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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
July 15, 2002
To Our Shareholders:
We are pleased to submit to you our report for the period ended June 30,
2002. The net asset value per common share at that date was $15.40. During the
quarter the Fund declared and paid three $0.105 per share monthly dividends.
INVESTMENT REVIEW
For the quarter, Cohen & Steers Quality Income Realty Fund's total return,
based on income and change in net asset value, was 4.8%, which compared to the
NAREIT Equity REIT Index's* total return of 5.0%. Since its inception on
February 28, 2002, the Fund's total return was 8.1%. The Fund's performance
since its inception reflects the high cash position from the Fund's initial
public offering and the proceeds from the Fund's subsequent issuance of $280
million in Auction Market Preferred Shares on April 4, 2002. Because REIT prices
in general increased during the quarter, the large initial cash balance held by
the Fund was a relative drag on performance. However, as the enclosed portfolio
reflects, the Fund was essentially fully invested at quarter end.
In what has been characterized by the press as a 'grim' quarter for the
financial markets (the S&P 500 Index declined 13.4%), REITs extended their
winning streak, now to nearly two-and-a-half years, outperforming most asset
classes during this period by an extraordinary margin. Despite the continued
mild deterioration in real estate fundamentals, REIT share valuations expanded
moderately in the quarter. In our opinion, this is the result of the market's
anticipation of a recovery that will begin to take place, property
type-by-property type, as an economic expansion begins to unfold. Based on
performance in both the second quarter and the first half of the year, it
appears that the market expects the Regional Mall (+25.0% in the first half of
2002), Hotel (+22.7%), and Industrial (+20.8%) sectors to be the first to
recover.
The Apartment (+5.2%) and Office (+8.2%) sectors, although still producing
positive returns, were exceptions to the powerful performance of REITs this
year. Perhaps the most consistently strong sector of the economy has been
single-family home construction. Low interest rates and the strong propensity of
Americans to own their homes have created softness in many apartment markets.
Exacerbating this has been developers' and owners' access to low-cost financing,
which has helped create excess supply: multifamily construction has risen by
about 10% from last year's levels, despite soft demand. Consequently, vacancy
rates have risen and price competition is causing downward pressure on rental
rates. While we are looking for these trends to abate, we have not yet seen any
convincing sign that they are.
We remain cautiously optimistic with respect to the Office sector, despite
the absence of signs that a meaningful recovery in occupancies and rents is in
sight. In fact, continuing layoffs and expectations of relatively slow job
growth have caused some analysts to expect no recovery in many office markets
until late 2003 or even 2004. In contrast to the apartment market, however,
current and prospective supply of new office space has declined dramatically:
construction has declined 21% from last year's levels. Also, in contrast to the
Apartment sector, most office owners are selling at above-average discounts to
their net asset values and below-average
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
multiples of cash flow. This, in our opinion, suggests that the market is
already discounting continued weakness in many office markets. Further, the lead
time required to bring office space out of the ground is much longer than for
any other property type. As a result, we believe that improving occupancies and
rents may be evident sooner than many currently envision. We expect that, well
before any upturn, and as conditions begin to stabilize, the shares of office
owners will respond very positively.
In addition to the positive market performance of REITs so far this year,
the other big story has been their much-improved access to equity and debt
capital. The successful initial public offering of Heritage Property Investment
Trust was the first REIT IPO since 1999. In addition, the $3.9 billion of common
equity capital raised in the first half of the year places the industry in line
to raise the most equity capital in several years, albeit well below the $14.6
billion raised in 1998 and the record $26.3 billion raised in 1997. REITs have
also continued to take advantage of the favorable interest rate environment,
raising $5.4 billion in unsecured debt in the first half of the year, up
approximately 10% year over year. While much of this debt and equity capital has
been used to finance property acquisitions, a great deal of it has been used to
refinance existing or maturing high-cost debt. In either case, this capital was
put to good use, enhancing most companies' current and long-term earnings
potential.
The Fund benefited by its participation in a portion of this equity issuance
in two ways. First, simultaneous with its IPO, the Fund invested over $210
million in the common stock of nine REITs. In effect, these securities were
purchased at a slight discount to their market price, thereby increasing the
initial Net Asset Value of the Fund from $14.30 per share to $14.57 per share.
In addition, the Fund made purchases of newly issued stock directly from several
other REITs (both common and preferred securities) subsequent to the IPO date,
enabling the Fund to accelerate its initial investment program. As a result, the
Fund was able to announce its first three dividends of $0.105/share on April 2,
2002; these dividends were subsequently paid on April 30, 2002, May 31, 2002 and
June 28, 2002.
