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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
April 22, 2002
To Our Shareholders:
We are pleased to submit to you our first report for the period ended March
31, 2002. The net asset value per common share at that date was $15.00. The Fund
commenced operations on February 28, 2002 and as of March 31, 2002 had net
assets of $565.7 million and was 89% invested. Subsequent to quarter end, the
underwriters' final over-allotment was exercised, and the Fund now has 38.4
million common shares outstanding. The Fund also declared $0.105 per share
monthly dividends payable to common shareholders of record on April 15, 2002,
May 15, 2002, and June 14, 2002.
In addition, on April 4, 2002, the Fund issued $280 million in Taxable
Auction Market Preferred Shares. The proceeds of this issue, which received a
'AAA/aaa' rating from Standard & Poor's and Moody's, will be used to make
additional investments in real estate securities. In order to lock in the
dividend rate on a significant portion of the Taxable Auction Market Preferred
Shares financing, the Fund thereafter entered into interest rate swaps with a
notional value of $210 million.
INVESTMENT REVIEW
REIT performance, in general, continued to excel in the first quarter, with
the averages reaching new highs and substantially outdistancing all of the major
stock market indexes. Every REIT property sector advanced in the first quarter,
with the best performance being turned in by the Hotel sector, which was up
26.2%, as investors anticipated a strong rebound in this most economically
sensitive sector. The Regional Mall sector (+11.9%) performed well for similar
reasons, and because of its consistent earnings growth during the recent period
of economic weakness. The weakest sectors in the quarter were Apartment (+4.4%),
which began the year at a very high relative valuation, and Office (+5.2%),
whose fundamentals are not generally expected to respond as quickly to renewed
economic growth.
More than ever, it appears that investors have begun to accept REITs as an
asset class. Already this year, flows into real estate mutual funds have reached
a five-year high. REIT equity issuance was about $2.5 billion in the first
quarter, up from $356 million in first quarter 2001. REIT bond issuance,
however, at $2.0 billion, was down 47% from last year's $3.8 billion. Some
observers compare recent trends to those of the mid-1990's REIT bull market. We,
however, believe today's environment is completely different. That previous bull
market was the result of a unique cyclical growth opportunity: REITs were able
to acquire property from distressed owners at attractive prices and to finance
those acquisitions at favorable terms. Today, by contrast, despite ready access
to debt and equity capital, REITs have found opportunities to grow via
acquisitions scarce, as real estate, having been redistributed in the previous
cycle, is generally held in very strong hands. In addition, because of the
economic slowdown and the decline in the demand for space, there are very few
new development opportunities that make economic sense.
1
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
In our opinion, the recent change in investor sentiment toward REITs is the
result of the steady performance of property investments during the economic
slowdown, and the ability of REITs to maintain earnings and dividend growth in
more challenging times. The performance of REITs is in marked contrast to the
decline in overall stock market values over the past two years and to the record
decline in corporate profits registered in 2001. Indeed, the past several years
have clearly demonstrated the portfolio diversification benefits of REITs.
In addition, there appears to be a renewed focus on income as a primary
source of investment return. As investors have reduced their long-term return
expectations for many major asset classes, the attractiveness of REIT dividends
has never been greater. At the beginning of the year, the current yield of REITs
(7.4%) far exceeded that offered by all other equities and was higher than many
fixed-income investments. Unlike fixed-income investments, however, REITs offer
the possibility of growth-and, as the following table demonstrates, REIT
dividend growth over the past three years has been substantial. Nearly every one
of the 50 largest REITs (which in total represent about 75% of the market
capitalization of the REIT universe) increased its dividend per share over the
past two years. Excluding Hotel REITs, which were the casualties of last year's
unusual decline in travel, the REIT dividend record is nearly perfect, with only
one company reducing its dividend in each of the past two years. Further, thus
far in 2002, 20 companies, or 40% of this group, have already increased their
dividend payouts. Considering that the past two years were weak for real estate
fundamentals, one can only imagine the dividend growth potential of REITs in the
economic and real estate upturns that we envision for late-2002 and beyond.
Dividend Growth per Share
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1999 2000 2001
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50 Largest REITs
Weighted-Average Growth 6.3% 6.4% 7.0%
# of Companies Increasing Dividends 46 44 44
# of Companies Reducing Dividends 0 1 3
50 Largest REITs - ex Hotels
Weighted-Average Growth 6.6% 6.1% 10.9%
# of Companies Increasing Dividends 48 46 46
# of Companies Reducing Dividends 0 1 1
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In a partial reversal of last year's experience, the performance gap between
the higher-yielding, smaller-cap companies and the lower-yielding, larger-cap
companies has begun to close. While all sectors produced strong positive returns
in the quarter, it appears that the faster-growing companies have begun to
outperform the higher-yielding companies. This is logical, considering that
interest rates, whose low levels caused investors to flock to the
higher-yielding companies last year, have begun to rise in 2002. Further, it
appears that the more recession-resistant sectors have begun to underperform,
possibly the result of investors believing that the recession may be over. For
example, community center owners returned 6.4% in the quarter, versus 11.4% for
the mall owners. The
2
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
largest companies have yet to uniformly become market-performance leaders;
however, we believe that as the economic and real estate recoveries progress,
leadership by the larger companies should resume.
