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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
April 21, 2004
To Our Shareholders:
We are pleased to submit to you our report for the quarter ended March 31,
2004. The net asset value at that date was $18.59 per share. During the quarter,
three $0.085 per share monthly dividends were declared and paid.
INVESTMENT REVIEW
For the quarter, Cohen & Steers Total Return Realty Fund had a total return,
based on income and change in net asset value, of 10.9%. This compares with the
NAREIT Equity REIT Index's(a) total return of 12.0%.
The overall equity market was generally choppy during the first quarter, as
the broad market averages showed little change. In contrast, REITs performed
well, driven by continued investor appreciation for the potential for REITs to
continue to provide current income, lower volatility, competitive total returns,
portfolio diversification and, most importantly in our opinion, the improving
visibility and breadth of U.S. economic growth. Following the quarter-end,
however, bond and stock markets, particularly REITs, had a decidedly negative
response to the strong March jobs report. As more fully discussed in the
'Investment Outlook' section below, we believe that this is a temporary
correction driven by valuation concerns of some investors and exacerbated by
short-term technical factors. We believe that REIT valuations and growth
prospects are more attractive now than at any time over the past several months.
Approximately two and a half years into an economic recovery, we believe the
impact is being felt broadly across the income-producing property markets in
many parts of the United States as demand for space is increasing and rents are
stabilizing. In our view, the resultant acceleration in REIT cash flow growth
rates is what has been driving stock prices since last year. After a modest
earnings decline in 2003, our forecast is for earnings growth to accelerate to
mid-single digit growth this year and high single digit growth next year.
The leadership patterns of recent quarters held during the first quarter.
The regional mall group, continuing to enjoy the best fundamentals of any
property type in our opinion, was the best performing sector with a 22.7% total
return. Health care, a more interest rate sensitive sector, benefited from a
further decline in interest rates and delivered 16.6%. Shopping centers'
continued earnings consistency helped drive them to a 15.5% total return.
Apartments, hotels and office lagged with 4.3%, 6.8% and 9.0% total returns,
respectively.
-------------------
(a) The NAREIT Equity REIT Index is an unmanaged, market capitalization weighted
index of all publicly traded REITs that invest predominantly in the equity
ownership of real estate. The index is designed to reflect the performance
of all publicly traded equity REITs as a whole.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
The fund's best performing investments during the quarter were in the
regional mall (20.6% total return) and health care sectors (18.8%), while the
worst performing sector for the fund was the apartment sector, which had a 7.1%
total return. Ventas Inc., continuing where it left off from last year, was the
fund's best performing stock, contributing a total return of 26.5% during the
quarter. Other standouts included Newcastle Investment Corp, Glimcher Realty
Trust, Macerich Company and Mills Corp., all of which provided total returns in
excess of 20%. Laggards during the quarter were Equity Office Properties, Camden
Property Trust and Home Properties, each of which had a total return of less
than 3%.
Taking a more thematic approach toward examining the determinants of
performance within the REIT sector during the first quarter, we have observed
that cash flow growth has been the dominant driver. We found a meaningful
correlation between current cash flow growth rate and first quarter stock price
performance. In our view, those companies that are facing positive property
fundamentals and those that have the ability to deploy capital at attractive
yields (whether through acquisitions or redevelopment of existing real estate,
or through ground-up development) also tend to have an attractive cost of both
equity and debt capital. This has enabled many of these companies to expand
their portfolios even more profitably. This activity, of course, often has the
potential to result in a very positive effect on growth in both net asset value
and earnings.
Not surprisingly, the stock prices of many of the aggressive acquirers of
property have appreciated the most during the first quarter. Skeptics may
observe that property prices look expensive by historical standards. However, we
expect the economic recovery to continue and therefore do not believe that there
will be a better buying opportunity a year from now if our forecast for stronger
job growth, increased occupancies, and higher rents is realized.
The converse of this has been true for companies on the opposite side of
this trend. Companies that have viewed the current pricing of real estate assets
as expensive or even somewhat irrational have opted to be net sellers of
assets -- de-leveraging and waiting for a better buying opportunity. The
practitioners of this strategy have been rewarded with anemic stock price
appreciation. The market's judgment appears to be that these companies have
foregone an opportunity to boost earnings and create value.
INVESTMENT OUTLOOK
As discussed, a very strong March increase in U.S. nonfarm payrolls was
announced on April 2, 2004, well in excess of consensus expectations (308,000
new jobs created versus an expectation of 120,000). The bond and stock markets
reacted negatively to the news, as did REITs, due to concerns that the Federal
Reserve would raise interest rates. REIT stock prices declined in the week
following the release of the jobs report as investors took profits from a group
of stocks that had appreciated without interruption for the past 14 months.
