<PAGE>
<PAGE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
January 29, 1999
To Our Shareholders:
We are pleased to submit to you our annual report for Cohen & Steers Total
Return Realty Fund, Inc. for the quarter and year ended December 31, 1998. The
net asset value per share at that date was $12.35. During the quarter, three
$0.08 per share monthly dividends were declared and paid. In addition, a
distribution of $2.01 per share ($0.21 per share ordinary income plus a $1.80
per share capital gain distribution) was declared for shareholders of record on
December 31 and paid on January 15, 1999.
1998 REVIEW
The equity income strategy delivered very strong results on a relative
basis in 1998. For the year, Cohen & Steers Total Return Realty Fund's - 14.2%
total return (based on change in net asset value plus income) compared favorably
to the NAREIT Equity REIT Index total return of - 17.5%
Without a doubt, 1998 was the most challenging year ever for REIT
investors. The bear market that gripped the industry, in the face of seemingly
strong fundamentals, surprised most with the speed and severity of losses that
were sustained. In a year filled with ironies, the overall investment
environment in 1998 was nothing less than ideal: strong economic growth with low
inflation and declining interest rates precipitated a record-shattering
continuation of strong stock market performance. It was also a year in which
real estate fundamentals remained strong, and the public market discipline was
effective in reigning in any potential speculative excesses in the property
markets. We suspect that if one could have accurately predicted this set of
circumstances at the beginning of the year, one would have assumed that REITs
would produce outstanding investment returns. On the contrary, REITs recorded
their worst year of investment performance in over 20 years, with every property
sector showing a price decline.
At the company level, REIT financial performance in 1998 was exceptionally
good on both an absolute and relative basis. Earnings growth averaged 13%, more
than double the 5.2 % rate of earnings growth of the S&P 500 Index, and
throughout the year most companies consistently reported better-than-expected
results. Further, we estimate that dividend growth in the REIT industry was a
healthy 8%, implying a decline in payout ratios, thereby ensuring the stability
and safety of those dividends. Ignoring these positive developments, investors
instead chose to focus on some actual and potentially negative real estate
industry trends. These included the state of equilibrium of most major property
markets, potential future slowing growth of REIT earnings, competition from
private real estate investors, and the increasing industry-wide use of leverage,
among others.
Perhaps most importantly, investors in 1998 became concerned about
persistent deflationary pressures and their long-term impact on rents and
property values. It is no coincidence, in our opinion, that in addition to
REITs, 1998's worst performing investments included other potential victims of
deflation such as most commodities, precious and non-precious metals, and just
about anything that is energy-related. In a low inflation (or deflationary) and
low interest rate environment, investors often pay the highest price for
longer-term
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
investments, such as high grade long-term bonds or high growth stocks;
technology, communications or internet companies, for example. If deflation is
expected to persist for a long period, investors typically demand a higher
current return in order to offset the risk of a potential long-term decline in
asset values. The net result was that equity REIT dividend yields rose from 5.5%
at the beginning of the year to a 5-year high of 7.5% by year end.
The downward spiral of REIT share prices further disadvantaged many
companies. Sentiment became so negative that for the first time in many years
REITs became unable to access the equity capital markets. In response, many
companies began to increase their use of debt financing or off-balance sheet
leverage through joint ventures. This too is a strategy whose success is
threatened by future deflation. By late summer, however, the collapse of the
commercial mortgage backed securities market put a major crimp in the flow of
debt financing. As capital raising ground to a halt, most companies scaled back
their acquisition programs, causing most analysts to reduce estimates of
earnings growth in 1999 and beyond. More importantly, the withdrawal of capital
from the real estate market began to exert extreme pressure on property values,
with many estimating approximately a 10-15% drop in prices from earlier peaks.
In some sectors, such as hotels, the price decline was far worse. Once again,
the public market's influence dominated the functioning of real estate markets.
The reduction in interest rates by the Federal Reserve in the fall
cushioned the decline of REIT share prices, but had a much more beneficial
effect on the broader financial markets. The fourth quarter decline in REIT
share prices compared to a 21.3% total return of the S&P 500 Index. Nonetheless,
as liquidity returned to real estate markets and fears of a global economic
slowdown abated, property values began to stabilize as did REIT share prices,
albeit at depressed levels.
