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QUARTERLY REPORT
MARCH 31, 1998
COHEN & STEERS
TOTAL RETURN REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
April 15, 1998
To Our Shareholders:
We are pleased to submit to you our report for Cohen & Steers Total Return
Realty Fund Inc. for the quarter ended March 31, 1998. The net asset value per
share at that date was $17.28. In addition, during the quarter, three $0.08 per
share monthly dividends were declared and paid.
INVESTMENT REVIEW
The first quarter of 1998 was without question one of the most rewarding
for investors at large, yet one of the most challenging ever for owners of REIT
shares. For the quarter ended March 31, 1998, the Fund's total return, based on
income and change in net asset value was 0.07%. The economy continued to defy
consensus expectations of a slowdown, growing steadily while inflation remained
nearly nonexistent. Interest rates remained quite stable, with long-term rates
remaining at their lowest levels in decades. The stock market set record after
record, turning in its best first quarter performance in a decade, with nearly
every sector fully participating.
The real estate recovery continued to gather steam and the fundamentals for
REITs remained strong. Industry participants in general posted healthy earnings
growth for the fourth quarter of 1997 with most reporting positive earning
surprises. There are, as well, expectations of continued strong profit growth
for REITs in the first quarter of 1998 and the remainder of the year. In this
ideal environment, however, REITs as a group managed to decline in price,
despite a sharp rally at the end of March. Lagging the S&P 500 Index by nearly
15 percentage points, REITs underperformed the stock market by the widest margin
ever for a single quarter. In a reversal of recent trends, the worst performing
groups were the Office and Hotel sectors, while the best performers were the
more defensive Apartment and Self Storage sectors.
We believe that the poor performance of REITs on both an absolute and
relative basis can be traced to three conditions that, we also believe, have
been favorably resolved. First, there had been an oversupply of shares created
by a surge of equity offerings by many companies, particularly during January
and February. In the quarter, over $5 billion of new equity was sold. With REITs
having committed to a substantial amount of property acquisitions, their need
for equity capital temporarily exceeded the market's demand, causing a decline
in price. However, that decline brought most stocks down to a level where
managements became unwilling to issue equity due to possible dilution. As a
result, the potential near-term supply of equity offerings diminished
significantly, thereby relieving the pressure on prices.
The second issue relates to the introduction of legislation that would have
potentially curtailed the growth of the REIT industry by making corporate or
property acquisitions more costly. The specter of such potential legislation
understandably made many investors wary of this sector. Fortunately, this
situation was largely resolved when the only measure to reach Congress was one
that will affect so-called 'paired share' REITs. Our current understanding is
that this measure will alter the rules under which they operate and require the
five companies that have this structure to adopt alternative strategies with
respect to the structuring of future acquisitions. The Fund owns shares of one
such company, Meditrust Corp. We consider it to be an excellent value at the
current price and we are confident that it will not experience a significant
slowing of its growth rate. Most importantly, the fact that this was the only
measure to be seriously considered by Congress dissipates a cloud of uncertainty
that would have overhung the REIT market for much of 1998.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
The third and more complex issue is that there has been a change in
sentiment regarding the state of real estate markets in general and the
prospects for continued strong REIT earnings growth. It is clear that property
prices have risen dramatically in recent years as health has finally been
restored to the real estate industry. While most REITs continue to report
outstanding earnings, many markets have reached equilibrium, whereby rent growth
is likely to moderate and new construction is likely to become more pervasive.
In short, looking past what is shaping up to be a very strong year in 1998, the
market appears to be discounting a slowing of the current unsustainable high
rate of earnings growth in 1999 and beyond. This has precipitated a contraction
of earnings multiples for almost all REITs.
INVESTMENT OUTLOOK
It is ironic that while the situation confronting investors in REITs is no
different from that which is confronting investors in most other sectors of
corporate America, there have been entirely different stock market consequences.
As the U.S. faces the possibility of a maturing economy and slowing growth, the
message coming from many corporations has been to reduce earnings growth
expectations, dramatically so, in some instances. Yet, the market appears to be
overlooking these lower expectations, sending most stocks, as measured by the
popular market averages, to record highs. The exception to this has been REITs,
which have suffered stock price declines despite the fact that we believe their
growth prospects and earnings visibility are superior to the average non-real
estate company.