While REITs have demonstrated little correlation with interest rates over longer
periods of time, it appears that in the short term, the extreme bond market
activity has negatively impacted REITs. The more defensive sectors such as
shopping centers and health care underperformed, while the more cyclical sectors
such as office and apartments declined less.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
We believe that this has been a temporary correction in the REIT market
driven by valuation concerns by some investors as well as by short-term
technical factors. Ironically, if strong job growth continues in the coming
months, as we expect, real estate fundamentals should respond very favorably,
especially in the apartment and office sectors where job growth is the single
greatest determinant of demand for space.
We continue to maintain a positive outlook for the U.S. economy. At this
time, in our opinion, all the pre-conditions for strong job growth are in place.
Corporate profits have staged a dramatic recovery and are at an all-time high as
a percentage of GDP. Therefore, it is increasingly profitable for firms to hire
the next incremental worker. The recently reported declines in weekly initial
jobless claims to three-year lows and the spike in the monthly change in nonfarm
payrolls to the highest levels in four years have finally begun to demonstrate
that this is occurring.
Though not widely understood, we believe that job growth has actually been
occurring for some time. Many of the companies that we invest in are on the
front lines of the consumer and corporate economy. A number of the office and
apartment companies that we speak with have observed improved leasing activity
for their portfolios that would contradict the virtually nonexistent rate of job
growth implied by the official government statistics until recently. Thus, we
believe that a normal cyclical economic recovery is in the process of unfolding.
In addition, the supply/demand dynamic in most real estate markets is turning
more positive. Many real estate companies are adding value, in our view, by
making real estate investments in a profitable and disciplined fashion. As a
result of the historically low interest rate environment of the last few years,
many REITs were able to improve their balance sheets in a way that gives these
companies better potential for an attractive spread between property yields and
their blended cost of capital. As a result, our forecast is that cash flow
growth rates for REITs should begin to accelerate in 2004 after declining in
2003.
With earnings visibility improving, our forecast is for a resumption of
meaningful dividend increases in the next year or two. This is an important
factor to consider when assessing how REITs react to rising interest rates.
Unlike fixed income securities, REITs have the potential to increase their
dividends as the economy expands and companies see their earnings increase,
which can help to offset rising rates. During the last economic expansion, for
example (the period from 1992 through 2001), REITs increased their dividends on
average by about 7% per year.
With the recent pullback, REITs are now back to trading closely in line with
their underlying net asset values. As a result, we believe REIT valuations are
now more attractive than at any time over the past several months. Thus, while
market activity could continue to be choppy over the near term, we believe that
REIT
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
fundamentals are poised to continue to improve, which should be positive for
dividends and share prices over the intermediate and longer term.
Sincerely,
/s/ Martin Cohen /s/ Robert H. Steers
MARTIN COHEN ROBERT H. STEERS
President Chairman
/s/ Greg E. Brooks
GREG E. BROOKS
Portfolio Manager
Cohen & Steers is online at COHENANDSTEERS.COM
We have enhanced both the look and features of our Web site
to give you more information about our company, our funds
and the REIT market in general. Check out our new
interactive Asset Allocation Tool, which allows you to
hypothetically add REITs to any portfolio to see how they
impact expected total returns and risk. Or try the Fund
Performance Calculator and see how our funds have performed
versus the S&P 500 Index or Nasdaq Composite. As always, you
can also get daily net asset values, fund fact sheets,
portfolio highlights, recent news articles and our overall
insights on the REIT market.