INVESTMENT OUTLOOK
Many have noted that in the first half of 2002 a record $2.8 billion flowed
into real estate mutual funds, whose total assets of $15.4 billion at mid-year
is also a record. Flows into mutual funds are considered by many to be a
barometer of investor psychology and an influence over the movement of share
prices. Many analysts and commentators have argued that the rise of REIT prices
has had less to do with sound, or improving, fundamentals, than with the sheer
power of money chasing this small group of stocks. On the contrary, we believe
that the rise of REIT prices reflects an underlying trend that is much more
powerful than the flow of capital into mutual funds.
We believe that the strength of REITs is based on the market's increased
confidence in their stability of cash flows, the veracity of their financial
disclosure, and the sustainability and growth potential of dividends. These
features, sadly, are in stark contrast to the issues that are of greatest
concern to investors today with respect to much of corporate America. Nowhere is
this better reflected than in the debt market for REITs. As shown in the chart
below, for the first time ever, REIT unsecured debt is now trading at a yield
that is lower than comparably rated industrial companies. This has nothing to do
with the flow of capital into mutual funds. Rather, this is the
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
result of the rash of downgrades in corporate America and the bankruptcy or
near-bankruptcy of companies that very recently had investment-grade credit
ratings. In contrast, the market appears to have greater confidence in
asset-based lending. This is not confined to the public market. Because the
default rate on commercial mortgages continues to hover at a record-low level
(less than 1%), financial institutions have continued to extend credit to real
estate owners throughout the economic downturn.
YIELD SPREAD
BBB-RATED REITS LESS BBB-RATED INDUSTRIALS
Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jun-02
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
15 23 34 143 82 66 83 76 24 33 -18
Source: Merrill Lynch
To be sure, there are several things that must happen for REITs to continue
to perform well. Foremost is that the economy must indeed continue on the path
toward recovery, without which real estate conditions and the outlook for
earnings will worsen. It is our sense that the market has already begun to
factor a stronger economy with healthy job growth into REIT valuations. In
addition, discipline must be maintained with respect to development so that any
new demand for space is not immediately satisfied with new supply. Related to
this, of course, is that the low interest rate environment and strength of real
estate credit must not encourage speculative development unwarranted by
fundamentals.
Despite the strong performance of REIT shares, we continue to view their
valuations as well within fair and rational bounds. On average, REITs trade at
around 10x cash flow, compared to a peak of 14x and a long-term average of 12x.
Also on average, REITs are currently trading close to the net asset values of
their underlying properties, a level that is consistent with the historical
average. The direction of net asset value is an important factor for share
prices, and the prospect of improving asset values as the real estate recovery
proceeds gives us further confidence in current valuations. Importantly, based
on the high current dividend yield of REITs, their
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
exceptional dividend growth potential, and the prospect of total returns from
other assets, which is barely more than REIT current yields alone, we believe
that REITs should continue to deliver acceptable long-term total returns.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
GREG E. BROOKS
GREG E. BROOKS
Portfolio Manager
Cohen & Steers is online at WWW.COHENANDSTEERS.COM
We have recently enhanced both the look and features of our
website 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 WWW.COHENANDSTEERS.COM
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 2002 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD*
----------- ------------ ------------
EQUITIES 100.19%
COMMON STOCK 76.40%
APARTMENT/RESIDENTIAL 9.37%
Apartment Investment & Management
Co. -- Class A...................... 256,400 $ 12,614,880 6.67%
AvalonBay Communities.................. 129,800 6,061,660 6.00
Gables Residential Trust............... 431,000 13,761,830 7.55
Home Properties of New York............ 383,000 14,531,020 6.33
Post Properties........................ 481,800 14,531,088 10.34
Summit Properties...................... 259,800 6,066,330 8.14
United Dominion Realty Trust........... 896,700 14,123,025 7.05
------------
81,689,833
------------
DIVERSIFIED 2.04%
Colonial Properties Trust.............. 457,100 17,804,045 6.78
------------
HEALTH CARE 10.93%
Health Care Property Investors......... 516,500 22,157,850 7.55
Health Care REIT....................... 1,079,325 32,325,784 7.81
Nationwide Health Properties........... 1,410,300 26,443,125 9.81
Ventas................................. 1,124,400 14,336,100 7.45
------------
95,262,859
------------
INDUSTRIAL 2.36%
First Industrial Realty Trust.......... 501,300 16,467,705 8.28
ProLogis............................... 158,100 4,110,600 5.46
------------
20,578,305
------------
OFFICE 25.45%
Arden Realty........................... 530,300 15,087,035 7.10
Boston Properties...................... 313,800 12,536,310 6.11
Brandywine Realty Trust................ 779,400 20,186,460 6.80
CarrAmerica Realty Corp. .............. 140,000 4,319,000 6.48
Crescent Real Estate Equities Co. ..... 911,300 17,041,310 8.02
Equity Office Properties Trust......... 1,141,100 34,347,110 6.64
Highwoods Properties................... 944,300 24,551,800 9.00
Mack-Cali Realty Corp. ................ 774,200 27,213,130 7.06
Prentiss Properties Trust.............. 809,300 25,695,275 7.06
Vornado Realty Trust................... 884,543 40,865,886 5.71
------------
221,843,316
------------
See accompanying notes to financial statements.
