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COHEN & STEERS
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TOTAL RETURN REALTY FUND
QUARTERLY REPORT
SEPTEMBER 30, 1998
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<S> <C>
COHEN & STEERS
TOTAL RETURN REALTY FUND First Class Mail
757 THIRD AVENUE U.S. Postage
NEW YORK, NY 10017 PAID
Boston, MA
Permit No. 56712
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
October 15, 1998
To Our Shareholders:
We are pleased to submit to you our report for the quarter and nine months
ended September 30, 1998. The net asset value per share at that date was $15.05.
In addition, during the quarter, three $0.08 per share monthly dividends were
declared and paid.
INVESTMENT REVIEW
For the quarter ended September 30, 1998, Cohen & Steers Total Return
Realty Fund had a total return, based on income and change in net asset value,
of -6.5%. This performance compares favorably to the NAREIT Equity REIT Index
total return of -10.5%. The Fund's year-to-date return of -10.2% was materially
better than the NAREIT Equity REIT Index return of -15.0%. The continued strong
relative performance of the Fund validates its strategy of focusing on
investments having above-average current income, attractive relative to asset
value, and visible and stable earnings prospects.
Never before has the state of real estate finance deteriorated as quickly
and dramatically as in the latest three-month period. Whereas at mid-year the
equity market was beginning to close to REITs in need of capital, the decline in
REIT share prices in the third quarter completely shut off access to equity
capital for all publicly traded real estate companies. Despite a sharp rally in
mid-September, this year's price decline remains on track to be the worst in
REIT history.
Of greater near-term consequence, however, is the recent shutdown of the
real estate debt markets. It is estimated that somewhere between $30 and $40
billion of mortgage loans and commitments have been made by financial
institutions to real estate developers and owners. These loans, which are now
held on the books of these financial institutions, were expected to be
'securitized' and sold to investors in the form of commercial mortgage backed
securities ('CMBS'). The recent widening of yield spreads between U.S.
government debt securities and nearly all other debt has left these securities
unsold, and in many instances unsalable. The financial institutions holding this
paper face substantial losses and, moreover, can no longer make any further loan
commitments. Whereas the problems in the equity market primarily affected public
companies, the difficulties in the debt market affect the entire real estate
industry.
As a result, the real estate industry is facing a liquidity crisis that is
typical for this stage of the economic and real estate cycle. Unlike the end of
nearly all other real estate cycles, however, property market conditions are
exceptionally good: vacancy rates are low, rents are rising and new construction
is sufficient only to meet existing strong demand for space -- hardly the
circumstances which should cause investor concern. This has led many in the real
estate industry -- both public and private -- to question the wisdom of the
financial market mechanism.
We believe that the absence of demand for both debt and equity real estate
securities is a reflection of the market's concern with respect to three issues.
First is the future course of the economy. If the weakness in the stock market
and strength of the government bond market signal an economic recession, then
the resulting decline in demand for space would clearly remove the strongest
underpinning of the real estate recovery of the past several years. Second, the
dramatic growth of the real estate equity and debt markets over the past several
years has raised the specter of potential financial excesses in the real estate
markets; simply put, too much money has
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
been chasing real estate. And third, the threat of deflationary pressures on the
prices of both hard and financial assets is potentially a devastating one for
all investors, particularly those in real estate.
In contrast to the opinions of many, we believe that the capital markets
have behaved magnificently with respect to real estate. Cutting off funding of
new development before severe over-building could take place, for example, has
dramatically improved the probability of a more mild real estate downturn, if
there is to be one at all. Similarly, the closing of the debt markets is
punishing both those resorting to high leverage as well as their lenders for
imprudent financial practices. Finally, the liquidity squeeze has put an end to
an upward spiral of property prices, which, if allowed to go any further, would
have reached an unsustainable high level.
INVESTMENT OUTLOOK
Although REIT investors have clearly suffered short-term pain, the
longer-term outlook has dramatically improved. As we have mentioned in the past,
we believe that the valuation level of REITs, by just about every measure, is as
attractive as ever. The decline in prices during the third quarter has only
improved that valuation picture. It is therefore our contention that much of the
fundamental risk facing the industry is already discounted in the currently
depressed share prices. Nonetheless, we believe there may still be some market
turbulence before year-end due to potential further fallout from the credit
crunch, particularly if one or more major financial institutions were to fail or
if widespread concern about an economic slowdown turns into fear of a severe
recession. In addition, there may be tax-loss selling before year-end that could
further depress stock prices. We would view any further weakness in the REIT
group, however, as the final phase of a correction that could lead to a period
of strong and sustainable earnings growth and stock market performance.
