<PAGE>
<PAGE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
February 3, 1998
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, 1997. The net asset
value per share on that date was $17.51. During the fourth quarter, three $0.08
per share monthly dividends were declared and paid. In addition, a capital gains
distribution of $1.88 per share was declared for shareholders of record on
December 31, 1997 and paid on January 14, 1998.
1997 REVIEW
The year 1997 proved to be very rewarding for nearly every participant in
the real estate securities industry. REIT share prices once again exhibited
stability amid turbulent financial market conditions, demonstrating their low
correlation to other asset classes. Yet, they still provided investment returns
which were well above their historic norm. For the quarter and the year ended
December 31, 1997, the Fund's total return based on income, realized capital
gains and change in net asset value was 2.0% and 20.6%, respectively.
During the year, Wall Street underwrote nearly $30 billion of REIT equity
securities, more than double the previous record amount raised in 1993. Due to
the combination of equity issuance and price appreciation, the market
capitalization of equity REITs grew by over 60% to $145 billion. The mutual fund
industry enjoyed record inflows into real estate funds, which are now one of the
most popular new asset classes.
REITs acquired an unprecedented $50 billion in property in 1997, becoming
the single most important source of capital for the real estate industry. They
grew in number for the first time since 1994, the result of IPO activity which
included some of the financial market's largest initial offerings of the year.
REITs also participated in a record amount of merger and acquisition activity,
including some of the largest, most visible and controversial of 1997. Whereas
several years ago no REIT had a stock market capitalization of more than $1
billion, by year-end there were 50.
REITs enjoyed solid earnings growth, averaging approximately 11% per share,
with dividends increasing at a slower, but still respectable, 6% pace. For the
second year in a row the best performing sectors of the REIT industry were
owners of hotel and office properties, both of which benefited from supply
shortages resulting from the continued strength of the U.S. economy. It is in
these two sectors that some of the year's biggest and highest profile and
corporate transactions occurred.
We believe that there were essentially two developments in 1997 that were
responsible for this record-setting activity, and which have permanently
reshaped the industry: extraordinary financial market conditions, particularly
related to interest rates, and the emergence of new management strategies by the
leading companies.
We have never been proponents of the notion, and are not now, that REITs
are interest-sensitive securities. Statistics and our own observations have
proven that there is, in fact, a very low correlation between REIT returns and
interest rates. However, in 1997 we believe that the low interest rate
environment influenced the REIT industry in a number of important ways. Because
the industry is highly capital intensive, lower interest rates reduced the
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
cost of capital to a level which made property acquisitions extremely
advantageous for those companies that could efficiently access the debt markets.
These acquisitions produced higher rates of earnings growth which, in turn,
improved returns on equity and positively impacted share prices. The ability of
these REITs to sell additional equity allowed them to expand their borrowing
capacity and grow even further. While at some point this virtuous cycle must
come to an end, we believe that as long as the interest rate environment remains
benign and the availability of acquisitions remains plentiful, REITs should
continue to enjoy unprecedented growth through this means.
The superior current returns available throughout the spectrum of REIT
securities, from common stocks to debt instruments, have attracted a much
expanded investor constituency. In addition, the greater market capitalization
and size of individual issues have made REITs an important target of capital
providers from the very smallest to the very largest investors. Importantly, the
terms of debt financing, often at maturities greater than 10 years and at fixed
rates, closely matches the investment horizon of the acquired assets. In the
case of some instruments such as perpetual preferred stocks, this debt-like
security has no maturity and thereby represents the closest thing to permanent
financing the real estate industry can attain. Further, the requirement that
companies maintain strong financial ratios to maintain favorable credit ratings
imposes fiscal discipline unlike anything the industry has ever known. This
situation, which has not existed in nearly 30 years, has served to strengthen
equity values across the entire industry.
The result of these developments in the financial market environment is
that the REIT industry has achieved critical mass much sooner than expected.
Having achieved this milestone, the industry's access to capital continues to
widen, thereby ensuring the stature of REITs as the dominant participants in the
real estate industry for a long time to come.