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5
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2002 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD*
----------- ------------ ------------
OFFICE/INDUSTRIAL 5.35%
Kilroy Realty Corp..................... 119,800 $ 3,204,650 7.40%
Liberty Property Trust................. 758,200 26,537,000 6.74
Reckson Associates Realty
Corp. -- Class B.................... 663,800 16,926,900 10.18
------------
46,668,550
------------
SHOPPING CENTER 20.90%
COMMUNITY CENTER 10.59%
Developers Diversified Realty Corp..... 1,747,378 39,316,005 6.76
Federal Realty Investment Trust........ 441,200 12,225,652 6.93
Kimco Realty Corp. .................... 100,000 3,349,000 6.21
Kramont Realty Trust................... 1,293,300 20,679,867 8.13
Urstadt Biddle Properties -- Class A... 544,000 6,201,600 7.19
Weingarten Realty...................... 297,147 10,519,004 6.27
------------
92,291,128
------------
REGIONAL MALL 10.31%
CBL & Associates Properties............ 14,100 571,050 5.48
Glimcher Realty Trust.................. 217,400 4,021,900 10.40
Macerich Co. .......................... 1,280,757 39,703,467 7.10
Mills Corp. ........................... 1,198,900 37,165,900 7.06
Taubman Centers........................ 553,700 8,443,925 6.69
------------
89,906,242
------------
TOTAL SHOPPING CENTER.................. 182,197,370
------------
TOTAL COMMON STOCK
(Identified cost -- $631,003,371) 666,044,278
------------
PREFERRED STOCK 23.79%
APARTMENT/RESIDENTIAL 4.06%
Apartment Investment & Management Co.,
8.75%, Series D........................ 8,600 213,280 8.79
Apartment Investment & Management Co.,
10.10%, Series R....................... 950,000 25,080,000 9.47
BRE Properties, 8.08%, Series B.......... 169,000 4,233,450 8.06
Home Properties of New York, 9.00%,
Series F............................... 200,000 5,380,000 8.36
Mid-America Apartment Communities,
8.875%, Series B....................... 21,800 545,654 8.87
------------
35,452,384
------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2002 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD*
----------- ------------ ------------
HEALTH CARE 0.08%
Health Care Property Investments,
8.70%, Series B..................... 10,000 $ 253,700 8.59%
Health Care Property Investments,
8.60%, Series C..................... 18,800 470,940 8.58
------------
724,640
------------
HOTEL 6.22%
FelCor Lodging Trust, 9.00%,
Series B............................ 1,004,800 24,999,424 9.04
Innkeepers USA Trust, 8.625%,
Series A............................ 80,300 1,975,380 8.78
LaSalle Hotel Properties, 10.25%,
Series A............................ 1,000,000 27,250,000 9.39
------------
54,224,804
------------
INDUSTRIAL 0.02%
Centerpoint Properties Trust, 8.48%,
Series A............................ 8,300 210,405 8.35
------------
OFFICE 5.90%
CarrAmerica Realty Corp., 8.57%,
Series B............................ 21,000 531,300 8.46
CarrAmerica Realty Corp., 8.55%,
Series C............................ 50,100 1,268,031 8.46
Crescent Real Estate Equities Co.,
6.75%, Series A (Convertible)....... 1,888,900 36,795,772 8.68
#Highwoods Properties, 8.625%,
Series A............................ 13,195 12,807,397 8.88
------------
51,402,500
------------
OFFICE/INDUSTRIAL 0.16%
Liberty Property Trust, 8.80%,
Series A........................... 5,800 147,030 8.68
PS Business Parks, 9.25%, Series A..... 10,800 276,210 9.08
PS Business Parks, 8.75%, Series F..... 11,100 279,942 8.68
#ProLogis, 8.54%, Series C............. 4,000 196,500 8.69
ProLogis, 8.75%, Series E.............. 18,000 465,840 8.46
------------
1,365,522
------------
SHOPPING CENTER 7.35%
COMMUNITY CENTER 4.28%
Commercial Net Lease Realty, 9.00%,
Series A............................ 25,000 629,500 8.94
Developers Diversified Realty Corp.,
8.60%, Series F..................... 1,039,400 25,933,030 8.62
Federal Realty Investment Trust, 8.50%,
Series B............................ 310,300 7,974,710 8.29
New Plan Excel Realty Trust, 8.625%,
Series B............................ 110,100 2,752,500 8.64
------------
37,289,740
------------
OUTLET CENTER 0.08%
#Chelsea Property Group, 8.375%,
Series A.......................... 14,000 655,375 8.95
------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2002 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD*
----------- ------------ ------------
REGIONAL MALL 2.99%
CBL & Associates Properties, 8.75%,
Series B............................ 430,000 $ 21,594,600 8.72%
Rouse Capital, 9.25%, Series Z......... 30,000 756,000 9.17
Simon Property Group, 8.75%, Series F.. 30,000 786,300 8.36
Taubman Centers, 8.30%, Series A....... 127,600 2,973,080 8.93
------------
26,109,980
------------
TOTAL SHOPPING CENTER.................. 64,055,095
------------
TOTAL PREFERRED STOCK
(Identified cost -- $200,391,629) 207,435,350
------------
TOTAL EQUITIES (Identified
cost -- $831,395,000)........... 873,479,628
------------
PRINCIPAL
AMOUNT
-----------
COMMERCIAL PAPER 1.32%
American Express Credit Corp., 1.89%, due
7/1/02 (Identified cost -- $11,513,000) $11,513,000 11,513,000
----------- ------------
TOTAL INVESTMENTS (Identified
cost -- $842,908,000) ............... 101.51% 884,992,628
LIABILITIES IN EXCESS OF OTHER ASSETS AND
LIQUIDATION VALUE OF TAXABLE AUCTION
MARKET PREFERRED SHARES ............ (33.63)% (293,188,446)
-------- ------------
NET ASSETS -- COMMON STOCK (Equivalent to $15.40
