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COHEN & STEERS
TOTAL RETURN REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
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TOTAL RETURN REALTY FUND
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QUARTERLY REPORT
SEPTEMBER 30, 2000
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
October 20, 2000
To Our Shareholders:
We are pleased to submit to you our report for Cohen & Steers Total Return
Realty Fund for the quarter and nine months ended September 30, 2000. The net
asset value per share at that date was $12.27. In addition, during the quarter,
three $0.08 per share monthly dividends were declared and paid.
INVESTMENT REVIEW
For the quarter, Cohen & Steers Total Return Realty Fund total return, based
on income and change in net asset value, was 8.3%. This performance compares to
the NAREIT Equity REIT Index* total return of 7.7%. For the nine months ended
September 30, 2000 the total return was 22.8%. The NAREIT Equity REIT Index
total return was 21.8%.
It was another extraordinary quarter in what has been an extraordinary year
for the REIT industry. For the first time in many years REITs are outperforming
nearly every market average by an extremely wide margin. We believe that the
major reason for this is that whereas earnings disappointments have become
routine in most areas of corporate America, including the technology sector,
REIT earnings, with very few exceptions, have comfortably exceeded expectations.
We believe these results, which are derived from in-place tenants and rents,
bode well for earnings over the next several quarters and this has encouraged
the entire analyst community to raise estimates of earnings growth rates and net
asset values for most companies. Understandably, this has been a strong catalyst
for rising share prices.
We are pleased with our substantial out-performance in the third quarter, as
well as our outperformance year-to-date. This was primarily the result of our
heavy weighting in the Office and Industrial sectors, which continue to enjoy
the strong fundamentals and high earnings growth. This is particularly true of
companies with properties in major central business districts where, with
vacancy rates at all-time low levels (6.7%, down from 8.9% a year ago) and
little new supply on the horizon, there are shortages of space in some markets
and rents are soaring. Also contributing to our recent results was our position
in the quarter's best performing sector, Health Care, which was up 22%. At long
last, positive changes in the regulatory environment and the resolution of the
fate of many weak operators precipitated greater investor optimism. In the case
of the health care REITs that we own, it became apparent to the investment
community that their dividends were secure, and this enabled the stocks to
return to more rational valuations.
One of the more puzzling aspects of this year's REIT rally is that it has
taken place rather quietly and with only modest inflows into real estate mutual
funds. Net inflows this year have been barely $500 million. While mutual fund
flows are not necessarily related to stock price movement, as evidenced by this
year's performance, it is a valuable indicator of investor psychology. It
appears to us that investors at large either disbelieve the sustainability of
this rally or remain highly distracted with the action of the more volatile
sectors of the market. In addition, it is quite possible that after the two year
bear market of 1998-99, investor confidence in the sector simply has not yet
been restored.
In the quarter, a further shrinkage in the REIT universe took place. Urban
Shopping Centers, Burnham Pacific and First Washington Real Estate proposed to
liquidate or go private, while Grove Property Trust and
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
Western Properties Trust agreed to be acquired by larger REITs. In addition, a
good number of REIT stock buyback programs continued, albeit at a decelerated
pace. Meanwhile, equity issuance in the quarter was minimal, with only about
$100 million in common stock being publicly offered. In short, by the end of the
third quarter, the supply/demand picture for REIT shares remained quite
positive.
INVESTMENT OUTLOOK
The fourth quarter has started with a great deal of financial market
turbulence and it appears that a host of uncertainties with respect to a
possible economic slowdown, politics and the national election, energy prices,
Mid-East peace, Fed policy and worldwide currency turmoil -- not to mention a
bona fide bear market in the NASDAQ market -- appear to have shaken investor
confidence.
In the final analysis, it is how the resolution of these issues affects the
future course of the economy that will determine the health of real estate
markets and, in turn, what will be the appropriate investment strategy. It
appears to us that the two scenarios that are most likely are: 1) a slowing, but
still positive, rate of economic growth (a 'soft landing'), or 2) an outright
recession whereby the economy suffers an actual decline. From our perspective,
either scenario leads us to very similar and straightforward investment
strategies. For example, in either economic environment it is logical to expect
that rent growth and absorption of space will slow. In some markets, there will
actually be rent declines and increases in vacancy rates. Those property sectors
that are most sensitive to short-term swings in the economy will likely suffer
some difficulty.
Nevertheless, at this stage of the economic cycle the current strong health
of the real estate markets is a noteworthy anomaly that must be appreciated. In
periods immediately prior to nearly every economic slowdown in the past, real
estate markets have tended to be substantially overbuilt, with vacancy rates
running at historically high levels, only to go even higher when economic
activity actually slows. Today, in contrast, vacancy rates are hovering at
historically low levels in nearly every property type and geographic region.