The second major development of 1997 was the emergence of new operating
strategies that heretofore were never contemplated by participants in the REIT
industry. Historically, REITs operated primarily as passive owners of property,
often confined by the tax rules that govern the industry, but more often
confined by conservative management styles and narrow vision. This began to
change in the early 1990s when some older REITs took advantage of extraordinary
property acquisition opportunities and newer REITs came public with more
entrepreneurial management teams. With ready access to both capital and
investment opportunities, REITs have begun to aggressively pursue a vastly wider
range of assets and businesses. For example, the handful of so-called
'paired-share' REITs (two companies whose shares trade together, one a REIT
which owns property, the other a tax-paying company which can actively operate
businesses) have led the way towards revolutionizing the entire structure and
leadership of the hotel industry.
Other REITs, however, have established subsidiary companies or related
entities to allow management to operate businesses outside of the mainstream of
the sponsoring company. In some cases, the operation of these businesses is not
permissible under REIT regulations and must be conducted in a taxable
corporation. In other cases, some REITs have begun to separate or spin off
assets or business lines which possess various different risk/return
characteristics or represent property types that are best suited to be held in a
distinctly different entity or structure.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
There are several investment implications of this emerging trend. REITs can
no longer be viewed as passive holders of property or mere financial partners.
More than ever, they now are in firm control of their assets and their
destinies. Further, the range of business opportunities available to REITs is
vastly greater, and is limited only by the imagination of management. This new
opportunity set is enabling REITs to attract a very high caliber of executives
at every level of responsibility. Moreover, the pursuit of these opportunities
is boosting both the current and prospective growth rates of these companies.
Perhaps most importantly, this is being reflected in an expansion of share
prices and P/E multiples which are providing shareholders with considerable
returns evidenced by investment results in 1997.
INVESTMENT OUTLOOK
We expect the investment environment in 1998 to continue to be quite
favorable for certain sectors of the real estate and REIT market. We believe
that further growth of the U.S. economy, albeit at a slower rate than in 1997,
will sustain the positive trends in real estate fundamentals. We expect that
inflation and interest rates will remain tame, perhaps even declining from
year-end levels. This would sustain the highly accommodative financial market
conditions that REITs benefited from last year. It is our expectation that,
barring any unusual developments, REIT earnings will grow at an even faster rate
than last year due to healthy internal growth as well as the high level of
acquisition and refinancing activity in 1997 that will contribute to financial
results in 1998. A consensus of Wall Street analysts is currently forecasting
average earnings per share growth in the 13-15% range for the industry in 1998.
Dividend growth, in our opinion, will also exceed last year's pace due to an
industry-wide bottoming of pay-out ratios. In short, we see no reason why REITs
should not post mid-teen returns in the coming year, in line with their
long-term track record.
We believe that the major risk in our (and the consensus) outlook is that a
severe economic slowdown may occur which causes unpredictable dislocations and
financial market turmoil. Whether this happens or not, an environment of slowing
economic growth could precipitate some changes in leadership among the REIT
sectors. The hotel sector, which is the most economically sensitive, could
suffer the most. Similarly, some segments of the retail sector might suffer. We
are concerned that despite the strong economy of the past several years the
retail sector has experienced only average profit growth; in a slowing economy
we would expect a diminishing profit growth picture.
The three themes that we believe will produce the best results this year
are: 1) Companies with the most entrepreneurial and opportunistic management, 2)
Property types with long lease terms, and 3) Securities with above-average, yet
safe, current yields.
Due to the same factors that contributed to their success in 1997, the
leading entrepreneurial management teams are likely to find even greater
opportunities in 1998. We expect further significant portfolio acquisitions and
large scale purchases of businesses on terms that will ensure a higher rate of
long-term growth. We also expect that 1998 will be a year in which REITs make
significant acquisitions from non-real estate companies that view a sale of
properties such as office, warehouse and distribution facilities to be an
efficient source of capital. Ironically,
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
the elevated level of stock prices and P/E ratios in general signify investor
expectations of high returns on equity and increased earnings growth. As a
result, many companies may find that their financial resources are better
devoted to high return operational aspects of their business rather than capital
intensive facilities. Consequently, we expect that both new and existing REITs
will become an important source of capital to a host of American industries and
companies.