per share based on 38,432,243 shares of
capital stock outstanding) ........... 67.88% 591,804,182
-------- ------------
NET ASSETS -- TAXABLE AUCTION MARKET PREFERRED
SHARES SERIES T, SERIES W, SERIES TH, AND
SERIES F (Equivalent to $25,000 per share
based on 2,800 shares outstanding for each
class) ............................... 32.12% 280,000,000
-------- ------------
TOTAL NET ASSETS ...................... 100.00% $871,804,182
-------- ------------
-------- ------------
-------------------
* 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.
# Security trades infrequently. The Fund prices this security at fair value
using procedures approved by the Fund's Board of Directors.
## 75,105 shares segregated as collateral for the interest rate swaps.
See accompanying notes to financial statements.
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8
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2002 (UNAUDITED)
ASSETS:
Investments in securities, at value (Identified
cost -- $842,908,000) (Note 1)........................ $884,992,628
Cash.................................................... 662
Dividends receivable.................................... 5,197,094
Other assets............................................ 40,543
------------
Total Assets........................................ 890,230,927
------------
LIABILITIES:
Payable for investment securities purchased............. 9,967,267
Unrealized depreciation on interest rate swap
transactions (Note 6)................................. 6,705,207
Payable for dividends declared on common shares......... 599,297
Interest payable on interest rate swap transactions..... 415,288
Payable to investment manager........................... 375,245
Payable for dividends declared on preferred shares...... 214,368
Other liabilities....................................... 150,073
------------
Total Liabilities................................... 18,426,745
------------
TOTAL NET ASSETS, including liquidation value of Preferred
Shares.................................................... $871,804,182
------------
------------
LIQUIDATION VALUE OF PREFERRED SHARES:
Taxable auction market preferred shares, Series T
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ $ 70,000,000
Taxable auction market preferred shares, Series W
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series TH
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series F
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
------------
$280,000,000
------------
------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES consist of:
Common stock ($0.001 par value, 38,432,243 shares issued
and outstanding) (Notes 1 and 5)...................... $555,389,974
Undistributed net investment income..................... 815,270
Accumulated net realized gain on investments............ 219,517
Net unrealized appreciation on investments and interest
rate swap transactions................................ 35,379,421
------------
$591,804,182
------------
------------
NET ASSET VALUE PER COMMON SHARE:
($591,804,182 [div] 38,432,243 shares outstanding)........ $ 15.40
------------
------------
MARKET PRICE PER COMMON SHARE............................... $ 15.18
------------
------------
MARKET PRICE PREMIUM/(DISCOUNT) TO NET ASSET VALUE PER
COMMON SHARE.............................................. (1.43)%
------------
------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 2002* (UNAUDITED)
Investment Income (Note 1):
Dividend income......................................... $16,978,034
Interest income......................................... 789,909
-----------
Total Income....................................... 17,767,943
-----------
Expenses:
Investment Management Fees (Note 2)..................... 2,183,916
Interest expense on interest rate swap transaction
(Note 6)............................................. 1,547,834
Administration fees (Note 2)............................ 106,064
Professional fees....................................... 48,826
Custodian fees and expenses............................. 47,888
Reports to shareholders................................. 26,744
Directors' fees and expenses (Note 2)................... 15,505
Transfer agent fees..................................... 9,175
Miscellaneous........................................... 200,489
-----------
Total Expenses..................................... 4,186,441
Reduction of Expenses (Note 2).......................... (822,180)
-----------
Net Expenses....................................... 3,364,261
-----------
Net Investment Income....................................... 14,403,682
-----------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain on investments........................ 219,517
Net unrealized appreciation on investments.............. 42,084,628
Net unrealized depreciation on interest rate swap
transactions......................................... (6,705,207)
-----------
Net realized and unrealized gain/(loss) on
investments..................................... 35,598,938
-----------
Net Increase in Net Assets Resulting from Operations........ 50,002,620
-----------
Less Dividends and Distributions to Preferred Stock
Shareholders from:
Net investment income................................... (1,486,800)
-----------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $48,515,820
-----------
-----------
-------------------
* The Fund commenced operations on February 28, 2002.