INVESTMENT OUTLOOK
We begin the New Year in an investment environment that is almost identical
to that which prevailed through most of last year; continued strong economic
growth, low inflation and interest rates and a strong stock market. If the
environment is no different from 1998, one must question what will alter the
outlook for REIT investing in 1999.
What is different for REITs is that their prices are 22% lower and their
earnings are 13% higher than a year ago. This compares to the S&P 500 Index
whose price is 27% higher and whose earnings are up only 5%. Further, whereas
one year ago REITs, on average, were trading at more than a 20% premium to their
net asset values (NAVs) they are now trading below their NAVs. As a result, on
both a relative and absolute basis, REITs are just about as cheap as they have
ever been. It therefore appears to us that the concerns that weighed on
investors through most of 1998 should be adequately factored in REIT share
prices.
We do not believe, however, that a new bull market in REIT shares is about
to begin. Rather, we expect most real estate markets to remain in equilibrium,
whereby the supply and demand for space is about equal. Based upon the
experience of last year, the near instantaneous reaction of the financial
markets to any actual or perceived imbalances will likely serve to maintain this
equilibrium condition. The swiftness with which the real
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
estate markets have moved is primarily the result of the domination of public
securities markets for debt and equity financing of real estate. This is
enhanced by the rapid flow of property-level and regional market information.
These are perhaps the most important by-products of securitization.
While a persistent equilibrium condition is a consequence of public market
discipline and is generally very positive for the industry, it does pose a
number of challenges. It represents a vast increase in the efficiency of the
market and thereby a narrowing and reduction of profit opportunities, both in
the direct property markets as well as in REIT investing. Thus it is our belief
that future returns from REITs will be consistent with this less cyclical,
steady fundamental environment. A reversion to a low to mid teens type of
return, on average, should result from the current 7.5% dividend yield and a
single digit long-term growth rate. This environment should foster the continued
consolidation of the real estate industry, resulting in the creation of
ever-larger companies. These companies too may begin to produce 'index-like'
returns due to the increasing size and scope of their property holdings. Some
have suggested that the real estate industry is quickly taking on many of the
characteristics of the utility industry, both from an operational and investment
return standpoint.
Just as 1998 was a challenging year for investors, 1999 will be an even
more challenging year for REIT managements. Their biggest challenge will be to
make the transition to both an opportunity and a capital constrained
environment. In essence, the stock market has already anticipated this by virtue
of the severe industry-wide contraction in P/E multiples. Not all companies will
make this transition successfully, and for those that cannot adopt strategies
that promote long-term earnings growth and value creation, further multiple
erosion is possible and NAV per share (or some discount from it) will become an
effective ceiling on their stock prices. For those that do succeed, a
restoration of prior stock market valuations may result.
Another major challenge relates to management compensation in an
equilibrium environment. Over the past two years, there has been an escalation
in compensation programs that are heavily oriented to share price performance,
and for many companies the number of options granted was the maximum authorized
by shareholders. As a result of the bear market, these options have little or no
near-term value, and the company may have no additional options to grant. The
longer-term issue that affects nearly all companies relates to these incentive
compensation plans in an industry which now enjoys slow growth and therefore
lower potential stock price appreciation. The requirement that REITs pay out
their income as dividends, of course, further lessens the long-term appreciation
potential of REIT shares. This will require REITs to be more judicious in
rewarding future stock options and to adopt compensation plans that reward
management primarily on per-share profit performance.
Perhaps the biggest challenge facing the REIT industry as a whole is to
restore the confidence of investors. REIT shareholders had become accustomed to
a nearly ideal investment climate after seven consecutive years of excellent
profit growth and stock market returns, irrespective of financial market or
economic conditions. This was clearly a reflection of the long recovery that had
been underway in the real estate market, until early 1998. Nevertheless, the
price decline of REITs during periods of both stock market strength and weakness
during the year has shaken the confidence of REIT investors. Many had expected
low volatility in addition to defensive investment
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
characteristics during any market downturn. The fact that neither of these was
evident in 1998 has confused many investors with respect to the true investment
characteristics of REITs.