The conditions described above have vastly broadened the range of
high-return opportunities available to the leading public real estate companies.
Competition from debt-financed private competitors has been eliminated, while
the property portfolios amassed by many of them will soon be available for
acquisition either through outright sale or by foreclosure due to mortgages in
default. Though not as severe as the conditions that prevailed in the early
1990's, the improved position of many REITs since that period will enable them
to experience substantial growth, just as they did then.
This renewed opportunity set will likely attenuate the widely anticipated
slowdown in profits due to the maturing real estate cycle and the narrowing of
acquisition opportunities. In the environment that we foresee in the next year,
we believe that REITs may reemerge as vehicles that can provide above-average
current income and experience accelerating growth. Further, these conditions
will enhance the position of REITs, as the country's most powerful and efficient
real estate owners and managers.
We suspect that this point of view probably represents a minority opinion.
In addition, the industry continues to face several hurdles that could suppress
investor enthusiasm. Foremost is the continuous need that REITs have for both
equity and debt capital, which regularly seems to place an effective ceiling on
their share prices. In periods such as this past year, capital became
unavailable to REITs not just as a result of a supply-demand imbalance but also
because the market perceived that REITs lacked good investment opportunities. We
believe that just the opposite may occur in the coming months; if the
opportunity set for REITs expands, so will their P/E ratios, and capital
availability will no longer be an issue.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
Interestingly, especially at current prices, a slowdown in economic growth
may not have a meaningful impact on REIT share prices for three reasons. First,
REITs are cheaper today than at any time in the past, including before and
during economic recessions. Second, REIT dividends are extremely secure due to
the long-term nature of leases that produce earnings, the low payout ratios that
are prevalent in the industry and the modest use of leverage. Further, economic
weakness appears certain to precipitate further interest rate declines and in
this environment, REITs will be very attractive to both equity and
income-oriented investors alike. And third, worsening economic conditions will
further expand the range of acquisition opportunities available to REITs, again,
just like in the early 1990's.
From an investment strategy standpoint, it is important to note that in the
environment we foresee, not all REITs will emerge as winners. Unfortunately,
there are many companies that used excessive leverage, pursued irrational
business plans and failed to adhere to practices that would have enhanced
shareholder value. The experience of the past year has served to clearly
distinguish companies and management teams that are capable of weathering
economic storms and exercising financial discipline. These are the biggest
potential winners in the real estate industry in the next few years. We have
utilized the recent period of price weakness to increase the Fund's exposure to
companies with these positive attributes while maintaining our current income
discipline.
Perhaps the biggest hurdle that REITs will have to overcome is that they
have performed so poorly recently and have failed to provide the defensive
characteristics that have been their hallmark for many years. Their decline, in
our opinion, had nothing to do with their intrinsic nature, but had everything
to do with the position of the real estate cycle. If we are correct in assuming
that we are about to enter a new phase of that cycle, and that there is the
prospect of renewed growth, investors will regain confidence in the ability of
REITs to provide consistently satisfactory returns going forward.