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES
FOR THE PERIOD
FEBRUARY 28, 2002*
THROUGH JUNE 30, 2002
(UNAUDITED)
-----------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income.............................. $ 14,403,682
Net realized gain on investments................... 219,517
Net unrealized appreciation on investments and
interest rate swap transactions................. 35,379,421
------------
Net increase in net assets resulting from
operations.................................. 50,002,620
------------
Less Dividends and Distributions to Preferred Stock
Shareholders from:
Net investment income.............................. (1,486,800)
------------
Net increase in net assets from operations
applicable to common shares..................... 48,515,820
------------
Less Dividends and Distributions to Common Stock
Shareholders from:
Net investment income.............................. (12,101,612)
------------
Capital Stock Transactions (Note 5):
Increase in net assets from common share
transactions.................................... 557,997,269
Increase in net assets from common shares issued to
shareholders for reinvestment of dividends...... 646,745
Decrease in net assets from underwriting
commissions and offering
expenses from issuance of Preferred Shares...... (3,356,016)
------------
Net increase in net assets from capital stock
transactions................................ 555,287,998
------------
Total increase in net assets applicable to
common shares............................... 591,702,206
Net Assets Applicable to Common Shares:
Beginning of period................................ 101,976
------------
End of period...................................... $591,804,182
------------
------------
-------------------
* Commencement of Operations.
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout the period and other performance information derived from the
Financial Statements. It should be read in conjunction with the Financial
Statements and notes thereto.
FOR THE PERIOD
FEBRUARY 28, 2002*
THROUGH
JUNE 30, 2002
PER SHARE OPERATING PERFORMANCE: (UNAUDITED)
-------------------------------- --------------------
Net asset value per common share, beginning of period....... $ 14.57
----------
Income from investment operations:
Net investment income................................... 0.38
Net realized and unrealized gain/(loss) on
investments........................................... 0.94
----------
Total income from investment operations............. 1.32
----------
Less dividends and distributions to preferred shareholders
from:
Net investment income................................... (0.04)
----------
Total from investment operations applicable to
common shares..................................... 1.28
----------
----------
Less: Offering and organization costs charged to paid-in
capital -- Common Shares.................................. (0.03)
Offering and organization costs charged to paid-in
capital -- Preferred Shares........................... (0.09)
Dilutive effect of common share offering................ (0.01)
----------
Total offering and organization costs............... (0.13)
----------
Less: dividends and distributions to common shareholders
from:
Net investment income................................... (0.32)
----------
Net increase in net asset value per common share............ 0.83
----------
Net asset value, per common share, end of period............ $ 15.40
----------
----------
Market value, per common share, end of period............... $ 15.18
----------
----------
---------------------------------------------------------------------------------
Net asset value total return(1)............................. 8.13%(2)
----------
----------
Market value return(1)...................................... 3.25%(2)
----------
----------
---------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
-------------------------
Net assets applicable to common shares, end of period (in
millions)................................................. $ 591.8
----------
----------
Ratio of expenses to average daily net assets applicable to
common shares (before expense reduction).................. 2.20%(3)
----------
----------
Ratio of expenses to average daily net assets applicable to
common shares (net of expense reduction).................. 1.77%(3)
----------
----------
Ratio of net investment income to average daily net assets
applicable to common shares
(before expense reduction)................................ 7.14%(3)
----------
----------
Ratio of net investment income to average daily net assets
applicable to common shares
(net of expense reduction)................................ 7.57%(3)
----------
----------
Ratio of expenses to average daily net assets (before
expense reduction)........................................ 1.63%(3)
----------
----------
Ratio of expenses to average daily net assets (net of
expense reduction)........................................ 1.31%(3)
----------
----------
Portfolio turnover rate..................................... 0.95%(2)
----------
----------
See accompanying notes to financial statements.