Our belief is that the behavior of REITs is best explained by the real
estate cycle, which often does not correlate well to either the stock market or
the economy. This was clearly the case in 1998 as the REIT market adjusted to
the transition from the growth to the equilibrium phase of the real estate
cycle. With the real estate industry now stabilized and as continued growth in
earnings and dividends are demonstrated by REITs, investors seeking
diversification should return to the group, especially if, as is likely, this
growth is superior to that of companies in most other sectors of the economy.
Because of the continued growth of the economy and the health of most property
markets, we concur with Wall Street estimates of earnings growth for the
industry in the 9% range for 1999, with similar results preliminarily estimated
for 2000.
Our task as your portfolio manager is to identify those companies that can
effectively meet the challenges we have outlined. We believe that we have
accomplished this in 1998, as evidenced by our strong relative returns in the
fourth quarter and since the account's inception. Looking forward we believe
that from the current valuation level, REITs, on average, do not have a great
deal of risk. Further, if we are correct in our assessment of the managements of
the companies we hold, our portfolio should enjoy excellent investment returns.
Sincerely,
<TABLE>
<S> <C>
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
</TABLE>
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
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES (NOTE 1)
---------- ------------
<S> <C> <C>
EQUITIES 107.23%
COMMON STOCK 84.68%
APARTMENT/RESIDENTIAL 7.81%
Apartment Investment & Management Co. -- Class A............. 92,500 $ 3,439,844
Charles E. Smith Residential Realty.......................... 28,300 909,137
Summit Properties............................................ 161,800 2,791,050
------------
7,140,031
------------
DIVERSIFIED 5.27%
Anthracite Capital........................................... 186,700 1,458,594
Pacific Gulf Properties...................................... 167,300 3,356,456
------------
4,815,050
------------
HEALTH CARE 18.01%
American Health Properties................................... 114,800 2,367,750
ElderTrust................................................... 142,300 1,636,450
Health Care Property Investors............................... 103,700 3,188,775
Healthcare Realty Trust...................................... 111,800 2,494,538
Nationwide Health Properties................................. 129,700 2,796,656
Omega Healthcare Investors................................... 131,800 3,978,712
------------
16,462,881
------------
HOTEL 2.18%
Innkeepers USA............................................... 168,400 1,989,225
------------
INDUSTRIAL 3.83%
First Industrial Realty Trust................................ 130,600 3,501,713
------------
OFFICE 20.39%
Arden Realty Group........................................... 148,500 3,443,344
Brandywine Realty Trust...................................... 100,000 1,787,500
CarrAmerica Realty Corp...................................... 46,100 1,106,400
Crescent Real Estate Equities Co. ........................... 167,300 3,847,900
Highwoods Properties......................................... 139,700 3,597,275
Mack-Cali Realty Corp. ...................................... 116,300 3,590,763
SL Green Realty Corp. ....................................... 32,000 692,000
Tower Realty Trust........................................... 28,000 563,500
------------
18,628,682
------------
</TABLE>
See accompanying notes to financial statements.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES (NOTE 1)
---------- ------------
<S> <C> <C>
OFFICE/INDUSTRIAL 3.37%
Liberty Property Trust....................................... 47,300 $ 1,164,762
Prime Group Realty Trust..................................... 126,300 1,910,288
------------
3,075,050
------------
SHOPPING CENTER 21.56%
COMMUNITY CENTER 5.76%
JDN Realty Corp. ............................................ 22,200 478,688
Pan Pacific Retail Properties................................ 106,000 2,113,375
Pennsylvania REIT............................................ 104,700 2,035,106
Saul Centers................................................. 41,200 638,600
------------
5,265,769
------------
FACTORY OUTLET CENTER 4.59%
Prime Retail................................................. 294,978 2,894,472
Tanger Factory Outlet Centers................................ 61,500 1,303,031
------------
4,197,503
------------
REGIONAL MALL 11.21%
CBL & Associates Properties.................................. 57,700 1,489,381
JP Realty.................................................... 133,700 2,623,862
Macerich Co.................................................. 81,500 2,088,438
Simon Property Group......................................... 72,000 2,052,000
The Mills Corp. ............................................. 100,100 1,989,487
------------
10,243,168
------------
TOTAL SHOPPING CENTER........................................ 19,706,440
------------
SPECIALTY 2.26%
Entertainment Properties Trust............................... 121,400 2,063,800
------------
TOTAL COMMON STOCK (Identified cost -- $83,043,561).......... 77,382,872
------------
</TABLE>
See accompanying notes to financial statements.