The long-term nature of real estate leases and the income generated in such
transactions will be viewed very favorably by investors, in our opinion. In a
slowing economy, longer-term leases provide greater stability than leases that
can be canceled or are up for regular renewal. It is for this reason that we
continue to view the office sector very favorably. In addition to the long-term
nature of office leases, there continues to be greater absorption of space than
construction of new supply, and there is still room for rental rates to increase
in most major markets. We believe that even if the prominent office building
owners slowed their pace of property acquisitions, they would still enjoy
healthy earnings growth for the next several years.
Finally, we believe that what some have described as a 'shortage of yield'
will favor REITs in 1998. With government deficits nearly absent and the
unprecedented high level of liquidity in corporate America, investors have begun
looking for investments that can provide current returns that are higher than
the risk-free rate. As was the case in 1997, REITs remain among the highest
yielding common stocks, and other securities issued by REITs offer yields that
are superior to comparable securities issued by non-real estate companies.
In our view, the greatest accomplishment of REITs in the last several years
as well as the past 20 years is that they have produced consistently outstanding
returns while providing significant portfolio diversification. When one examines
the investment track records of most other asset classes that have been
perceived to be strong diversifiers, such as precious metals, commodities,
foreign stocks (and direct real estate, for that matter), they have largely
failed to deliver any significant investment benefits other than for some very
brief periods. We therefore believe that because of their investment
characteristics, combined with the current cyclical and financial market
conditions, REITs can once again provide satisfactory investment results in
1998.
Sincerely,
<TABLE>
<S> <C>
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
</TABLE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF VALUE
SHARES (NOTE 1)
---------- ------------
<S> <C> <C>
EQUITIES 106.86%
APARTMENT/RESIDENTIAL 18.21%
Associated Estates Realty Corp. ............................. 139,700 $ 3,309,144
Avalon Properties............................................ 89,200 2,759,625
Charles E. Smith Residential Realty.......................... 139,100 4,938,050
Colonial Properties Trust.................................... 123,500 3,720,437
Oasis Residential, $2.25, Series A (Convertible Preferred)... 210,200 5,386,375
Summit Properties............................................ 164,700 3,479,288
------------
23,592,919
------------
DIVERSIFIED 7.79%
CCA Prison Realty Trust...................................... 86,700 3,868,987
Pacific Gulf Properties...................................... 262,200 6,227,250
------------
10,096,237
------------
HEALTH CARE 15.55%
American Health Properties................................... 154,900 4,269,431
Health Care REIT............................................. 140,700 3,957,188
Healthcare Realty Trust...................................... 28,200 816,037
Meditrust Corp............................................... 122,600 4,490,225
Nationwide Health Properties................................. 120,700 3,077,850
Omega Healthcare Investors................................... 91,500 3,534,188
------------
20,144,919
------------
HOTEL 3.59%
Innkeepers USA Trust......................................... 141,900 2,199,450
Sunstone Hotel Investors..................................... 141,900 2,447,775
------------
4,647,225
------------
INDUSTRIAL 4.70%
EastGroup Properties......................................... 138,700 2,999,387
First Industrial Realty Trust................................ 85,600 3,092,300
------------
6,091,687
------------
</TABLE>
See accompanying notes to financial statements.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF VALUE
SHARES (NOTE 1)
---------- ------------
<S> <C> <C> <C>
OFFICE 7.03%
Brandywine Realty Trust...................................... 100,000 $ 2,512,500
CarrAmerica Realty Corp. .................................... 27,400 868,238
Mack-Cali Realty Corp. ...................................... 83,400 3,419,400
SL Green Realty Corp. ....................................... 32,000 830,000
Tower Realty Trust........................................... 60,100 1,479,962
------------
9,110,100
------------
OFFICE/INDUSTRIAL 4.14%
Reckson Associates Realty Corp.............................. 83,000 2,106,125
TriNet Corporate Realty Trust............................... 84,100 3,253,619
------------
5,359,744
------------
SELF STORAGE 1.05%
Sovran Self Storage......................................... 41,700 1,352,644
------------
SHOPPING CENTER 44.80%
COMMUNITY CENTER: 25.68%
Alexander Haagen Properties................................. 212,200 3,700,237