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12
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS -- (CONTINUED)
PREFERRED SHARES:
-----------------
Liquidation value, end of period (in 000's)................. $ 280,000
----------
----------
Total shares outstanding (in 000's)......................... 11
----------
----------
Asset coverage per share.................................... $77,839.66
----------
----------
Liquidation preference per share............................ $25,000.00
----------
----------
Average market value per share.............................. $25,000.00(4)
----------
----------
-------------------
* Commencement of operations.
(1) 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 dividends as
reinvested.
(2) Not annualized.
(3) Annualized.
(4) Based on weekly prices.
See accompanying notes to financial statements.
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13
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on August 22, 2001 and is
registered under the Investment Company Act of 1940, as amended, as a
non-diversified, closed-end management investment company. The Fund had no
operations until February 15, 2002 when it sold 7,000 shares of common stock for
$100,275 to Cohen & Steers Capital Management, Inc. (the 'Investment Manager').
In addition, on February 27, 2002, the Investment Manager wired $1,701 to the
Fund to pay the difference in net asset value ('NAV') of $14.325 on
February 14, 2002 with the actual NAV of $14.568 at the closing on February 28,
2002. Investment operations commenced on February 28, 2002.
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 accounting principles in the United States of
America. 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. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the Board of Directors shall determine in good faith
to reflect its fair market value.
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 Investment
Manager 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. However, certain fixed-income securities may be valued on the
basis of prices provided by a pricing service when such prices are believed by
the Board of Directors to reflect the fair market value of such securities.
Where securities are traded on more than one exchange and also over-the-counter,
the
--------------------------------------------------------------------------------
14
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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.
Interest Rate Swaps: The Fund uses interest rate swaps in connection with
the sale of Taxable Auction Market Preferred Shares. In an interest rate swap,
the Fund agrees to pay the other party to the interest rate swap (which is known
as the 'Counterparty') a fixed rate payment in exchange for the Counterparty
agreeing to pay the Fund a variable rate payment that is intended to approximate
the Fund's variable rate payment obligation on the Taxable Auction Market
Preferred Shares. The payment obligation is based on the notional amount of the
swap. Depending on the state of interest rates in general, the use of interest
rate swaps could enhance or harm the overall performance of the common shares.
The market value of interest rate swaps is based on pricing models that consider
the time value of money, volatility, the current market and contractual prices
of the underlying financial instrument.
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. Discounts and premiums of securities purchased are
amortized using the scientific method over their respective lives.
Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid to common shareholders monthly. Dividends to
shareholders are recorded on the exdividend date. 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.
Net realized capital gains, unless offset by any available capital loss
carryforward, are distributed to shareholders annually.
Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. Federal income tax regulations which may
differ form generally accepted accounting principals.
Series T, Series TH, and Series F preferred shares pay dividends based on a
variable interest rate set at auctions, normally held every seven days.
Dividends for Series T, Series TH, and Series F preferred shares are accrued for
the subsequent seven day period on the auction date. In most instances,
dividends are payable every seven days, on the first business day following the
end of the dividend period.
Series W preferred shares pay dividends based on a variable interest rate
set at auctions, normally held every 28 days. Dividends for Series W preferred
shares are accrued for the subsequent 28 day period on the auction date. In most
instances, dividends are payable every 28 days, on the first business day
following the end of the dividend period.
--------------------------------------------------------------------------------
15
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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.
NOTE 2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS
WITH AFFILIATES.
Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
'Investment Manager') serves as the investment manager to the Fund, pursuant to
an Investment Management Agreement (the 'Management Agreement'). The Investment
Manager furnishes a continuous investment program for the Fund's portfolio,
makes the day-to-day investment decisions for the Fund and generally manages the
Fund's investments in accordance with the stated polices of the Fund, subject to
the general supervision of the Board of Directors of the Fund. The Investment
Manager also performs certain administrative services for the Fund. For the
services under the Management Agreement, the Fund pays the Investment Manager a
monthly management fee, computed daily and payable monthly at an annual rate of
0.85% of the Fund's average daily managed asset value. Managed asset value is
the net asset value of the common shares plus the liquidation preference of the
preferred shares. For the period February 28, 2002 (commencement of operations)
through June 30, 2002, the Fund incurred investment management fees of
$2,183,916.
The Investment Manager has contractually agreed to waive its investment
management fee in the amount of 0.32% of average daily managed asset value for
the first 5 fiscal year of the Fund's operations, 0.26% of average daily managed
asset value in year 6, 0.20% of average daily managed asset value in year 7,
0.14% of average daily managed asset value in year 8, 0.08% of average daily
managed asset value in year 9 and 0.02% of average daily managed asset value in
year 10. As long as this expense cap continues, it may lower the Fund's expenses
and increase its total return. For the period February 28, 2002 (commencement of
operations) through June 30, 2002, the Investment Manager waived management fees
of $822,180.