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6
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES (NOTE 1)
---------- ------------
<S> <C> <C>
PREFERRED STOCK 22.55%
Apartment Investment & Management Co., 9.375%,
Series G ................................................. 125,100 $ 2,760,019
Camden Property Trust, $2.25, Series A (Convertible)......... 210,200 4,979,113
SL Green Realty Corp., 8.00%, Series A (Convertible)......... 114,200 2,655,150
Reckson Associates Realty, 7.625%, Series A (Convertible).... 154,000 3,253,250
Bradley Real Estate, 8.40%, Series A (Convertible)........... 40,026 945,614
Prime Retail, 8.50%, Series B (Convertible).................. 94,800 1,576,050
Crown American Realty Trust, 11.00%, Series A................ 44,300 2,165,162
General Growth Properties, 7.25%, Series A (Redeemable)...... 88,400 2,276,300
------------
TOTAL PREFERRED STOCK (Identified cost -- $21,814,171)....... 20,610,658
------------
TOTAL EQUITIES (Identified cost -- $104,857,732)............. 97,993,530
------------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
COMMERCIAL PAPER 8.18%
General Electric Co., 4.70%, 1/4/99
(Identified cost -- $7,477,060)........................... $7,477,000 7,477,000
------------
TOTAL INVESTMENTS (Identified cost -- $112,334,792) ........... 115.41% 105,470,530
LIABILITIES IN EXCESS OF OTHER ASSETS ......................... (15.41%) (14,084,262)
------- ------------
NET ASSETS (Equivalent to $12.35 per share based on 7,399,100 shares of
capital stock outstanding) ................................. 100.00% $ 91,386,268
------- ------------
------- ------------
</TABLE>
See accompanying notes to financial statements.
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7
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (Identified cost -- $112,334,792) (Note 1)............... $105,470,530
Cash......................................................................................... 561
Dividends and interest receivable............................................................ 843,721
Receivable for investment securities sold.................................................... 202,257
Other assets................................................................................. 1,272
------------
Total Assets........................................................................... 106,518,341
------------
LIABILITIES:
Payable for dividends declared............................................................... 14,953,730
Payable to investment advisor................................................................ 60,873
Payable to administrator..................................................................... 13,044
Other liabilities............................................................................ 104,426
------------
Total Liabilities...................................................................... 15,132,073
------------
NET ASSETS applicable to 7,399,100 shares of $0.001 par value common stock outstanding (Note 4).... $ 91,386,268
------------
------------
NET ASSET VALUE PER SHARE:
($91,386,268 [div] 7,399,100 shares outstanding)................................................ $ 12.35
------------
------------
MARKET PRICE PER SHARE............................................................................. $ 12.81
------------
------------
MARKET PRICE PREMIUM TO NET ASSET VALUE PER SHARE.................................................. 3.74%
------------
------------
NET ASSETS consist of:
Paid-in capital (Notes 1 and 4).............................................................. $ 96,061,507
Accumulated net realized gain on investments sold............................................ 2,189,023
Net unrealized depreciation on investments................................................... (6,864,262)
------------
$ 91,386,268
------------
------------
</TABLE>
See accompanying notes to financial statements.