While we cannot explain the behavior of the stock market in general, it
appears to us that the market is reflecting concern over several issues facing
the REIT industry today, and has more than adequately discounted them in share
prices. Some of these issues are based on fundamental factors while others are
technical and psychological.
The recovery in property prices clearly requires much more selective and
judicious acquisition policies. Whereas there continue to be a growing number of
acquisition opportunities as the shift from private to public ownership of real
estate accelerates, there is also greater competition not only among REITs but
from a host of private investor groups and popular 'opportunity funds' as well.
Lacking public market discipline and limits on the use of leverage, these
financial buyers may be elevating prices to levels which may not appear to make
near-term economic sense. While many REIT managers feel compelled to maintain
earnings growth through acquisitions, these other entities are under pressure to
quickly deploy substantial amounts of capital they have recently raised from
their investors. In addition, some of these investors, as well as several REITs,
have begun to engage in new development or to look overseas for investment
opportunities, despite the greater risks that these ventures entail. Some
investors are concerned that the adoption of these strategies reflects these
managers' beliefs that the U.S. real estate recovery is reaching a late stage
and that, as a result, such managers are willing to assume greater risk in order
to meet their return objectives.
Another common investor concern is that the voracious appetite for equity
by the REIT industry will cause a persistent overhang of shares that may not be
readily absorbed by the marketplace. The willingness of some REITs to sell
equity upon any sustained rise in their stock price reduces or eliminates
scarcity value with respect to the availability of their shares. A further
source of supply is emanating from founding institutional investors whose
shareholdings in a number of REITs were previously subject to restrictions on
sale. Some of these restrictions are
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
expiring and more and more shares are coming onto the market. This supply is
helping to satisfy underlying demand and is consequently placing a ceiling on
some companies' share prices.
With equity prices languishing, many companies are making greater use of
debt financing. The renewed availability of low cost debt capital from both
financial institutions and the public market is creating a preferred source of
financing for many REITs. For example, many of the prominent companies in the
Regional Mall sector have made substantial and high profile acquisitions within
recent months that have elevated their debt/equity ratios. Although leverage has
been an excellent means of enhancing returns, it does not come without the side
effect of lowering earnings predictability. While it is understandable that
investors are concerned about the risk of increased financial leverage, it must
be noted that the debt level for the majority of companies in our universe
remains much lower than in past cycles. In addition, the balance sheet
requirements imposed on REITs by the various rating agencies should ensure that
leverage will not become excessive.
In summary, we believe that the contraction in earnings multiples over
recent months is a rational reaction to the advancing age of the real estate
cycle but more than fully discounts most of the issues regarding future
fundamentals. It is for this reason that we have believed for some time that
investors should reduce their total return expectations to a level more in line
with historic averages. Nonetheless, this does not mean that there are not
abundant opportunities to earn adequate and competitive returns. In fact, at
current price levels we believe that REITs are as attractively valued as at any
time since the real estate recovery began. We base this on absolute and relative
earnings multiples and dividend yields. Further, as we have expected for some
time, dividend growth for many REITs is beginning to accelerate due to the
bottoming out of dividend payout ratios.
Importantly, the leading REITs continue to have ample internal growth
prospects as well as plentiful acquisition opportunities. In addition, as active
portfolio managers we have the ability to take advantage of the asynchronous
cycles of different property types and geographic regions of the country. We
continue to believe that the transformation of the real estate industry to one
that is dominated by public companies is still in its infancy, and we believe
the transformation may bring substantial rewards to investors in the leading
companies.
