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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
April 20, 1999
To Our Shareholders:
We are pleased to submit to you our report for the quarter ended March 31,
1999. The net asset value per share at that date was $11.48. In addition, during
the quarter, three $0.08 per share monthly dividends were declared and paid.
INVESTMENT REVIEW
For the three months ended March 31, 1999 Cohen & Steers Total Return
Realty Fund, Inc. had a total return of -5.1%, based on income and change in net
asset value. This performance compares favorably to the NAREIT Equity REIT Index
total return of -5.9%. This solid relative performance marks the fifth
consecutive quarter of the Fund outperforming its benchmark. Our goal will be to
continue to deliver solid relative performance based on the Fund's emphasis on
above-average current income, consistent earnings growth, and attractive
relative valuation levels.
Simply stated, REITs have remained out of favor so far in 1999. As has been
the case since the peak in REIT share prices in December 1997, earnings and
dividends have continued to grow at a steady pace, causing valuation measures
such as price/earnings ratios and dividend yields to reach extreme levels. For
example, at quarter-end the average equity REIT dividend yield was 8.0%.
Relative to the broader stock market averages, which have been continually
rising to record levels, REIT valuations have reached an unprecedented level on
both an absolute and relative basis. And, as shown in the following chart, the
current REIT bear market has now become one of the longest and deepest in
history.
<TABLE>
<CAPTION>
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EQUITY REIT PRICE TOTAL DURATION
BEAR MARKET DECLINE RETURN (MONTHS)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
9/72 - 12/74 -48.3% -37.0% 27
8/79 - 4/80 -15.9% -11.1% 8
6/81 - 7/82 -15.8% -7.1% 13
2/87 - 10/87 -20.9% -17.1% 8
8/89 - 10/90 -34.4% -24.2% 14
9/93 - 11/94 -17.5% -10.9% 14
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AVERAGE -25.5% -17.9% 14
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12/97 - 3/99 -27.6% -21.3% 15
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</TABLE>
Importantly, the two bear markets that were deeper than the current one
were both accompanied by economic recessions and real estate depressions. Severe
overbuilding, which led to unusually high vacancy rates and bankruptcies,
precipitated the real estate problems in those previous bear markets. In
contrast, the U.S. economy today appears to remain quite strong and real estate
fundamentals are not only extremely healthy but appear to be improving. Fourth
quarter earnings for the REIT industry grew by 15% according to industry
sources, with much of that improvement coming from strong growth in rents. In
addition, recent statistics indicate continued low vacancy rates and a decline
in new construction for every major property type, suggesting that fears of
potential overbuilding are unfounded.
Though we take no solace in negative returns, we are encouraged that our
portfolio strategy of emphasizing the largest, strongest companies is continuing
to have a positive effect on relative investment performance. For the quarter,
we have outperformed our benchmark by a substantial margin.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
INVESTMENT OUTLOOK
It appears to us that the bear market may have ended and that sentiment
towards the REIT sector is beginning to improve. It has been our belief that
there were three factors that precipitated this bear market: fear of an economic
slowdown, fear of price deflation that would reduce real estate values, and a
narrowing of investment opportunities for public real estate companies. The
first two factors appear to have been favorably resolved, while the third
remains unsettled.
The U.S. economy remains quite strong and there seem to be few, if any,
signs of a slowdown. Further, there appears to be little or no reason for either
domestic or foreign monetary authorities to enact policies that would
precipitate an economic slowdown. Our economy has successfully absorbed the
slowdown in most of Asia, Russia, and Latin and South America. There are now
signs that many of these economies have at least bottomed out, if not entered a
recovery phase. The prospect of a stronger world economy, coupled with the
substantial rise in oil prices, wage pressures and other telltale signs of price
inflation, have caused the bond market to fall in 1999, raising yields to a
9-month high. These recent developments, in our view, have begun to nearly
eliminate any lingering fears of widespread price deflation.