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8
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Investment Income (Note 1):
Dividend income.............................................................................. $ 9,839,776
Interest income.............................................................................. 163,655
------------
Total Income........................................................................... 10,003,431
------------
Expenses:
Investment advisory fees (Note 2)............................................................ 825,545
Administration fees (Note 2)................................................................. 176,845
Transfer agent fees.......................................................................... 66,060
Professional fees............................................................................ 55,947
Custodian fees and expenses.................................................................. 71,429
Reports to shareholders...................................................................... 52,413
Directors' fees and expenses (Note 2)........................................................ 31,499
Interest expense (Notes 1 and 6)............................................................. 16,974
Registration and filing fees................................................................. 16,170
Amortization of organization expenses (Note 1)............................................... 9,431
Insurance.................................................................................... 5,339
Miscellaneous................................................................................ 11,255
------------
Total Expenses......................................................................... 1,338,907
Reduction of Expenses (Note 7)......................................................... (17,383)
------------
Net Expenses........................................................................... 1,321,524
------------
Net Investment Income.............................................................................. 8,681,907
------------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain on investments............................................................. 9,196,571
Net change in unrealized appreciation/(depreciation) on investments.......................... (34,059,788)
------------
Net realized and unrealized loss on investments........................................ (24,863,217)
------------
Net Decrease in Net Assets Resulting from Operations............................................... $(16,181,310)
------------
------------
</TABLE>
See accompanying notes to financial statements.
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9
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Change in Net Assets:
From Operations:
Net investment income................................. $ 8,681,907 $ 8,109,310
Net realized gain on investments...................... 9,196,571 13,726,253
Net change in unrealized appreciation/(depreciation)
on investments..................................... (34,059,788) 3,923,679
------------------ -----------------
Net increase/(decrease) in net assets resulting
from operations.............................. (16,181,310) 25,759,242
------------------ -----------------
Dividends and Distributions to shareholders from (Note 1):
Net investment income................................. (5,466,924) (7,695,064)
Net realized gain on investments...................... (15,192,513) (13,318,139)
Tax return of capital................................. (1,325,146) --
------------------ -----------------
Total dividends and distributions to
shareholders................................. (21,984,583) (21,013,203)
------------------ -----------------
Total increase/(decrease) in net assets......... (38,165,893) 4,746,039
Net Assets:
Beginning of year..................................... 129,552,161 124,806,122
------------------ -----------------
End of year........................................... $ 91,386,268 $ 129,552,161
------------------ -----------------
------------------ -----------------
</TABLE>
See accompanying notes to financial statements.
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10
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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 year 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 YEAR ENDED DECEMBER 31,
-----------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1998 1997 1996 1995 1994
- ------------------------------------------------------------ ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 17.51 $ 16.87 $ 13.44 $ 13.26 $ 13.30
------- -------- -------- ------- -------
Income from investment operations
Net investment income.................................. 1.17 1.10 1.02 0.88 0.83
Net realized and unrealized gain/(loss) on
investments......................................... (3.36) 2.38 3.42 0.26 0.01
------- -------- -------- ------- -------
Total from investment operations................. (2.19) 3.48 4.44 1.14 0.84
------- -------- -------- ------- -------
Less dividends and distributions to shareholders from:
Net investment income.................................. (0.74) (0.96) (0.96) (0.67) (0.47)
Net realized gain on investments....................... (2.05) (1.88) (0.05) -- --
Tax return of capital.................................. (0.18) -- -- (0.29) (0.41)
------- -------- -------- ------- -------
Total from dividends and distributions to
shareholders................................... (2.97) (2.84) (1.01) (0.96) (0.88)
------- -------- -------- ------- -------
Net increase/(decrease) in net asset value....... (5.16) 0.64 3.43 0.18 (0.04)
------- -------- -------- ------- -------
Net asset value, end of year................................ $ 12.35 $ 17.51 $ 16.87 $ 13.44 $ 13.26
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Market value, end of year................................... $ 12.81 $ 17.75 $ 16.50 $13.375 $12.375
------- -------- -------- ------- -------
------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------
TOTAL MARKET VALUE RETURN(a)................................ - 12.20% +24.96% +32.37% +16.38% - 2.32%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
TOTAL NET ASSET VALUE RETURN(a)............................. - 14.21% +20.57% +34.68% +9.14% +6.45%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $91,386 $129,552 $124,806 $99,425 $98,136
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Ratio of expenses to average weekly net assets (before
expense reduction).................................. 1.14% 1.22% 1.20% 1.25% 1.35%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Ratio of expenses to average weekly net assets (net of
expense reduction).................................. 1.12% 1.17% 1.16% 1.23% 1.31%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Ratio of net investment income to average weekly net
assets (before expense reduction)................... 7.35% 6.12% 7.16% 6.78% 6.14%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Ratio of net investment income to average weekly net
assets (net of expense reduction)................... 7.37% 6.17% 7.21% 6.79% 6.19%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Portfolio turnover rate................................ 76% 41% 31% 51% 65%
------- -------- -------- ------- -------
------- -------- -------- ------- -------
</TABLE>
- ------------
(a) 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
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
reinvested dividends.
