. 2,177,775
Net change in unrealized appreciation on investments.......................................... 23,156,592
------------
Net realized and unrealized gain on investments......................................... 25,334,367
------------
Net Increase in Net Assets Resulting From Operations................................................ $ 32,853,748
------------
------------
</TABLE>
See notes to financial statements.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Change in Net Assets:
From Operations:
Net investment income................................. $ 7,519,381 $ 6,483,190
Net realized gain (loss) on investments............... 2,177,775 (355,997)
Net change in unrealized appreciation on invest-
ments.............................................. 23,156,592 2,265,610
------------------ -----------------
Net increase in net assets resulting from opera-
tions........................................ 32,853,748 8,392,803
------------------ -----------------
Dividends and Distributions from (Note 1):
Net investment income................................. (4,936,509) (5,200,915)
Net realized gain on investments...................... (369,955) --
Tax return of capital................................. -- (1,902,118)
------------------ -----------------
Total dividends and distributions............... (7,472,921) (7,103,033)
------------------ -----------------
Total increase in net assets.................... 25,380,827 1,289,770
Net Assets:
Beginning of year..................................... 99,425,295 98,135,525
------------------ -----------------
End of year........................................... $124,806,122 $99,425,295
------------------ -----------------
------------------ -----------------
</TABLE>
See notes to financial statements.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
Financial Statements. It should be read in conjunction with the Financial
Statements and notes thereto.
<TABLE>
<CAPTION>
Period Ended
Year Ended Year Ended Year Ended December, 31,
PER SHARE OPERATING PERFORMANCE: December 31, 1996 December, 31, 1995 December, 31, 1994 1993(a)
- ------------------------------------------ ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year........ $ 13.44 $ 13.26 $ 13.30 $ 13.96(c)
------- ------- ------- -------
Net investment income................. 1.02 0.88 0.83 0.18
Net realized and unrealized gain
(loss) on investments............... 3.42 0.26 0.01 (0.60)
------- ------- ------- -------
Total from investment
operations..................... 4.44 1.14 0.84 (0.42)
------- ------- ------- -------
Less dividends and distributions from:
Net investment income................. (0.67) (0.70) (0.47) (0.18)
Distributions in excess of net
investment income................... (0.00) (0.00) (0.00) (0.03)
Realized gain on investments.......... (0.34) (0.00) (0.00) (0.00)
Tax return of capital................. (0.00) (0.26) (0.41) (0.03)
------- ------- ------- -------
Total from dividends and
distributions.................. (1.01) (0.96) (0.88) (0.24)
------- ------- ------- -------
Net increase (decrease) in net
asset value.................... 3.43 0.18 (0.04) (0.66)
------- ------- ------- -------
Net asset value, end of year.............. $ 16.87 $ 13.44 $ 13.26 $ 13.30
------- ------- ------- -------
------- ------- ------- -------
Market value, end of year................. $ 16.50 $13.375 $12.375 $ 13.50
------- ------- ------- -------
------- ------- ------- -------
TOTAL MARKET VALUE RETURN(D).............. 32.37% +16.38% -2.32% -8.48%
------- ------- ------- -------
------- ------- ------- -------
TOTAL NET ASSET VALUE RETURN(D)........... 34.68% +9.14% +6.45% -4.26%(c)
------- ------- ------- -------
------- ------- ------- -------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands).......................... $124,806 $99,425 $98,136 $98,388
------- ------- ------- -------
------- ------- ------- -------
Ratio of expenses to average weekly
net assets (before expense
reduction).......................... 1.20% 1.25% 1.35% 1.22%
------- ------- ------- -------
------- ------- ------- -------
Ratio of expenses to average weekly
net assets (net of expense
reduction).......................... 1.16% 1.23% 1.31% 1.15%(b)
------- ------- ------- -------
------- ------- ------- -------
Ratio of net investment income to
average weekly net assets (net of
expense reduction).................. 7.21% 6.79% 6.19% 5.21%(b)
------- ------- ------- -------
------- ------- ------- -------
Ratio of net investment income to
average net assets (before expense
reduction).......................... 7.16% 6.78% 6.14% 5.14%
------- ------- ------- -------
------- ------- ------- -------
Portfolio turnover rate............... 31% 51% 65% 16%
------- ------- ------- -------
------- ------- ------- -------
Average Commission Rate(e)............ $0.0678 N/A N/A N/A
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- ------------
(a) For the period September 27, 1993 (Commencement of Operation) to December
31, 1993.