The factor relating to the opportunity set available to REITs has not been
resolved, at least not on an industry-wide basis. There are few, if any,
cyclical industries in which the same investment and operational strategy works
at different phases of the cycle. Because we believe the real estate industry
has completed its growth phase and has now entered the equilibrium phase, it is
becoming clear to us that the formula for success in real estate today is quite
different than in most of the 1990's. Changing property dynamics, capital flows
and investor expectations require a complete re-evaluation of how real estate
enterprises should be run. This is summarized in the chart below:
WINNING REAL ESTATE INVESTMENT STRATEGIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
GROWTH PHASE EQUILIBRIUM PHASE
=====================================================================================================================
<S> <C>
Acquire as many assets as quickly as possible Rationalize assets acquired in the 1990's
- ---------------------------------------------------------------------------------------------------------------------
Take advantage of distressed sellers of property Take advantage of overly aggressive property buyers
- ---------------------------------------------------------------------------------------------------------------------
Measure success of acquisitions by earnings accretion Assess merit of acquisitions based on return on assets
- ---------------------------------------------------------------------------------------------------------------------
Seek external growth through property acquisitions Maximize internal growth by improving profitability
- ---------------------------------------------------------------------------------------------------------------------
Raise as much equity as often as possible Do not dilute shareholders by issuing equity
- ---------------------------------------------------------------------------------------------------------------------
Utilize high financial leverage Reduce financial leverage
- ---------------------------------------------------------------------------------------------------------------------
Form new REITs Consolidate public company universe
- ---------------------------------------------------------------------------------------------------------------------
Invest in assets Invest in entities
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Our investment strategy continues to emphasize companies whose management
teams have recognized the maturity of the cycle and have adopted new strategies
that will enhance shareholder value. During the growth phase of the cycle, the
strategy of acquiring as much property as possible, as quickly as possible and
with whatever means available, was the key to success. There was a large number
of willing sellers at the same time that occupancies, rents and asset values
were all rising very quickly. With stock prices high and financing plentiful,
nearly all acquisitions contributed to per share earnings, further sustaining
lofty share valuations.
In the equilibrium phase of the cycle, property prices are high,
acquisition opportunities are fewer, and competition is much greater,
particularly from private capital sources. In addition, the bear market has
significantly
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
raised the cost of equity capital for REITs, further narrowing their acquisition
and financing opportunities. It is ironic that a seller's market for property
now coincides with a buyer's market for shares of property-owning REITs. As a
result, we believe that a large-scale consolidation of the industry may be at
hand. In recent weeks several proposals to take REITs private have been
announced and it is our understanding that a great many more are currently being
considered. Clearly, if the gap between public and private market values
persists, we believe many REITs will either be taken private or taken over by
other REITs. This activity may prove to be a catalyst for better stock price
performance.
In this environment some exciting strategic opportunities are surfacing
that can materially improve the quality of REIT property portfolios and increase
earnings growth rates. REITs today have an unprecedented opportunity to sell
properties at attractive prices, pruning their portfolios of assets that are
under-performing or that do not fit from a strategic standpoint. The proceeds of
these sales can be used to repay debt, be re-deployed into higher returning
assets, or simply be retained for future opportunities. A large number of REITs
have chosen to repurchase shares; however, this is a strategy which we believe
most often has little merit, given the ongoing capital requirements of the real
estate business. In any case, the combination of asset sales and a slowdown in
the acquisition pace of the industry has materially reduced the amount of
financing required by REITs. The perception that REITs will not be tapping the
equity market on a regular basis will dramatically improve the supply/demand
picture for their shares.
The governance of the public market is having the further effect of
disciplining the management of the REIT industry. Reductions in staff and other
overhead are now commonplace, and efforts to improve profitability of existing
owned assets have become foremost priorities. In conjunction with employing a
higher required rate of return on new investment, industry participants have a
unique opportunity to enjoy a meaningful increase in profitability.