Ironically, whereas in prior cycles real estate was a victim of the slowing
economy, in this cycle shortages of space and soaring rents may actually be
impairing the growth of the economy by either imposing limits on, or increasing
the cost of, business expansion. As a result, while a slowdown in economic
growth would clearly not be positive for real estate fundamentals, it may not be
as negative as it has in the past. In fact, compared to other sectors of the
economy, real estate may actually fare quite well and continue to register above
average profit growth.
Other effects of an economic slowdown could actually be positive for REITs.
We would expect to see the cancellation or postponement of most real estate
development activity that can no longer be justified. Yield spreads between
government and corporate debt securities are rising, and this is increasing the
yield on commercial mortgage securities as well. A higher cost of borrowing
further discourages new development by raising required returns. A restrained
development situation should bode well for reduced downward pressure on
occupancies and rents. This is particularly the case in the Office sector where
there is the further protection of long lease terms. Notwithstanding the
bankruptcy of many 'new economy' companies, mainstream class A office users
rarely, if ever, default on their leases. For this reason, we are continuing to
overweight this sector. Similarly, apartment markets in which there are barriers
to entry, such as in the Northeast, remain our favorites due to our expectations
for continued strong demand for rental housing under almost any foreseeable
economic conditions. The same holds true for our holdings in the Health Care
sector. Finally, as we have emphasized for some time, dividend
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
yield -- the hallmark of REIT investing, since REITs must pay out nearly all of
their earnings as dividends -- is likely to become more desirable as investors'
overall return expectations diminish. Since an economic slowdown should
eventually precipitate strength in the bond market, the resulting lower interest
rate environment may bring increased attention to the merits of diversification
and the role that REITs can play in a portfolio.
On the negative side of the ledger, the Retail sector may still present some
investment risk due its economic sensitivity. While we are under-weighted in the
Retail sector we are paying strict attention to valuations, and are ready to
increase our holdings at prices that would appear to discount investors' worst
expectations. One of our overriding concerns, irrespective of property type or
regional orientation, is financial liquidity. It would be natural to expect a
contraction in credit to occur, at least in the early stages of a slowdown, and
certainly for riskier borrowers. Real estate continues to be viewed as a higher
risk proposition, and those companies that have near-term maturities of debt, or
have reached their limits on new borrowing, are likely to be highly
disadvantaged in a more challenging economic climate. Thus, maintenance of
strict discipline and thorough risk analysis remain paramount in our investment
process.
We believe that the performance of REITs this year has been a major step
towards the restoration of investor confidence in them. It will still be a slow
process, however, made all the more difficult by the challenges of a less robust
economic environment. We have long argued that the most important byproduct of
the securitization of real estate would be significantly less volatility in real
estate fundamentals and the real estate cycle. Notwithstanding the volatility of
REIT share prices, this has so far been the case. An economic slowdown, should
it occur, would certainly present an important test of this belief. Nonetheless,
if REITs continue to display resilience both from an earnings and stock price
standpoint, as we believe they can, returns should continue to be rewarding.
Sincerely,
<TABLE>
<S> <C>
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
</TABLE>
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Cohen & Steers is online at WWW.COHENANDSTEERS.COM. Visit our website for
weekly NAVs, portfolio information, performance information, recent news
articles, literature and insights on the REIT market.
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* The NAREIT Equity REIT Index is an unmanaged, market capitalization weighted
index of all publicly-traded REITs that invest predominately in the equity
ownership of real estate. The index is designed to reflect the performance of
all publicly-traded REITs as a whole.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------- -----------
<S> <C> <C> <C>
EQUITIES 96.03%
COMMON STOCK 83.64%
APARTMENT/RESIDENTIAL 15.56%
Apartment Investment & Management Co. -- Class A...... 35,700 $ 1,644,431
Camden Property Trust................................. 72,400 2,244,400
Colonial Properties Trust............................. 64,100 1,646,569
Gables Residential Trust.............................. 59,900 1,628,531
Home Properties of New York........................... 66,100 1,974,738
Summit Properties..................................... 87,500 2,105,469
United Dominion Realty Trust.......................... 264,600 2,877,525
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14,121,663
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HEALTH CARE 12.68%
Health Care Property Investors........................ 133,800 3,963,825
Healthcare Realty Trust............................... 122,100 2,579,363
Nationwide Health Properties.......................... 240,900 3,839,344
Ventas................................................ 225,000 1,125,000
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11,507,532
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HOTEL 8.00%
FelCor Lodging Trust.................................. 91,500 2,115,938
Host Marriott Corp. .................................. 143,800 1,617,750
MeriStar Hospitality Corp. ........................... 174,200 3,527,550
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7,261,238
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INDUSTRIAL 4.57%
First Industrial Realty Trust......................... 86,400 2,656,800
Pacific Gulf Properties............................... 55,700 1,489,975
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4,146,775
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OFFICE 20.86%
Arden Realty Group.................................... 131,400 3,523,163