Sincerely,
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MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
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Cohen & Steers is now online at WWW.COHENANDSTEERS.COM. Visit our website
for daily navs, portfolio information, performance information, recent
news articles, literature and insights on the REIT market.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
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<S> <C> <C>
EQUITIES 96.90%
APARTMENT/RESIDENTIAL 11.85%
Apartment Investment & Management Co. -- Class A.............. 21,000 $ 792,750
Apartment Investment & Management Co., 9.375%, Series G
(Preferred)................................................. 125,100 2,971,125
Camden Property Trust, $2.25, Series A (Convertible
Preferred).................................................. 210,200 5,281,275
Charles E. Smith Residential Realty........................... 33,700 1,023,638
Summit Properties............................................. 164,700 3,129,300
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13,198,088
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DIVERSIFIED 3.89%
Pacific Gulf Properties....................................... 215,100 4,328,887
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HEALTH CARE 19.61%
American Health Properties.................................... 131,200 3,083,200
ElderTrust.................................................... 174,000 2,544,750
Health Care Property Investors................................ 106,100 3,501,300
Healthcare Realty Trust....................................... 111,800 2,850,900
Meditrust Corp................................................ 112,300 1,916,119
Nationwide Health Properties.................................. 129,700 2,918,250
Omega Healthcare Investors.................................... 153,700 5,024,069
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21,838,588
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INDUSTRIAL 2.99%
First Industrial Realty Trust................................. 130,600 3,330,300
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OFFICE 14.37%
Arden Realty Group............................................ 105,300 2,349,506
Brandywine Realty Trust....................................... 100,000 1,912,500
Crescent Real Estate Equities Co.............................. 107,200 2,706,800
Highwoods Properties.......................................... 104,800 2,908,200
Mack-Cali Realty Corp......................................... 90,500 2,715,000
SL Green Realty Corp.......................................... 32,000 672,000
SL Green Realty Corp., 8.00%, Series A (Convertible
Preferred).................................................. 114,200 2,740,800
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16,004,806
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OFFICE/INDUSTRIAL 8.05%
Prime Group Realty Trust...................................... 130,000 2,177,500
Reckson Associates Realty Corp., 7.625%, Series A (Convertible
Preferred).................................................. 154,000 3,368,750
TriNet Corporate Realty Trust................................. 104,900 3,422,363
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8,968,613
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 1998 (UNAUDITED)
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<CAPTION>
NUMBER
OF SHARES VALUE
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<S> <C> <C>
SHOPPING CENTER 33.97%
COMMUNITY CENTER 15.76%
Bradley Real Estate, 8.40%, Series A (Convertible
Preferred).................................................. 40,026 $ 930,605
CenterTrust Retail Properties................................. 179,400 2,332,200
Federal Realty Investment Trust............................... 47,200 1,067,900
Glimcher Realty Trust......................................... 133,400 2,284,475
JDN Realty Corp............................................... 10,400 239,200
Pan Pacific Retail Properties................................. 173,400 3,229,575
Pennsylvania REIT............................................. 202,500 4,151,250
Saul Centers.................................................. 139,900 2,378,300
Sizeler Property Investors.................................... 103,800 934,200
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17,547,705
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FACTORY OUTLET CENTER 5.30%
Prime Retail.................................................. 294,978 2,894,471
Prime Retail, 8.50%, Series B (Convertible Preferred)......... 94,800 1,611,600
Tanger Factory Outlet Centers................................. 61,600 1,397,550
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5,903,621
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REGIONAL MALL 12.91%
CBL & Associates Properties................................... 96,400 2,482,300
Crown American Realty Trust, 11.00%, Series A (Preferred)..... 44,300 2,190,081
General Growth Properties, 7.25%, Series A (Redeemable
Preferred).................................................. 88,400 2,215,525
JP Realty..................................................... 133,700 2,974,825
Macerich Company.............................................. 81,500 2,190,312
The Mills Corp................................................ 100,100 2,327,325
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14,380,368
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TOTAL SHOPPING CENTER......................................... 37,831,694
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SPECIALTY 2.17%
Entertainment Properties Trust................................ 130,500 2,414,250
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TOTAL EQUITIES (Identified cost -- $114,707,144).............. 107,915,226
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<CAPTION>
PRINCIPAL
AMOUNT
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<S> <C> <C>
COMMERCIAL PAPER 2.79%
Associates Corp., 5.72%, 10/01/98 (Identified
cost -- $3,107,060)......................................... $3,107,000 3,107,000
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TOTAL INVESTMENTS (Identified cost -- $117,814,204)............. 99.69% 111,022,226
OTHER ASSETS IN EXCESS OF LIABILITIES............................. 0.31% 348,914
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NET ASSETS (Equivalent to $15.05 per share based on 7,399,100
shares of capital stock outstanding).......................... 100.00% $111,371,140
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
FINANCIAL HIGHLIGHTS*
SEPTEMBER 30, 1998 (UNAUDITED)
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<CAPTION>
NET ASSET VALUE
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..................................... $ 6,649,577 $ 0.90
Net realized and unrealized loss on security
transactions........................................... (19,493,913) (2.64)
Distributions from net investment income.................. (5,336,685) (0.72)
------------ ------
Net decrease in net asset value................................. (18,181,021) (2.46)
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End of period: 9/30/98.......................................... $111,371,140 $15.05
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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
George Grossman
Director
Jeffrey H. Lynford
Director
Willard H. Smith, Jr.
Director
Elizabeth O. Reagan
Vice President
Adam Derechin
Vice President and Assistant Treasurer
William Goodwin
Assistant Secretary
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
1775 Eye Street, NW
Washington, DC 20006
New York Stock Exchange Symbol: RFI
Website: www.cohenandsteers.com
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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