So visit us today at COHENANDSTEERS.COM
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
MARCH 31, 2004 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD(a)
--------- ------------ --------
EQUITIES 99.08%(b)
COMMON STOCK 80.04%
DIVERSIFIED 9.68%
Colonial Properties Trust......................... 82,100 $ 3,349,680 6.57%
Crescent Real Estate Equities Co.................. 170,600 3,065,682 8.35
iStar Financial................................... 36,900 1,560,870 6.60
Vornado Realty Trust.............................. 143,200 8,660,736 4.70
------------
16,636,968
------------
HEALTH CARE 11.04%
Health Care Property Investors.................... 230,000 6,509,000 5.90
Health Care REIT.................................. 27,600 1,120,560 5.91
Nationwide Health Properties...................... 161,800 3,603,286 6.65
Ventas............................................ 281,700 7,741,116 4.73
------------
18,973,962
------------
HOTEL 0.38%
Hospitality Properties Trust...................... 14,200 658,880 6.21
------------
INDUSTRIAL 2.75%
First Industrial Realty Trust..................... 64,700 2,555,650 6.94
Keystone Property Trust........................... 89,500 2,175,745 5.43
------------
4,731,395
------------
MORTGAGE 2.02%
Newcastle Investment Corp......................... 103,027 3,472,010 7.12
------------
OFFICE 22.12%
Arden Realty...................................... 160,000 5,172,800 6.25
Brandywine Realty Trust........................... 184,900 5,648,695 5.76
CarrAmerica Realty Corp........................... 155,100 5,257,890 5.90
Equity Office Properties Trust.................... 203,400 5,876,226 6.92
HRPT Properties Trust............................. 71,900 812,470 7.08
Mack-Cali Realty Corp............................. 150,800 6,772,428 5.61
Maguire Properties................................ 93,000 2,380,800 6.25
Prentiss Properties Trust......................... 165,300 6,099,570 6.07
------------
38,020,879
------------
-------------------
(a) Dividend yield is computed by dividing the security's current annual
dividend rate by the last sale price on the principal exchange, or market,
on which such security trades.
(b) Percentages indicated are based on the net assets of the fund.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 2004 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ------------ -----------
OFFICE/INDUSTRIAL 6.52%
Kilroy Realty Corp.............................. 56,600 $ 2,009,300 5.58%
Liberty Property Trust.......................... 135,600 6,102,000 5.38
Reckson Associates Realty Corp.................. 110,000 3,095,400 6.04
------------
11,206,700
------------
RESIDENTIAL -- APARTMENT 11.33%
Archstone-Smith Trust........................... 152,900 4,512,079 5.83
AvalonBay Communities........................... 69,900 3,745,242 5.23
Camden Property Trust........................... 78,900 3,546,555 5.65
Gables Residential Trust........................ 122,900 4,455,125 6.65
Home Properties................................. 47,000 1,915,250 6.09
Mid-America Apartment Communities............... 35,400 1,314,402 6.30
------------
19,488,653
------------
SELF STORAGE 0.15%
Sovran Self Storage............................. 6,200 258,974 5.77
------------
SHOPPING CENTER 14.05%
COMMUNITY CENTER 4.21%
Developers Diversified Realty Corp.............. 22,600 913,040 5.05
Federal Realty Investment Trust................. 52,400 2,420,880 4.24
Heritage Property Investment Trust.............. 51,300 1,595,430 6.75
Kramont Realty Trust............................ 69,500 1,313,550 6.88
Urstadt Biddle Properties -- Class A............ 60,000 990,000 5.21
------------
7,232,900
------------
REGIONAL MALL 9.84%
CBL & Associates Properties..................... 42,100 2,582,414 4.73
Glimcher Realty Trust........................... 95,200 2,579,920 7.08
Macerich Co..................................... 110,500 5,955,950 4.53
Mills Corp...................................... 109,000 5,808,610 4.47
------------
16,926,894
------------
TOTAL SHOPPING CENTER........................... 24,159,794
------------
TOTAL COMMON STOCK (Identified
cost -- $83,730,598)..................... 137,608,215
------------
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 2004 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ------------ -----------
PREFERRED STOCK 19.04%
DIVERSIFIED 1.24%
Colonial Properties Trust, 9.25%, Series C...... 600 $ 16,410 8.45%
Colonial Properties Trust, 8.125%, Series D..... 14,600 400,624 7.40
Crescent Real Estate Equities Co., 6.75%, Series
A (Convertible)............................... 75,500 1,723,665 7.40
------------
2,140,699
------------
HEALTH CARE 2.71%
Nationwide Health Properties, 7.677%, Series
P............................................. 47,000 4,653,000 7.76
------------
HOTEL 0.19%
FelCor Lodging Trust, 9.00%, Series B........... 2,900 73,718 8.85
Host Marriott Corp, 10.00%, Series C............ 3,500 96,250 9.09
Host Marriott Financial Trust, 6.75%, QUIPS(a)
(Convertible)................................. 3,200 164,157 6.59
------------
334,125
------------