Bradley Real Estate......................................... 125,200 2,629,200
Burnham Pacific Properties.................................. 201,000 3,077,813
Glimcher Realty Trust....................................... 271,800 6,132,487
Mid-America Realty Investments.............................. 128,300 1,299,038
Pan Pacific Retail Properties............................... 53,500 1,143,562
Pennsylvania REIT........................................... 214,700 5,273,569
Price REIT.................................................. 67,400 2,759,187
Regency Realty Corp......................................... 56,600 1,567,113
Saul Centers................................................ 156,600 2,848,162
Sizeler Property Investors.................................. 103,800 1,089,900
Western Investment Real Estate Trust........................ 127,200 1,749,000
------------
33,269,268
------------
FACTORY OUTLET CENTER: 5.45%
Horizon Group............................................... 474,000 5,184,375
Tanger Factory Outlet Centers............................... 61,600 1,882,650
------------
7,067,025
------------
</TABLE>
See accompanying notes to financial statements.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF VALUE
SHARES (NOTE 1)
---------- ------------
<S> <C> <C> <C>
REGIONAL MALL: 13.67%
CBL & Associates Properties................................. 49,100 $ 1,212,156
Crown American Realty Trust, 11.00%, Series A (Preferred)... 87,900 4,592,775
JP Realty................................................... 77,000 1,997,188
Macerich Company............................................ 89,300 2,545,050
Simon DeBartolo Group....................................... 84,000 2,745,750
The Mills Corp. ............................................ 61,300 1,501,850
Urban Shopping Centers...................................... 89,200 3,110,850
------------
17,705,619
------------
TOTAL SHOPPING CENTER.................................... 58,041,912
------------
TOTAL EQUITIES (Identified cost -- $111,241,801)...... 138,437,387
------------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C> <C>
COMMERCIAL PAPER 3.43%
American Express Credit Corp., 6.45%, 1/02/98
(Identified cost -- $4,445,060).......................... $4,445,000 4,445,000
------------
TOTAL INVESTMENTS (Identified cost -- $115,686,861)............. 110.29% 142,882,387
LIABILITIES IN EXCESS OF OTHER ASSETS........................... (10.29%) (13,330,226)
------- ------------
NET ASSETS (Equivalent to $17.51 per share based on
7,399,100 shares of capital stock outstanding)... 100.00% $129,552,161
------- ------------
------- ------------
</TABLE>
See accompanying notes to financial statements.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (Identified cost -- $115,686,861) (Note 1)............... $142,882,387
Cash......................................................................................... 885
Dividends and interest receivable............................................................ 737,125
Receivable for investment securities sold.................................................... 195,776
Unamortized organization costs and other assets (Note 1)..................................... 12,101
------------
Total Assets........................................................................... 143,828,274
------------
LIABILITIES:
Payable for dividends declared............................................................... 14,003,435
Payable for investment securities purchased.................................................. 102,257
Payable to Investment Advisor (Note 2)....................................................... 81,506
Payable to Administrator (Note 2)............................................................ 17,465
Other liabilities............................................................................ 71,450
------------
Total Liabilities...................................................................... 14,276,113
------------
NET ASSETS applicable to 7,399,100 shares of $0.001 par value common stock outstanding (Note 4).... $129,552,161
------------
------------
NET ASSET VALUE PER SHARE:
($129,552,161[div]7,399,100 shares outstanding)................................................. $ 17.51
------------
------------
MARKET PRICE PER SHARE............................................................................. $ 17.75
------------
------------
MARKET PRICE PREMIUM TO NET ASSET VALUE PER SHARE.................................................. 1.37%
------------
------------
NET ASSETS consist of:
Paid-in capital (Notes 1 and 4).............................................................. $ 97,386,653
Net unrealized appreciation on investments................................................... 27,195,526
Undistributed net realized gain on investments sold.......................................... 4,969,982
------------
$129,552,161
------------
------------
</TABLE>
See accompanying notes to financial statements.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Investment Income:
Dividend income............................................................................... $ 9,589,606
Interest income............................................................................... 62,624
------------
Total Income............................................................................ 9,652,230
------------
Expenses:
Investment advisory fees (Note 2)............................................................. 920,745
Administration fees (Note 2).................................................................. 207,772
Interest expense (Notes 1 and 7).............................................................. 203,879
Transfer agent fees........................................................................... 62,845
Custodian fees and expenses................................................................... 57,890
Professional fees............................................................................. 45,615
Directors' fees and expenses (Note 2)......................................................... 31,626
Reports to shareholders....................................................................... 28,782
Registration fees............................................................................. 16,170
Amortization of organization expenses (Note 1)................................................ 12,804
Insurance..................................................................................... 6,976
Miscellaneous................................................................................. 9,631
------------
Total Expenses.......................................................................... 1,604,735
Reduction of Expenses (Note 6).......................................................... (61,815)
------------
Net Expenses............................................................................ 1,542,920
------------
Net Investment Income............................................................................... 8,109,310
------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments.............................................................. 13,726,253
Net change in unrealized appreciation on investments.......................................... 3,923,679
------------
Net realized and unrealized gain on investments......................................... 17,649,932
------------
Net Increase in Net Assets Resulting From Operations................................................ $ 25,759,242
------------
------------
</TABLE>
See accompanying 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, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Change in Net Assets:
From Operations:
Net investment income................................. $ 8,109,310 $ 7,519,381
Net realized gain on investments...................... 13,726,253 2,177,775
Net change in unrealized appreciation on
investments........................................ 3,923,679 23,156,592
------------------ -----------------
Net increase in net assets resulting from
operations................................... 25,759,242 32,853,748
------------------ -----------------
Dividends and Distributions to shareholders from (Note 1):
Net investment income................................. (7,695,064) (7,102,966)
Net realized gain on investments...................... (13,318,139) (369,955)
------------------ -----------------
Total dividends and distributions to share-
holders...................................... (21,013,203) (7,472,921)
------------------ -----------------
Total increase in net assets.................... 4,746,039 25,380,827
Net Assets:
Beginning of year..................................... 124,806,122 99,425,295
------------------ -----------------
End of year........................................... $129,552,161 $ 124,806,122
------------------ -----------------
------------------ -----------------
</TABLE>
See accompanying 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>
For the period
For the Year Ended December 31, September 27, 1993(a)
---------------------------------------------------------- through
PER SHARE OPERATING PERFORMANCE: 1997 1996 1995 1994 December 31, 1993
- ------------------------------------------------- ------------- ------------- ------------- ------------- ---------------------
<S> <C> <C> <C> <C> <C>
Income from investment operations
Net asset value, beginning of period............. $ 16.87 $ 13.44 $ 13.26 $ 13.30 $ 13.96(b)
------------- ------------- ------ ------ ------
Net investment income........................ 1.10 1.02 0.88 0.83 0.18
Net realized and unrealized gain/(loss) on
investments................................ 2.38 3.42 0.26 0.01 (0.60)
------------- ------------- ------ ------ ------
Total from investment operations........ 3.48 4.44 1.14 0.84 (0.42)
------------- ------------- ------ ------ ------
Less dividends and distributions to shareholders
from:
Net investment income........................ (0.96) (0.96) (0.67) (0.47) (0.18)