Brandywine Realty Trust............................... 196,100 3,971,025
CarrAmerica Realty Corp. ............................. 14,900 450,725
Crescent Real Estate Equities Co. .................... 167,200 3,730,650
Highwoods Properties.................................. 148,200 3,501,225
Mack-Cali Realty Corp. ............................... 133,400 3,760,212
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18,937,000
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</TABLE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------- -----------
<S> <C> <C> <C>
OFFICE/INDUSTRIAL 7.62%
Kilroy Realty Corp. .................................. 2,700 $ 72,056
Liberty Property Trust................................ 139,400 3,833,500
Prentiss Properties Trust............................. 17,000 444,125
Prime Group Realty Trust.............................. 73,500 1,157,625
Reckson Associates Realty Corp. -- Class B............ 54,500 1,410,187
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6,917,493
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SELF STORAGE 0.35%
Storage USA........................................... 10,400 317,200
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SHOPPING CENTER 14.00%
COMMUNITY CENTER 4.55%
Kimco Realty Corp. ................................... 11,900 502,775
Pan Pacific Retail Properties......................... 66,000 1,320,000
Philips International Realty Corp. ................... 133,600 2,304,600
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4,127,375
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REGIONAL MALL 9.45%
CBL & Associates Properties........................... 13,000 325,812
JP Realty............................................. 111,400 2,012,162
Macerich Co. ......................................... 126,500 2,688,125
Simon Property Group.................................. 81,300 1,905,469
Taubman Centers....................................... 142,500 1,647,656
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8,579,224
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TOTAL SHOPPING CENTER................................. 12,706,599
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TOTAL COMMON STOCK (Identified
cost -- $73,160,677)........................... 75,915,500
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PREFERRED STOCK 12.39%
Apartment Investment & Management Co., 8.75%,
Series D............................................ 10,000 211,250
Apartment Investment & Management Co., 9.375%,
Series G............................................ 125,100 2,697,469
Camden Property Trust, $2.25, Series A
(Convertible)....................................... 90,100 2,246,869
CarrAmerica Realty Corp., 8.57%, Series B............. 41,000 881,500
Colonial Properties Trust, 8.75%, Series A............ 69,500 1,489,906
Crown American Realty Trust, 11.00%, Series A......... 44,300 1,705,550
Taubman Centers, 8.30%, Series A...................... 111,200 2,015,500
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TOTAL PREFERRED STOCK (Identified
cost -- $11,761,883)........................... 11,248,044
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TOTAL EQUITIES (Identified cost -- $84,922,560)... 87,163,544
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</TABLE>
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------- -----------
<S> <C> <C> <C>
CORPORATE BOND 0.91%
#Macerich Co. 144A, Convertible, 7.25%
12/15/02 (Identified cost -- $770,175)...... $ 945,000 $ 829,237
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COMMERCIAL PAPER 2.49%
Union Bank of Switzerland Finance., 6.59%, due
10/2/00 (Identified cost -- $2,255,174)..... 2,256,000 2,256,000
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TOTAL INVESTMENTS (Identified cost -- $87,947,909)..... 99.43% 90,248,781
OTHER ASSETS IN EXCESS OF LIABILITIES.................. 0.57% 518,091
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NET ASSETS (Equivalent to $12.27 per share based on
7,399,100 shares of capital stock outstanding)....... 100.00% $90,766,872
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</TABLE>
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# Security is restricted subject to Rule 144A and trades infrequently. The Fund
prices this security by obtaining a bid and ask price from two market makers
on a weekly basis. The average of the bid and ask prices is used as the
security's price.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
FINANCIAL HIGHLIGHTS'D'
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
------------------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period: 12/31/99................ $78,658,094 $10.63
Net investment income.................... $ 4,842,887 $ 0.66
Net realized and unrealized gain on
investments........................... 12,592,961 1.70
Distributions from net investment........ (5,327,070) (0.72)
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Net increase in net asset value.............. 12,108,778 1.64
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End of period: 9/30/2000..................... $90,766,872 $12.27
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</TABLE>
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'D' Financial information included in this report has been taken from the
records of the Fund without examination by independent accountants.
AVERAGE ANNUAL TOTAL RETURNS*
(PERIODS ENDED SEPTEMBER 30, 2000)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS SINCE INCEPTION (9/27/93)
-------- ---------- -------------------------
<S> <C> <C>
18.54% 10.15% 8.63%
</TABLE>
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* 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
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REINVESTMENT PLAN
We urge shareholders who want to take advantage of this plan and whose
shares are held in 'Street Name' to consult your broker as soon as possible
to determine if you must change registration into your own name to
participate.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
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
Lawrence B. Stoller
Assistant Secretary
INVESTMENT ADVISER
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, NY 10017
(212) 832-3232
FUND ADMINISTRATOR
Princeton Administrators, L.P.
P.O. Box 9095
Princeton, NJ 08543-9095
(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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STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as...............................'D'