(b) Annualized
(c) Net of offering costs of $0.14 per share.
(d) Total market value return is computed based upon the New York Stock
Exchange market price of the Fund's shares and excludes the effects of
sales loads or brokerage commissions. Dividends and distributions, if any,
are assumed for purposes of this calculation, to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. Total net asset value
return measures the changes in value over the period indicated, taking into
account dividends as reinvested.
(e) For fiscal years beginning on or after September 1, 1995, a portfolio is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
See notes to financial statements.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Total Return Realty Fund, Inc. (the 'Fund') was incorporated
under the laws of the State of Maryland on September 4, 1992 and is registered
under the Investment Company Act of 1940 (the 'Act'), as amended, as a
closed-end, non-diversified management investment company. The Fund had no
operations until September 13, 1993 when it sold 7,100 shares of common stock
for $100,110 to Cohen & Steers Capital Management, Inc. (the 'Adviser').
Investment operations commenced on September 27, 1993. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements. The policies are in conformity with
generally accepted accounting principles. The preparation of the financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Actual results could
differ from those estimates.
Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there have been no sales on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day.
Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. ('NASDAQ') National
Market System are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Adviser to
be over-the-counter, but excluding securities admitted to trading on the NASDAQ
National List, are valued at the mean of the current bid and asked prices as
reported by NASDAQ, the National Quotations Bureau or such other comparable
sources as the Board of Directors deems appropriate to reflect their fair market
value. Where securities are traded on more than one exchange and also
over-the-counter, the securities will generally be valued using the quotations
the Board of Directors believes reflect most closely the value of such
securities.
Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost unless the Board of Directors determines that this does
not represent fair value.
Security Transactions and Investment Income: Security transactions are
recorded on a trade date basis. Realized gains and losses on investments sold
are recorded on the basis of identified cost for accounting and tax purposes.
Interest income is recorded on the accrual basis. Dividend income is recorded on
the ex-dividend date.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Dividends and Distributions to Shareholders: Dividends from investment
company taxable income are declared and paid monthly. A portion of the Fund's
dividends may consist of amounts in excess of investment company taxable income
derived from non-taxable components of the dividends from the Fund's portfolio
investments. As a result, the Fund had a return of capital of $1,902,118 ($0.26
per share), for the year ended December 31, 1995, which has been deducted from
paid-in capital. Net realized capital gains, unless offset by any available
capital loss carryforward, are distributed to shareholders annually.
Distributions to shareholders are recorded on the ex-dividend date.
Dividends from net income and capital gain distributions are determined in
accordance with U.S. Federal income tax regulations which may differ from
generally accepted accounting principles. During the year ended December 31,
1996, the Fund decreased paid-in capital by $69,022, decreased undistributed net
investment income by $2,582,872 and increased accumulated net realized gain on
investment securities sold by $2,651,894. These differences are primarily due to
payment of distributions subject to capital loss carryforward.
Federal Income Taxes: It is the policy of the Fund to qualify as a
regulated investment company, if such qualification is in the best interest of
the shareholders, by complying with the requirements of Subchapter M of the
Internal Revenue Code applicable to regulated investment companies, and by
distributing substantially all of its taxable earnings to its shareholders.
Accordingly, no provision for Federal income or excise tax is necessary.
Organization Costs: All costs incurred in connection with organizing and
establishing the Fund are being amortized on the straight-line basis over a
period of five years from the date on which the Fund commenced operations.