See accompanying notes to financial statements.
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11
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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 sale 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 which approximates value.
Security Transactions and Investment Income: Security transactions are
recorded on trade date. 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.
- --------------------------------------------------------------------------------
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 net investment
income are declared and paid monthly. A portion of the Fund's dividend may
consist of amounts in excess of net investment income derived from non-taxable
components of the dividends from the Fund's portfolio investments. As a result,
the Fund had a return of capital of $1,325,146 ($0.18 per share), for the period
ended December 31, 1998, which has been deducted from paid-in capital. Net
realized capital gains, unless offset by any available capital loss
carryforward, are distributed to shareholders annually. Distributions to
shareholders are recorded on the ex-dividend date.
Dividends from net 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, 1998, the Fund decreased undistributed net investment income by
$3,214,983 and decreased accumulated net realized loss on investments sold by
$3,214,983. These differences are primarily due to return of capital and capital
gain distributions received by the Fund on portfolio securities.
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, 1998, the Fund amortized $9,431 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
'Advisor') serves as the investment adviser to the Fund, pursuant to an Advisory
Agreement (the 'Advisory Agreement'). The Advisor 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
- --------------------------------------------------------------------------------
13
<PAGE>
<PAGE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998,
the Fund incurred investment advisory fees of $825,545.
Administrative 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 daily, prepares such figures
for publication on a daily basis, maintains certain books and records that are
not maintained by the Adviser, custodian or transfer agent, assists in the
preparation of financial information for the Fund's income tax returns, proxy
statements, and stockholder reports.
Under the terms of the Administration Agreement, the Fund has agreed to pay
a fee computed weekly and payable monthly, at an annual rate of 0.15% of the
Fund's average weekly net assets subject to a monthly minimum of $12,500. For
the year ended December 31, 1998, the Fund incurred administrative fees of
$176,845.
Director's Fees: Certain directors and officers of the Fund are also
directors, officers and/or employees of the Adviser. None of the directors and
officers so affiliated received compensation for their services. Fees and
related expenses accrued for non-affiliated directors totaled $31,499 for the
year ended December 31, 1998.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments, for
the year ended December 31, 1998, totaled $87,910,735 and $103,502,356,
respectively.
At December 31, 1998, the cost and unrealized depreciation in value of the
investments owned by the Fund are as follows:
<TABLE>
<S> <C>
Aggregated cost............................................................ $110,145,766
------------
Gross unrealized appreciation.............................................. $ 1,735,667
Gross unrealized depreciation.............................................. (6,410,903)
------------
Net unrealized depreciation................................................ $ (4,675,236)
------------
------------
</TABLE>
NOTE 4. COMMON STOCK
At December 31, 1998, the Fund has one class of common stock, par value
$0.001 per share, of which 100 million shares are authorized and 7,399,100
shares are outstanding. Cohen & Steers Capital Management, Inc. owned 10,979
shares.
NOTE 5. SUBSEQUENT EVENTS
On January 4, 1999 the Board of Directors on the Fund declared a dividend
of $0.08 per share payable on January 29, 1999 to shareholders of record on
January 15, 1999.