Administration Fees: Pursuant to an administration agreement, the Investment
Manager also performs certain administrative and accounting functions for the
Fund and receives a fee of 0.02% of the Fund's average daily managed asset
value. For the period February 28, 2002 (commencement of operations) through
June 30, 2002, the Fund incurred $51,386 in administration fees.
Director's Fees: Certain directors and officers of the Fund are also
directors, officers and/or employees of the Investment Manager. None of the
directors and officers so affiliated received compensation from the Fund for
their services as directors and/or officers. Fees and related expenses accrued
for non-affiliated directors totaled $15,505 for the period February 28, 2002
(commencement of operations) through June 30, 2002.
--------------------------------------------------------------------------------
16
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments, for the
period February 28, 2002 (commencement of operations) through June 30, 2002
totaled $837,070,645 and $5,895,163, respectively.
NOTE 4. INCOME TAXES
At June 30, 2002 the cost of investments, net unrealized
appreciation/(depreciation) and undistributed long-term capital gains/capital
loss carryforwards for federal income tax purposes were as follows:
Aggregate cost.................................... $831,395,000
------------
------------
Gross unrealized appreciation..................... $ 47,404,462
Gross unrealized depreciation..................... $ (5,319,834)
------------
Net unrealized appreciation on investments........ $ 42,084,628
Net unrealized depreciation on interest rate swap
transactions.................................... $ (6,705,207)
------------
Net unrealized appreciation....................... $ 35,379,421
------------
------------
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to return of capital and capital gain
distributions received by the Fund on portfolio securities. To the extent such
differences are permanent in nature, such amounts are reclassified within the
capital accounts.
NOTE 5. CAPITAL STOCK
On February 28, 2002, the Fund completed the initial public offering of
34,000,000 shares of common stock. Proceeds paid to the Fund amounted to
$494,292,000 after deduction of underwriting commissions and offering expenses
of $15,708,000.
On March 8, 2002, the Fund's underwriters exercised an option to purchase an
additional 2,000,000 shares of common stock. Proceeds paid to the Fund amounted
to $29,076,000 after deduction of underwriting commissions and offering expenses
of $924,000.
On March 21, 2002, the Fund's underwriters excercised an option to purchase
an additional 1,700,000 shares of common stock. Proceeds paid to the Fund
amounted to $24,714,600 after deduction of underwriting commissions and offering
expenses of $785,400.
On April 8, 2002, the Fund's underwriters excercised an option to purchase
an additional 681,983 shares of common stock. Proceeds paid to the Fund amounted
to $9,914,669 after deduction of underwriting commissions and offering expenses
of $315,076.
--------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
During the period February 28, 2002 (commencement of operations) through
June 30, 2002, the Fund issued 43,260 shares of common stock for the
reinvestment of dividends.
On April 4, 2002, the Fund issued 2,800 Taxable Auction Market Preferred
Shares Auction Rate Cumulative Preferred Shares, Series T (par value $0.001),
2,800 Taxable Auction Market Preferred Shares Auction Rate Cumulative Preferred
Shares, Series W (par value $0.001), 2,800 Taxable Auction Market Preferred
Shares Auction Rate Cumulative Preferred Shares, Series TH (par value $0.001),
and 2,800 Taxable Auction Market Preferred Shares Auction Rate Cumulative
Preferred Shares, Series F (par value $0.001) (together referred to as
'Preferred Shares'). Proceeds paid to the Fund amounted to $276,643,984 after
deduction of underwriting commissions and offering expenses of $3,356,016. This
issue has received a 'AAA/Aaa' rating from Standard & Poor's and Moody's.
Preferred Shares are senior to the Fund's Common Shares and will rank on a
parity with shares of any other series of Preferred Shares, and with shares of
any other series of preferred stock of the Fund, as to the payment of dividends
and the distribution of assets upon liquidation. If the Fund does not timely
cure a failure to (1) maintain a discounted value of its portfolio equal to the
Preferred Shares Basic Maintenance Amount, (2) maintain the 1940 Act Preferred
Shares Asset Coverage, or (3) file a required certificate related to asset
coverage on time, the Preferred Shares will be subject to a mandatory redemption
at the redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon to the date fixed for redemption. To the extent
permitted under the 1940 Act and Maryland Law, the Fund at its option may
without consent of the holders of Preferred Shares, redeem Preferred Shares
having a dividend period of one year or less, in whole, or in part, on the
business day after the last day of such dividend period upon not less than 15
calendar days and not more than 40 calendar days prior to notice. The optional
redemption price is $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon to the date fixed for redemption.