As we have discussed in the past, we believe that the equilibrium phase of
the cycle could last for a very long time due to the public market discipline
that has been imposed on the real estate industry. This leads us to believe that
real estate and REIT returns will generally revert to their historic levels: for
the 20 year period ended March 31, 1999, the NAREIT Equity REIT Index, for
example, had compounded average annual returns of 13.6%. While we cannot make
predictions about the Fund's absolute future performance, or its future
performance relative to an index, our goal will be to continue to provide
returns that are in excess of these broad-based indices. There are a host of
companies that have above-average growth potential and these are the mainstays
of our portfolio. In our opinion, the public market offers the single best real
estate investment today.
Sincerely,
<TABLE>
<S> <C>
Martin Cohen Robert H. Steers
MARTIN COHEN ROBERT H. STEERS
President Chairman
</TABLE>
Cohen & Steers is 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
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------- -----------
<S> <C> <C> <C>
EQUITIES 97.18%
COMMON STOCK 77.21%
APARTMENT/RESIDENTIAL 9.89%
Apartment Investment & Management Co. -- Class A................. 35,300 $ 1,279,625
Charles E. Smith Residential Realty.............................. 58,800 1,811,775
Essex Property Trust............................................. 33,300 869,962
Post Properties.................................................. 48,300 1,738,800
Summit Properties................................................ 161,800 2,700,038
-----------
8,400,200
-----------
DIVERSIFIED 7.03%
Anthracite Capital............................................... 394,600 2,959,500
Pacific Gulf Properties.......................................... 167,300 3,011,400
-----------
5,970,900
-----------
HEALTH CARE 13.72%
American Health Properties....................................... 92,400 1,680,525
ElderTrust....................................................... 109,600 986,400
Health Care Property Investors................................... 103,700 2,981,375
Healthcare Realty Trust.......................................... 111,800 2,124,200
Nationwide Health Properties..................................... 133,200 2,530,800
Ventas........................................................... 225,000 1,350,000
-----------
11,653,300
-----------
HOTEL 5.37%
FelCor Lodging Trust............................................. 96,600 2,239,913
Host Marriott Corp. ............................................. 67,400 749,825
Innkeepers USA................................................... 168,400 1,568,225
-----------
4,557,963
-----------
INDUSTRIAL 3.68%
First Industrial Realty Trust.................................... 130,500 3,123,844
-----------
OFFICE 21.49%
Arden Realty Group............................................... 131,400 2,923,650
Brandywine Realty Trust.......................................... 132,100 2,146,625
CarrAmerica Realty Corp. ........................................ 99,000 2,184,187
Crescent Real Estate Equities Co. ............................... 119,100 2,560,650
Highwoods Properties............................................. 139,700 3,291,681
Mack-Cali Realty Corp. .......................................... 125,400 3,683,625
SL Green Realty Corp. ........................................... 32,000 602,000
Tower Realty Trust............................................... 44,900 850,294
-----------
18,242,712
-----------
</TABLE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------- -----------
<S> <C> <C> <C>
OFFICE/INDUSTRIAL 3.42%
Liberty Property Trust........................................... 60,600 $ 1,257,450
Prime Group Realty Trust......................................... 124,200 1,645,650
-----------
2,903,100
-----------
SHOPPING CENTER 10.73%
COMMUNITY CENTER 4.30%
Federal Realty Investment Trust.................................. 67,100 1,421,681
Pan Pacific Retail Properties.................................... 87,600 1,554,900
Pennsylvania REIT................................................ 35,900 670,881
-----------
3,647,462
-----------
REGIONAL MALL 6.43%
JP Realty........................................................ 133,700 2,632,219
Simon Property Group............................................. 51,200 1,404,800
The Mills Corp................................................... 79,200 1,420,650
-----------