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
MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
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<S> <C> <C>
EQUITIES 100.64%
APARTMENT/RESIDENTIAL 13.16%
Avalon Properties........................................... 89,200 $ 2,586,800
Camden Property Trust, $2.25, Series A (Convertible
Preferred)............................................... 210,200 5,333,825
Charles E. Smith Residential Realty......................... 49,700 1,652,525
Colonial Properties Trust................................... 123,500 3,928,844
Summit Properties........................................... 164,700 3,314,588
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16,816,582
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DIVERSIFIED 6.71%
Entertainment Properties Trust.............................. 130,500 2,561,063
Pacific Gulf Properties..................................... 262,200 6,014,212
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8,575,275
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HEALTH CARE 24.44%
American Health Properties.................................. 154,900 4,104,850
*ElderTrust................................................. 192,900 3,448,087
Health Care Property Investors.............................. 68,300 2,522,831
Health Care REIT............................................ 140,700 3,869,250
Healthcare Realty Trust..................................... 32,800 926,600
Meditrust Corp.............................................. 173,800 5,366,075
Nationwide Health Properties................................ 120,700 3,017,500
Omega Healthcare Investors.................................. 204,900 7,991,100
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31,246,293
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HOTEL 1.82%
Innkeepers USA Trust........................................ 141,900 2,323,612
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INDUSTRIAL 3.92%
EastGroup Properties........................................ 93,800 1,934,625
First Industrial Realty Trust............................... 85,600 3,081,600
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5,016,225
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OFFICE 3.66%
Brandywine Realty Trust..................................... 100,000 2,381,250
SL Green Realty Corp........................................ 32,000 818,000
Tower Realty Trust.......................................... 60,100 1,479,962
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4,679,212
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
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<S> <C> <C>
OFFICE/INDUSTRIAL 10.36%
Prime Group Realty Trust.................................... 130,000 $ 2,522,000
Reckson Associates Realty Corp.............................. 83,000 2,189,125
TriNet Corporate Realty Trust............................... 222,800 8,536,025
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13,247,150
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SHOPPING CENTER 36.57%
COMMUNITY CENTER 21.82%
Alexander Haagen Properties................................. 220,100 3,686,675
Bradley Real Estate......................................... 125,200 2,613,550
Glimcher Realty Trust....................................... 271,800 5,945,625
Mid-America Realty Investments.............................. 128,300 1,331,113
Pan Pacific Retail Properties............................... 114,500 2,504,688
Pennsylvania REIT........................................... 214,700 5,260,150
Regency Realty Corp......................................... 31,600 835,425
Saul Centers................................................ 156,600 2,828,587
Sizeler Property Investors.................................. 103,800 1,148,288
Western Investment Real Estate Trust........................ 116,400 1,738,725
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27,892,826
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FACTORY OUTLET CENTER 5.97%
Horizon Group............................................... 474,000 5,836,125
Tanger Factory Outlet Centers............................... 61,600 1,794,100
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7,630,225
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REGIONAL MALL 8.78%
CBL & Associates Properties................................. 20,800 509,600
Crown American Realty Trust, 11.00%, Series A (Preferred)... 87,900 4,719,131
JP Realty................................................... 77,000 1,953,875
Macerich Company............................................ 89,300 2,656,675
Taubman Centers............................................. 105,500 1,378,094
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11,217,375
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TOTAL SHOPPING CENTER....................................... 46,740,426
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TOTAL INVESTMENTS (Identified cost -- $112,764,589)..............100.64% 128,644,775
LIABILITIES IN EXCESS OF OTHER ASSETS............................(0.64%) (819,627)
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NET ASSETS (Equivalent to $17.28 per share based on
7,399,100 shares of capital stock outstanding)................100.00% $127,825,148
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* Non-income producing security.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
FINANCIAL HIGHLIGHTS*
MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
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<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/97...................................... $129,552,161 $17.51
Net investment income......................................... $ 1,899,558 $ 0.26
Net realized and unrealized loss on investments............... (1,841,313) (0.25)
Distributions from net investment income........................... (1,785,258) (0.24)
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Net decrease in net asset value.................................... (1,727,013) (0.23)
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End of period: 3/31/98............................................. $127,825,148 $17.28
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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
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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.
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OFFICERS AND DIRECTORS INVESTMENT ADVISER
Cohen & Steers Capital Management, Inc.
Robert H. Steers 757 Third Avenue
Director and Chairman New York, NY 10017
(212) 832-3232
Martin Cohen
Director and President FUND ADMINISTRATOR
Princeton Administrators, L.P.
Gregory C. Clark P.O. Box 9095
Director Princeton, NJ 08543-9095
(800) 543-6217
Jeffrey H. Lynford
Director CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
Willard H. Smith Jr. P.O. Box 8200
Director Boston, MA 02266-8200
Elizabeth O. Reagan LEGAL COUNSEL
Vice President Dechert Price & Rhoads
30 Rockefeller Plaza
Adam Derechin New York, NY 10112
Vice President and
Assistant Treasurer New York Stock Exchange Symbol: RFI
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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