Distributions in excess of net investment
income..................................... -- -- -- -- (0.03)
Net realized gain on investments............. (1.88) (0.05) -- -- --
Tax return of capital........................ -- -- (0.29) (0.41) (0.03)
------------- ------------- ------ ------ ------
Total from dividends and distributions
to shareholders....................... (2.84) (1.01) (0.96) (0.88) (0.24)
------------- ------------- ------ ------ ------
Net increase/(decrease) in net asset
value................................. 0.64 3.43 0.18 (0.04) (0.66)
------------- ------------- ------ ------ ------
Net asset value, end of period................... $ 17.51 $ 16.87 $ 13.44 $ 13.26 $ 13.30
------------- ------------- ------ ------ ------
------------- ------------- ------ ------ ------
Market value, end of period...................... $ 17.75 $ 16.50 $ 13.375 $ 12.375 $ 13.50
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL MARKET VALUE RETURN(c)..................... +24.96% +32.37% +16.38% -2.32% -8.48%
------------- ------------- ------ ------ ------
------------- ------------- ------ ------ ------
TOTAL NET ASSET VALUE RETURN(c).................. +20.57% +34.68% +9.14% +6.45% -4.26%(b)
------------- ------------- ------ ------ ------
------------- ------------- ------ ------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in millions)...... $ 129.552 $ 124.806 $ 99.425 $ 98.136 $ 98.388
------------- ------------- ------ ------ ------
------------- ------------- ------ ------ ------
Ratio of expenses to average weekly net
assets (before expense reduction).......... 1.22% 1.20% 1.25% 1.35% 1.22%(d)
------------- ------------- ------ ------ ------
------------- ------------- ------ ------ ------
Ratio of expenses to average weekly net
assets (net of expense reduction).......... 1.17% 1.16% 1.23% 1.31% 1.15%(d)
------------- ------------- ------ ------ ------
------------- ------------- ------ ------ ------
Ratio of net investment income to average
weekly net assets (before expense
reduction)................................. 6.12% 7.16% 6.78% 6.14% 5.14%(d)
------------- ------------- ------ ------ ------
------------- ------------- ------ ------ ------
Ratio of net investment income to average
weekly net assets (net of expense
reduction)................................. 6.17% 7.21% 6.79% 6.19% 5.21%(d)
------------- ------------- ------ ------ ------
------------- ------------- ------ ------ ------
Portfolio turnover rate...................... 41% 31% 51% 65% 16%
------------- ------------- ------ ------ ------
------------- ------------- ------ ------ ------
Average commission rate(e)................... $ 0.0627 $ 0.0678 N/A N/A N/A
------------- ------------- ------ ------ ------
------------- ------------- ------ ------ ------
</TABLE>
- ------------
(a) Commencement of operations.
(b) Net of offering costs of $0.14 per share.
(c) 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 and distributions as reinvested.
(d) Annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose the average commission rate per share it paid for
trades on which commissions were charged.
See accompanying 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 has 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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12
<PAGE>
<PAGE>
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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. 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 investment 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, 1997, the Fund decreased undistributed net investment income by
$414,246 and increased accumulated net realized gain on investments sold by
$414,246. These differences are primarily due to return of capital and capital
gain distributions received by the Fund on portfolio securities and 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. For
the year ended December 31, 1997, the Fund amortized $12,804 in organization
costs.
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. (the
'Adviser') serves as the investment adviser to the Fund, pursuant to an Advisory
Agreement (the 'Advisory Agreement'). Under terms of the Advisory Agreement, 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 average weekly net
assets. For the year ended December 31, 1997, the Fund incurred investment
advisory fees of $920,745.
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13
<PAGE>
<PAGE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Administration Fees: Princeton Administrators, L.P. (the 'Administrator')
serves as the administrator pursuant to an Administration Agreement, as amended,
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, and assists
in the preparation of financial information for the Fund's income tax returns,
proxy statements, and shareholder 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 0.15% of the
Fund's average weekly net assets subject to a monthly minimum of $12,500. For
the year ended December 31, 1997, the Fund incurred administrative fees of
$207,772.