INDUSTRIAL 0.30%
Keystone Property Trust, 9.125%, Series D....... 18,800 517,940 8.28
------------
OFFICE 3.76%
Alexandria Real Estate Equities, 9.10%, Series
B............................................. 13,900 384,335 8.25
HRPT Properties Trust, 8.75%, Series B.......... 52,800 1,491,600 7.75
Highwood Properties, 8.625%, Series A........... 4,300 4,583,531 8.09
------------
6,459,466
------------
RESIDENTIAL -- APARTMENT 3.23%
Apartment Investment & Management Co., 8.75%,
Series D...................................... 6,431 162,190 8.68
Apartment Investment & Management Co., 9.375%,
Series G...................................... 113,200 3,096,020 8.56
Apartment Investment & Management Co., 10.10%,
Series Q...................................... 25,000 671,000 9.43
Apartment Investment & Management Co., 10.00%,
Series R...................................... 18,100 485,080 9.33
Mid-America Apartment Communities, 8.30%, Series
H............................................. 17,300 454,990 7.91
Post Properties, 8.50%, Series A................ 11,000 679,250 6.88
------------
5,548,530
------------
-------------------
(a) QUIPS Quarterly Income Preferred Securities
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 2004 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ------------ -----------
SHOPPING CENTER 7.61%
COMMUNITY CENTER 0.48%
Developers Diversified Realty Corp., 8.60%,
Series F...................................... 1,600 $ 43,600 7.89%
Ramco-Gershenson Property Trust, 9.50%, Series
B............................................. 11,600 330,600 8.35
Urstatdt Biddle Properties, 8.50%, Series C..... 4,000 446,000 7.62
------------
820,200
------------
OUTLET CENTER 0.45%
Chelsea Property Group, 8.375%, Series A........ 13,000 779,187 6.99
------------
REGIONAL MALL 6.68%
CBL & Associates Properties, 8.75%, Series B.... 13,000 706,550 8.06
Glimcher Realty Trust, 8.125%, Series G......... 16,000 414,400 7.84
Mills Corp., 9.00%, Series B.................... 73,800 2,054,592 8.08
Mills Corp., 9.00%, Series C.................... 25,000 693,750 8.11
Mills Corp., 8.75%, Series E.................... 26,000 712,400 7.99
Pennsylvania Real Estate Investment Trust,
11.00%, Series A.............................. 55,400 3,379,400 9.02
Taubman Centers, 8.30%, Series A................ 139,500 3,518,190 8.25
------------
11,479,282
------------
TOTAL SHOPPING CENTER........................... 13,078,669
------------
TOTAL PREFFERED STOCK (Identified
cost -- $27,399,814)..................... 32,732,429
------------
TOTAL EQUITIES (Identified
cost -- $111,130,412).................... 170,340,644
------------
PRINCIPAL
AMOUNT
---------
CORPORATE BOND 0.40%
Host Marriott, LP, 9.50%, due 1/15/07
(Identified cost -- $600,454)................. $600,000 675,000
------------
TOTAL INVESTMENTS (Identified
cost -- $111,730,866) ......................... 99.48% 171,015,644
OTHER ASSETS IN EXCESS OF LIABILITIES ........... 0.52% 900,558
------- ------------
NET ASSETS (Equivalent to $18.59 per share based on
9,249,159 shares of capital stock
outstanding) ................................. 100.00% $171,916,202
------- ------------
------- ------------
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
FINANCIAL HIGHLIGHTS (a)
MARCH 31, 2004 (UNAUDITED)
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
-------------------------- ---------------
NET ASSET VALUE:
Beginning of period: 12/31/03.................. $157,145,926 $16.99
Net investment income...................... $ 1,450,196 $ 0.16
Net realized and unrealized gain on
investments.............................. 15,678,619 1.70
Distributions from net investment income... (2,358,539) (0.26)
----------- ------
Net increase in net asset value................ 14,770,276 1.60
------------ ------
End of period: 3/31/2004....................... $171,916,202 $18.59
------------ ------
------------ ------
AVERAGE ANNUAL TOTAL RETURNS (b)
(PERIODS ENDED MARCH 31, 2004) (UNAUDITED)
SINCE INCEPTION
ONE YEAR FIVE YEARS TEN YEARS (9/27/93)
-------- ---------- --------- ---------
47.24% 18.38% 12.88% 12.52%
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.
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.
A description of the policies and procedures that the fund
uses to determine how to vote proxies relating to portfolio
securities is available (i) without charge, upon request, by
calling 1-800-330-7348, (ii) on our Web site at
cohenandsteers.com or (iii) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
-------------------
(a) Financial information included in this report has been taken from the
records of the fund without examination by independent accountants.
(b) Based on net asset value.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
PRIVACY POLICY
The fund is committed to maintaining the privacy of its
shareholders and to safeguarding their personal information.
The following is provided to help you understand what
personal information the fund collects, how we protect that
information, and why in certain cases we may share this
information with others.