Borrowings and Leverage: The Fund may borrow for leveraging purposes when
an investment opportunity arises but the Adviser believes that it is not
appropriate to liquidate any existing investments. The Fund will only borrow
when the Adviser believes that the cost of borrowing to carry the assets to be
acquired through leverage will be lower than the return earned by the Fund on
its longer-term portfolio investments. Should the differential between interest
rates on borrowed funds and the return from investment assets purchased with
such funds narrow, the Fund would realize less of a positive return, with the
additional risk that, during periods of adverse market conditions, the market
value of the Fund's entire portfolio holdings (including those acquired through
leverage) may decline far in excess of incremental returns the Fund may have
achieved in the interim.
NOTE 2. INVESTMENT ADVISORY FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
Investment Advisory Fees: Cohen & Steers Capital Management, Inc. serves as
the investment adviser to the Fund. The Adviser is responsible for the actual
management of the Fund's portfolio. The responsibility for making decisions to
buy, sell or hold a particular investment rests with the Adviser, subject to
review by the Board of Directors and the applicable provisions of the Act. For
the services provided pursuant to the Advisory Agreement, the Adviser is
entitled to receive a fee, computed weekly and payable monthly at an annual rate
of 0.70% of the Fund's
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13
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<PAGE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
average weekly net assets. For the year ended December 31, 1996, the Fund
incurred investment advisory fees of $730,662.
Administrative Fees: Princeton Administrators, L.P., (the 'Administrator')
serves as the administrator pursuant to an Administration Agreement with the
Fund. Under such Agreement, the Administrator generally assists in certain
aspects of the Fund's operations, other than providing investment advice,
subject to the overall authority of the Fund's Board of Directors. The
Administrator determines the Fund's net asset value weekly, prepares such
figures for publication on a weekly basis, maintains certain books and records
that are not maintained by the Adviser, custodian or transfer agent, assists in
the preparation of financial information for the Fund's income tax returns,
proxy statements, and stockholder reports.
Under the terms of the Administration Agreement, the Fund has agreed to pay
a fee computed weekly and payable monthly, at an annual rate of 0.20% of the
Fund's average weekly net assets subject to a monthly minimum of $12,500. For
the year ended December 31, 1996, the Fund incurred administrative fees of
$208,762.
Director's Fees: Certain directors of the Fund are also directors, officers
and/or employees of the Adviser. None of the directors so affiliated received
compensation for their services. Similarly, none of the Fund's officers received
compensation from the Fund. For the year ended December 31, 1996, the Fund
incurred directors' fees of $29,858.
NOTE 3. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1996, purchases and sales of securities,
excluding short-term investments, aggregated $42,052,901 and $33,059,036,
respectively.
At December 31, 1996, the cost and unrealized appreciation or depreciation
in value of the investments owned by the Fund, as computed on a Federal income
tax basis, are as follows:
<TABLE>
<S> <C>
Aggregated cost............................................................ $105,646,401
------------
Gross unrealized appreciation.............................................. $ 28,092,164
Gross unrealized depreciation.............................................. (672,690)
------------
Net unrealized appreciation................................................ $ 27,419,474
------------
------------
</TABLE>
NOTE 4. COMMON STOCK
There are 100,000,000 shares of $0.001 par value common stock authorized.
Of the 7,399,100 shares of common stock outstanding at December 31, 1996, Cohen
& Steers Capital Management, Inc. owned 8,864 shares.
NOTE 5. SUBSEQUENT EVENTS
On January 2, 1997, the Board of Directors of the Fund declared a dividend
of $0.08 per share payable on January 31, 1997, to shareholders of record on
January 15, 1997.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. DIRECTED BROKERAGE ARRANGEMENT
The Adviser directed certain portfolio trades to brokers who paid a portion
of the Fund's expenses. For the year ended December 31, 1996, the Fund's
expenses were reduced by $44,874 under this agreement.