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. Fees and related expenses accrued for
non-affiliated directors totaled $31,626 for the year ended December 31, 1997.
NOTE 3. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1997, purchases and sales of securities,
excluding short-term investments, totaled $54,739,200 and $67,023,531,
respectively.
At December 31, 1997, the cost and unrealized appreciation 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............................................................ $111,629,790
------------
Gross unrealized appreciation.............................................. $ 31,632,937
Gross unrealized depreciation.............................................. (380,340)
------------
Net unrealized appreciation................................................ $ 31,252,597
------------
------------
</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, 1997, Cohen
& Steers Capital Management, Inc. owned 9,384 shares.
NOTE 5. SUBSEQUENT EVENTS
On January 5, 1998, the Board of Directors of the Fund declared a dividend
of $0.08 per share payable on January 31, 1998, to shareholders of record on
January 15, 1998.
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, 1997, the Fund's
expenses were reduced by $61,815 under this agreement.
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14
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<PAGE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997, there were no loans
outstanding. During the year ended December 31, 1997, the average daily balance
of loans outstanding was $4,910,532 at a weighted average interest rate of
6.39%. The maximum amount of loans outstanding at any time during the year was
$11,427,243 as of January 15, 1997, which was 8.27% of total assets. The loan is
collateralized by the Fund's portfolio.
NOTE 8. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET REALIZED AND NET INCREASE
TOTAL NET UNREALIZED IN NET ASSETS
QUARTERLY INVESTMENT INVESTMENT GAIN/(LOSS) RESULTING DIVIDENDS AND
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 1997 AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
- -------------- --------- ----- ---------- ----- ----------- ------ ----------- ----- ----------- -----
March 31...... $2,311,924 $0.31 $1,846,121 $0.25 $ (29,534) $(0.01) $ 1,816,587 $0.24 $ 1,775,726 $0.24
June 30....... 2,397,020 0.33 2,041,791 0.28 5,972,663 0.81 8,014,454 1.09 1,775,712 0.24
September 30.. 2,388,834 0.32 2,023,699 0.27 10,357,370 1.40 12,381,069 1.67 1,775,716 0.24
December 31... 2,554,452 0.35 2,197,699 0.30 1,349,433 0.18 3,547,132 0.48 15,686,049 2.12
---------- ----- ---------- ----- ----------- ------ ----------- ----- ----------- -----
$9,652,230 $1.31 $8,109,310 $1.10 $17,649,932 $ 2.38 $25,759,242 $3.48 $21,013,203 $2.84
---------- ----- ---------- ----- ----------- ------ ----------- ----- ----------- -----
---------- ----- ---------- ----- ----------- ------ ----------- ----- ----------- -----
<CAPTION>
PER PER PER PER PER
FISCAL 1996 AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
- -------------- --------- ----- ---------- ----- ----------- ------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
QUARTERLY NET ASSETS AT
PERIOD END OF PERIOD
- -------------- ---------------------
<S> <C> <C>
PER
FISCAL 1997 AMOUNT SHARE
- -------------- ------------ ------
March 31...... $124,846,983 $16.87
June 30....... 131,085,725 17.72
September 30.. 141,691,079 19.15
December 31... 129,552,161 17.51
PER
<CAPTION>
FISCAL 1996 AMOUNT SHARE
- -------------- ------------ ------
<S> <C> <C>
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
</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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15
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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, 1997, 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 four
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, 1997, by correspondence with the custodian and brokers. 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, 1997, 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 four 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, 1998
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16
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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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17
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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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18
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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 and
Assistant Treasurer
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
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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19
<PAGE>
<PAGE>
[Graphic of an open door in a field with
buildings visible through door.]
COHEN & STEERS
TOTAL RETURN REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
TOTAL RETURN REALTY FUND
ANNUAL REPORT
DECEMBER 31, 1997
STATEMENT OF DIFFERENCES
------------------------
The division symbol shall be expressed as.......[div]