The Fund's Common shares and Preferred Shares have equal voting rights of
one vote per share and vote together as a single class. In addition, the
affirmative vote of the holders a majority, as defined in the 1940 Act, of the
outstanding Preferred Shares shall be required to (1) approve any plan of
reorganization that would adversely affect the Auction Rate Cumulative Preferred
Shares and (2) any matter that materially and adversely affects the rights,
preferences, or powers of that series.
NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS
The Fund has entered into three interest rate swap agreements with Merrill
Lynch Derivative Products, AG. Under the agreements the Fund receives a floating
rate and pays a respective fixed rate. Details of the swaps at June 30, 2002 are
as follows:
--------------------------------------------------------------------------------
18
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
UNREALIZED
NOTIONAL FLOATING RATE* TERMINATION APPRECIATION/
AMOUNT FIXED RATE (RATE RESET MONTHLY) DATE (DEPRECIATION)
------ ---------- -------------------- ---- --------------
$46,000,000 4.560% 1.844% April 5, 2005 $(1,079,426)
$46,000,000 5.210% 1.844% April 5, 2007 (1,568,060)
$46,000,000 5.580% 1.844% April 5, 2009 (1,950,107)
-----------
$(4,597,593)
-----------
-----------
---------
* Based on London Interbank Offered Rate (LIBOR).
The Fund has entered into three interest rate swap agreements with UBS AG.
Under the agreements, the Fund receives a floating rate and pays a respective
fixed rate. Details of the swaps at June 30, 2002 are as follows:
UNREALIZED
NOTIONAL FLOATING RATE* TERMINATION APPRECIATION/
AMOUNT FIXED RATE (RATE RESET MONTHLY) DATE (DEPRECIATION)
------ ---------- -------------------- ---- --------------
$24,000,000 4.450% 1.840% April 15, 2005 $ (487,783)
$24,000,000 5.120% 1.840% April 15, 2007 (720,446)
$24,000,000 5.495% 1.840% April 15, 2009 (899,385)
-----------
$(2,107,614)
-----------
-----------
---------
* Based on London Interbank Offered Rate (LIBOR).
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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19
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COHEN & STEERS QUALITY INCOME 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
FOR CAPITAL APPRECIATION: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
SPECIAL EQUITY FUND INSTITUTIONAL REALTY SHARES
IDEAL FOR INVESTORS SEEKING MAXIMUM CAPITAL IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
APPRECIATION, INVESTING IN A LIMITED NUMBER RETURN THROUGH BOTH CURRENT INCOME AND
OF COMPANIES ENGAGED IN THE REAL ESTATE OR CAPITAL APPRECIATION, INVESTING PRIMARILY IN
RELATED INDUSTRIES REITS
CONCENTRATED, HIGHLY FOCUSED PORTFOLIO OFFERS LOW TOTAL EXPENSE RATIO
SYMBOL: CSSPX HIGHER MINIMUM PURCHASE REQUIRED
SYMBOL: CSRIX
FOR MORE INFORMATION ABOUT ANY COHEN & STEERS FUND
OR TO OBTAIN A PROSPECTUS PLEASE CONTACT US AT:
1-800-330-REIT, OR VISIT OUR WEBSITE AT WWW.COHENANDSTEERS.COM
THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT EACH FUND INCLUDING ALL CHARGES AND EXPENSES,
AND SHOULD BE READ CAREFULLY BEFORE YOU INVEST.
--------------------------------------------------------------------------------
20
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
OFFICERS AND DIRECTORS KEY INFORMATION
Robert H. Steers INVESTMENT MANAGER
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 SUB-ADMINISTRATOR AND CUSTODIAN
Director State Street Bank and Trust Company
225 Franklin Street
Bonnie Cohen Boston, MA 02110
Director
TRANSFER AGENT -- COMMON SHARES
George Grossman Equiserve Trust Company
Director 150 Royall Street
Canton, MA 02021
Richard J. Norman (800) 426-5523
Director
TRANSFER AGENT -- PREFERRED SHARES
Willard H. Smith Jr. The Bank of New York
Director 100 Church Street
New York, NY 10007
Greg E. Brooks
Vice President LEGAL COUNSEL
Simpson Thacher & Bartlett
Adam Derechin 425 Lexington Avenue
Vice President and Assistant New York, NY 10017
Treasurer
New York Stock Exchange Symbol: RQI
Lawrence B. Stoller
Assistant Secretary 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.
--------------------------------------------------------------------------------
21
COHEN & STEERS
--------------------------
QUALITY INCOME REALTY FUND
SEMI-ANNUAL REPORT
JUNE 30, 2002
COHEN & STEERS
QUALITY INCOME REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
STATEMENT OF DIFFERENCES
------------------------
The division sign shall be expressed as .............................. [div]