NOTE 7. BORROWINGS
The Fund has entered into a Line of Credit Agreement with State Street Bank
& Trust Company for $15,000,000. At December 31, 1996, the par value of loans
outstanding was $8,464,636 at an interest rate of 7.50%. During the year ended
December 31, 1996, the average daily balance of loans outstanding was $2,734,232
at a weighted average interest rate of 6.40%. The maximum amount of loans
outstanding at any time during the period was $8,464,636 as of December 31,
1996, which was 6.32% of total assets. The loan is collateralized by the Fund's
portfolio.
NOTE 8. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET INCREASE
NET REALIZED AND (DECREASE)
TOTAL NET UNREALIZED GAIN IN NET ASSETS
INVESTMENT INVESTMENT (LOSS) RESULTING DIVIDENDS AND
QUARTERLY PERIOD INCOME INCOME ON INVESTMENTS FROM OPERATIONS DISTRIBUTIONS
- ----------------- ---------------- ------------------ -------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER PER PER PER PER
FISCAL 1996 AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
- ----------------- --------- ----- ---------- ----- ----------- ------ ----------- ------ ---------- -----
March 31......... $2,007,254 $0.27 $1,732,336 $0.23 $ 435,758 $ 0.06 $ 2,168,094 $ 0.29 $1,775,760 $0.24
June 30.......... 2,211,739 0.30 1,924,390 0.26 3,372,876 0.46 5,297,266 0.72 1,775,741 0.24
September 30..... 1,870,487 0.25 1,580,139 0.22 5,010,695 0.67 6,590,834 0.89 1,775,736 0.24
December 31...... 2,637,159 0.36 2,282,516 0.31 16,515,038 2.23 18,797,554 2.54 2,145,684 0.29
---------- ----- ---------- ----- ----------- ------ ----------- ------ ---------- -----
$8,726,639 $1.18 $7,519,381 $1.02 $25,334,367 $ 3.42 $32,853,748 $ 4.44 $7,472,921 $1.01
---------- ----- ---------- ----- ----------- ------ ----------- ------ ---------- -----
---------- ----- ---------- ----- ----------- ------ ----------- ------ ---------- -----
<CAPTION>
PER PER PER PER PER
FISCAL 1995 AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
- ----------------- --------- ----- ---------- ----- ----------- ------ ----------- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31......... $1,667,686 $0.23 $1,362,753 $0.19 ($4,071,089) ($0.55) ($2,708,336) ($0.36) $1,775,751 $0.24
June 30.......... 1,808,803 0.24 1,522,730 0.20 2,302,462 0.31 3,825,192 0.51 1,775,768 0.24
September 30..... 1,818,584 0.25 1,520,958 0.21 3,607,617 0.49 5,128,575 0.70 1,775,764 0.24
December 31...... 2,363,515 0.32 2,076,749 0.28 70,623 0.01 2,147,372 0.29 1,775,750 0.24
---------- ----- ---------- ----- ----------- ------ ----------- ------ ---------- -----
$7,658,588 $1.04 $6,483,190 $0.88 $ 1,909,613 $ 0.26 $ 8,392,803 $ 1.14 $7,103,033 $0.96
---------- ----- ---------- ----- ----------- ------ ----------- ------ ---------- -----
---------- ----- ---------- ----- ----------- ------ ----------- ------ ---------- -----
<CAPTION>
NET ASSETS AT
QUARTERLY PERIOD END OF PERIOD
- ----------------- ---------------------
<S> <C> <C>
PER
FISCAL 1996 AMOUNT SHARE
- ----------------- ------------ ------
March 31......... $ 99,817,629 $13.49
June 30.......... 103,339,154 13.97
September 30..... 108,154,252 14.62
December 31...... 124,806,122 16.87
PER
FISCAL 1995 AMOUNT SHARE
- ----------------- ------------ ------
<S> <C> <C>
March 31......... $ 93,651,438 $12.66
June 30.......... 95,700,862 12.93
September 30..... 99,053,673 13.39
December 31...... 99,425,295 13.44
</TABLE>
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase, from time to time, shares of its
common stock in the open market.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Cohen & Steers Total Return Realty Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Cohen & Steers Total Return Realty
Fund, Inc. as of December 31, 1996, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended and the financial highlights for each of the
three years in the period then ended and for the period September 27, 1993
(commencement of operations) to December 31, 1993. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Cohen & Steers Total Return Realty Fund, Inc. as of December 31, 1996, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the three years in the period then ended and for the period from
September 27, 1993 (commencement of operations) to December 31, 1993, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
February 3, 1997
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