The fund does not receive any personal information relating
to shareholders who purchase shares through an intermediary
that acts as the record owner of the shares. In the case of
shareholders who are record owners of the fund, to conduct
and process your business in an accurate and efficient
manner, we must collect and maintain certain personal
information about you. This is the information we collect on
applications or other forms, and from the transactions you
make with us.
The fund does not disclose any personal information about
its shareholders or former shareholders to anyone, except as
required or permitted by law or as is necessary to service
shareholder accounts. We will share information with
organizations, such as the fund's transfer agent, that
assist the fund in carrying out its daily business
operations. These organizations will use this information
only for purposes of providing the services required or as
otherwise as may be required by law. These organizations are
not permitted to share or use this information for any other
purpose. In addition, the fund restricts access to personal
information about its shareholders to employees of the
adviser who have a legitimate business need for the
information.
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
MEET THE COHEN & STEERS FAMILY OF OPEN-END FUNDS:
FOR HIGH CURRENT INCOME: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
EQUITY INCOME FUND REALTY SHARES
IDEAL FOR INVESTORS SEEKING A HIGH DIVIDEND IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
YIELD AND CAPITAL APPRECIATION, INVESTING RETURN THROUGH BOTH CURRENT INCOME AND
PRIMARILY IN REITS CAPITAL APPRECIATION, INVESTING PRIMARILY IN
A, B, C AND I SHARES AVAILABLE REITS
SYMBOLS: CSEIX, CSBIX, CSCIX, CSDIX SYMBOL: CSRSX
ALSO AVAILABLE: COHEN & STEERS INSTITUTIONAL
REALTY SHARES (CSRIX) REQUIRES A HIGHER
MINIMUM PURCHASE, BUT OFFERS A LOWER TOTAL
EXPENSE RATIO
FOR TOTAL RETURN: FOR CAPITAL APPRECIATION:
COHEN & STEERS COHEN & STEERS
UTILITY FUND SPECIAL EQUITY FUND
IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL IDEAL FOR INVESTORS SEEKING MAXIMUM CAPITAL
RETURN THROUGH BOTH CURRENT INCOME AND APPRECIATION, INVESTING IN A LIMITED NUMBER
CAPITAL APPRECIATION, INVESTING PRIMARILY IN OF REITS AND OTHER REAL ESTATE COMPANIES
UTILITIES CONCENTRATED, HIGHLY FOCUSED PORTFOLIO
SYMBOLS: CSUAX, CSUBX, CSUCX, CSUIX SYMBOL: CSSPX
FOR MORE INFORMATION ABOUT ANY COHEN & STEERS FUND
OR TO OBTAIN A PROSPECTUS PLEASE CONTACT US AT:
1-800-330-7348, OR VISIT OUR WEB SITE AT COHENANDSTEERS.COM
PLEASE CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES OF THE FUND CAREFULLY BEFORE
INVESTING. A PROSPECTUS CONTAINING THIS AND OTHER INFORMATION ABOUT THE FUND MAY BE OBTAINED BY
FOLLOWING THE INSTRUCTIONS ABOVE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
COHEN & STEERS SECURITIES, LLC, DISTRIBUTOR
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COHEN & STEERS TOTAL RETURN REALTY FUND, INC.
OFFICERS AND DIRECTORS KEY INFORMATION
Robert H. Steers INVESTMENT ADVISOR
Director and chairman Cohen & Steers Capital Management, Inc.
757 Third Avenue
Martin Cohen New York, NY 10017
Director and president (212) 832-3232
Gregory C. Clark FUND ADMINISTRATOR AND CUSTODIAN
Director State Street Corp.
225 Franklin Street
Bonnie Cohen Boston, MA 02110
Director
TRANSFER AGENT
George Grossman Equiserve Trust Company
Director 150 Royall Street
Canton, MA 02021
Richard J. Norman (800) 426-5523
Director
LEGAL COUNSEL
Frank K. Ross Simpson Thacher & Bartlett LLP
Director 425 Lexington Avenue
New York, NY 10017
Willard H. Smith Jr.
Director New York Stock Exchange Symbol: RFI
Greg E. Brooks Web site: cohenandsteers.com
Vice president
This report is for shareholder
Adam Derechin information. This is not
Vice president and assistant treasurer a prospectus intended for use in the
purchase or sale of fund shares.
Lawrence B. Stoller Past performance is of course
Assistant secretary 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
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
TOTAL RETURN REALTY FUND
--------------------------
QUARTERLY REPORT
MARCH 31, 2004