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14
<PAGE>
<PAGE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED)
NOTE 6. BORROWINGS
The Fund has entered into a Line of Credit Agreement with State Street Bank
& Trust Company for $15,000,000. At December 31, 1998, there were no loans
outstanding. During the year ended December 31, 1998, the average daily balance
of loans outstanding was $1,068,835 at a weighted average interest rate of
6.52%. The maximum amount of loans outstanding at any time during the year ended
was $2,961,887 on February 5, 1998, which was 2.23% of total assets. The loan is
collateralized by the Fund's portfolio.
NOTE 7. DIRECTED BROKERAGE ARRANGEMENTS
The Adviser has directed certain portfolio trades to brokers who paid a
portion of the Fund's expenses. For the year ended December 31, 1998, the Fund's
expenses were reduced by $17,383 under this arrangement.
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
- ------------ ----------------- ------------------ --------------------- --------------------- ---------------------
PER PER PER PER PER
FISCAL 1998 AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
- ------------ ---------- ----- ---------- ----- ------------ ------ ------------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31.... $2,241,503 $0.30 $1,899,558 $0.26 $ (1,841,313) $(0.25) $ 58,245 $ 0.01 $ (1,785,258) $(0.24)
June 30..... 3,202,066 0.43 2,843,127 0.38 (7,833,821) (1.06) (4,990,694) (0.68) (1,775,712) (0.24)
September
30........ 2,228,505 0.30 1,910,803 0.26 (9,818,779) (1.33) (7,907,976) (1.07) (1,775,716) (0.24)
December
31........ 2,331,357 0.32 2,028,419 0.27 (5,369,304) (0.72) (3,340,885) (0.45) (16,647,897) (2.25)
---------- ----- ---------- ----- ------------ ------ ------------ ------ ------------ ------
$10,003,431 $1.35 $8,681,907 $1.17 $(24,863,217) $(3.36) $(16,181,310) $(2.19) $(21,984,583) $(2.97)
---------- ----- ---------- ----- ------------ ------ ------------ ------ ------------ ------
---------- ----- ---------- ----- ------------ ------ ------------ ------ ------------ ------
<CAPTION>
QUARTERLY NET ASSETS AT
PERIOD END OF PERIOD
- ------------ ---------------------
PER
FISCAL 1998 AMOUNT SHARE
- ------------ ------------ ------
<S> <C> <C>
March 31.... $127,825,148 $17.28
June 30..... 121,058,742 16.36
September
30........ 111,375,051 15.05
December
31........ 91,386,268 12.35
<CAPTION>
PER PER PER PER PER
FISCAL 1997 AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
- ------------ ---------- ----- ---------- ----- ------------ ------ ------------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31.... $2,311,924 $0.31 $1,846,121 $0.25 $ (29,534) $(0.01) $ 1,816,587 $ 0.25 $ 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 1.08 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
FISCAL 1997 AMOUNT SHARE
- ------------ ------------ ------
<S> <C> <C>
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
</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
<PAGE>
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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.:
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statement of operations,
statements of changes in net assets and financial highlights present fairly, in
all material respects, the financial position of Cohen & Steers Total Return
Realty Fund, Inc. (the 'Fund') at December 31, 1998, 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 five years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
January 29, 1999
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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.
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
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17
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
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.
<TABLE>
<S> <C>
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
1-800-543-6217
George Grossman
Director CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
Jeffrey H. Lynford P.O. Box 8200
Director Boston, MA 02266-8200
Willard H. Smith, Jr. LEGAL COUNSEL
Director Dechert Price & Rhoads
1775 Eye Street, NW
Elizabeth O. Reagan Washington, DC 20006
Vice President
Adam Derechin New York Stock Exchange Symbol: RFI
Vice President and Assistant Treasurer 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.
</TABLE>
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19
<PAGE>
<PAGE>
COHEN & STEERS
TOTAL RETURN REALTY FUND
------------------------
ANNUAL REPORT
DECEMBER 31, 1998
COHEN & STEERS
TOTAL RETURN REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
STATEMENT OF DIFFERENCES
------------------------
The division sign shall be expressed as .......................... [div]