DIVIDEND REINVESTMENT PLAN
The Fund has a Dividend Reinvestment Plan (the 'Plan'). Each shareholder
may elect to have all distributions of dividends and capital gains automatically
reinvested in additional shares by State Street Bank & Trust Company (the 'Plan
Agent'), as agent for shareholders pursuant to the Plan. The Plan Agent will
effect purchases of shares under the Plan in the open market. Shareholders who
do not participate in the Plan will receive all distributions in cash paid by
check mailed directly to the shareholder of record (or if the shares are held in
street or other nominee name, then to the nominee) by the Plan Agent, as
dividend disbursing agent. Shareholders whose shares are held in the name of a
broker or nominee should contact the broker or nominee to determine whether and
how they may participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Fund declares a dividend or makes a capital gain distribution,
the Plan Agent will, as agent for the participants, receive the cash payment and
use it to buy shares in the open market, on the New York Stock Exchange or
elsewhere, for the participants' accounts. The Fund will not issue any new
shares in connection with the Plan.
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a dividend record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole shares credited to his or her account under the Plan will be issued
and a cash payment will be made for any fraction of a share credited to such
account, or the Plan Agent will sell the participant's shares and send the
participant the proceeds less a service fee and brokerage commissions.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes written confirmations of all transactions in the accounts, including
information needed by the shareholders for personal and tax records. Shares in
the account of each Plan participant will be held by the Plan Agent on behalf of
the participant. Proxy material relating to shareholders' meetings of the Fund
will include those shares purchased as well as shares held pursuant to the Plan.
If shares are held in the name of a brokerage firm, bank, or other nominee,
shareholders should contact the nominee to see if it will participate in the
Plan on their behalf. If shareholders wish to participate in the Plan, but their
brokerage firm, bank or other nominee is unable to participate on their behalf,
they should request to reregister shares in their own name, which will enable
participation in the Plan.
The Plan Agent's fees for the handling of reinvestment of dividends and
other distributions will be paid by the Fund. Each participant will pay a pro
rata of brokerage commissions incurred with respect to the Plan Agent's open
market purchases in connection with the reinvestment of distributions. There are
no other charges to participants for reinvesting dividends or capital gain
distributions.
The automatic reinvestment of dividends and other distributions will not
relieve participants of any income tax that may be payable or required to be
withheld on such dividends or distributions.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any distribution paid subsequent to written notice of the change sent
to all shareholders of the Fund at least 90 days before the record date for the
dividend or distribution. The Plan also may be amended or terminated by the Plan
Agent by at least 90 days' written notice to all shareholders of the Fund. All
correspondence concerning the Plan should be directed to the Plan Agent at State
Street Bank and Trust Co., P.O. Box 8200, Boston, MA 02266-8200 (telephone
800-426-5523).
ADDITIONAL INFORMATION
During the period, there have been no material changes in the Fund's
investment objectives or fundamental policies that have not been approved by the
shareholders. There have been no changes in the Fund's charter or By-Laws that
would delay or prevent a change in control of the Fund which have not been
approved by shareholders. There have been no changes in the principal risk
factors associated with the investment in the Fund. There have been no changes
in the persons who are primarily responsible for the day-to-day management of
the Fund's portfolio.
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COHEN & STEERS
TOTAL RETURN REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
[LOGO]
ANNUAL REPORT
DECEMBER 31, 1996