5,457,669
-----------
TOTAL SHOPPING CENTER............................................ 9,105,131
-----------
SPECIALTY 1.88%
Entertainment Properties Trust................................... 92,500 1,595,625
-----------
TOTAL COMMON STOCK (Identified cost -- $73,838,071)......... 65,552,775
-----------
PREFERRED STOCK 19.97%
Apartment Investment & Management Co., 9.375%, Series G.......... 125,100 2,869,481
Bradley Real Estate, 8.40%, Series A (Convertible)............... 40,026 900,585
Camden Property Trust, $2.25, Series A (Convertible)............. 178,600 4,174,775
Crown American Realty Trust, 11.00%, Series A.................... 44,300 2,126,400
General Growth Properties, 7.25%, Series A (Redeemable).......... 22,000 500,500
Prime Retail, 8.50%, Series B (Convertible)...................... 94,800 1,516,800
Reckson Associates Realty Corp., 7.625%, Series A
(Convertible)................................................. 124,000 2,526,500
SL Green Realty Corp., 8.00%, Series A (Convertible)............. 114,200 2,341,100
-----------
TOTAL PREFERRED STOCK (Identified cost -- $18,618,213)...... 16,956,141
-----------
TOTAL EQUITIES (Identified cost -- $92,456,284)............. 82,508,916
-----------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C> <C>
COMMERCIAL PAPER 1.73%
American Express Co., 5.00%, due 4/1/99 (Identified cost --
$1,469,060)................................................... $1,469,000 1,469,000
-----------
TOTAL INVESTMENTS (Identified cost -- $93,925,344)................ 98.91% 83,977,916
OTHER ASSETS IN EXCESS OF LIABILITIES............................... 1.09% 927,562
------ -----------
NET ASSETS (Equivalent to $11.48 per share based on 7,399,100
shares of capital stock outstanding)............................ 100.00% $84,905,478
------ -----------
------ -----------
</TABLE>
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COHEN AND STEERS TOTAL RETURN REALTY FUND, INC.
FINANCIAL HIGHLIGHTS*
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
------------------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/98...................................... $91,386,268 $12.35
Net investment income........................................ $ 1,873,539 $ 0.25
Net realized and unrealized losses from security
transactions.............................................. (6,579,081) (0.88)
Distributions from net investment income..................... (1,775,248) (0.24)
----------- ------
Net decrease in net asset value.................................... (6,480,790) (0.87)
----------- ------
End of period: 3/31/99............................................. $84,905,478 $11.48
----------- ------
----------- ------
</TABLE>
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* Financial information included in this report has been taken from the records
of the Fund without examination by independent accountants.
TOTAL RETURNS*
(PERIODS ENDED MARCH 31, 1999)
<TABLE>
<CAPTION>
FIVE YEARS SINCE INCEPTION (9/27/93)
ONE YEAR (ANNUALIZED) (ANNUALIZED)
- -------- ------------ -------------------------
<S> <C> <C>
- -19.67% 8.55% 12.31%
</TABLE>
- ------------
* Based on net asset value.
KEY INFORMATION
For general information and weekly
net asset value call: (800) 543-6217
NEW YORK STOCK EXCHANGE SYMBOL: RFI
REINVESTMENT PLAN
We urge shareholders who want to take advantage of this plan and whose shares
are held in 'Street Name' to consult your broker as soon as possible to
determine if you must change registration into your own name to participate.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
OFFICERS AND DIRECTORS
Robert H. Steers
Director and Chairman
Martin Cohen
Director and President
Gregory C. Clark
Director
George Grossman
Director
Jeffrey H. Lynford
Director
Willard H. Smith, Jr.
Director
Elizabeth O. Reagan
Vice President
Adam Derechin
Vice President and Assistant Treasurer
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
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
New York Stock Exchange Symbol: RFI
Website: www.cohenandsteers.com
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Fund shares. Past performance is of course no
guarantee of future results and your investment may be worth more or less at the
time you sell.
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COHEN & STEERS
------------------------
TOTAL RETURN REALTY FUND
QUARTERLY REPORT
MARCH 31, 1999
COHEN & STEERS
TOTAL RETURN REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