INVESTMENT OUTLOOK
It may seem ironic that the strong performance of REITs has coincided with
evidence that real estate fundamentals continue to deteriorate. Vacancy rates
for every property type are expected to rise for much of this year, as the
delivery of new space is greater than the demand for space. Furthermore, some
observers have suggested that in some regions the Office sector may not begin to
recover until 2004. As a result, many analysts have reduced their earnings
growth estimates for both 2002 and 2003. Rising interest rates might well
reverse the trends of the past year, whereby REITs had access to low-cost debt
capital and investors were attracted to the group's above-average dividend
yields. Compounding this situation is the fact that, as a result of their
outstanding performance, the share prices of many REITs are believed by some to
now exceed their underlying asset values. In fact, some analysts' most
optimistic return expectations for 2002 have been met in just the first quarter;
as a result, these analysts are now recommending the sale of REIT stocks.
It is also ironic that REITs, which have proven themselves to be star
performers during and after economic slowdowns, are expected by many to
underperform during economic recoveries. The argument is that in a rebounding
economy better relative growth can be found in industrial and technology
companies. In contrast, we believe that investors look further out. In our
opinion, the market is looking for signs of renewed economic growth and improved
property fundamentals beyond the immediate future. Indeed, there are some very
substantial signs that the economy may be entering a phase of very strong
growth. In addition, the economic slowdown has also led to a slowdown in
construction. Thus, while it may take time for some property markets to return
to a better supply/demand balance, the process of getting there is already
underway. We fully expect that earnings growth will accelerate once absorption
turns positive.
Perhaps the most important issue to reconcile regards valuation. While many
believe that REIT share prices are higher than their net asset values (NAVs) by
about 5%-10%, there is no other measure that even suggests that REITs are
overvalued. REIT stocks, trading on average at less than 10x this year's
expected earnings, are near the bottom of their historical multiple range.
Compared to other financial-market instruments, REITs continue to look extremely
cheap. Indeed, the S&P 500 Index, trading at 23x earnings, is at the upper end
of its historical range, while the NASDAQ multiple is simply stratospheric. Even
with the recent rise in interest rates, the cost of borrowing remains near a
record low. Furthermore, the gap in yields between REITs and Treasuries is still
at the upper end of its historical range. And, although REIT dividend yields are
in the middle of their long-term range, their payout ratios are at an all-time
low. Additionally, the gap between interest rates and the widely accepted real
estate capitalization rates (real estate income as a percentage of asset value)
is the widest it has been in over 30 years, at about 4.5 percentage points. If
cap rates were to decline by as little as 50 basis points, NAVs would rise by
about 12%, turning today's perceived NAV premium into a discount.
The only way we can reconcile the NAV measure with all of the other
valuation measures is to conclude that many analysts' calculations of real
estate values are not realistic. Most assets, particularly real estate, must be
valued based on current and future income in relation to the cost of capital.
Assuming that we are entering a
3
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
period of economic recovery that leads to rising occupancies, rental rates, and
net income, property values should be expected to rise over the next several
years. In addition, investors are likely to put a premium on the ability of
REITs to generate income that grows consistently, with low volatility. Indeed,
as venture capital, private equity, and technology investments have failed to
produce adequate risk-adjusted returns, we believe core property investments are
likely to become a mainstay in many diversified portfolios.
As real estate returns to favor, we expect that REITs will be the investment
choice for many. We believe that the modern REIT era is entering its second wave
of growth, having come through the first by delivering superior returns,
professional management, quality property portfolios, and a high degree of
investor liquidity. While we cannot ignore the fact that REIT share prices have
come a long way over the past two years, we believe that the long-term outlook
for this sector remains extremely bright.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
GREG E. BROOKS
GREG E. BROOKS
Portfolio Manager
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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 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
MARCH 31, 2002 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD*
----------- ------------ --------
EQUITIES 89.23%
COMMON STOCK 72.86%
APARTMENT/RESIDENTIAL 8.71%
Apartment Investment & Management Co. --
Class A....................................... 91,000 $ 4,401,670 6.78%
Gables Residential Trust........................ 419,000 13,009,950 7.76
Home Properties of New York..................... 357,700 12,322,765 6.97
Summit Properties............................... 218,600 5,355,700 7.76
United Dominion Realty Trust.................... 896,700 14,203,728 7.01
------------
49,293,813
------------
DIVERSIFIED 2.36%
Colonial Properties Trust....................... 387,600 13,352,820 7.66
------------
HEALTH CARE 11.51%
Health Care Property Investors.................. 70,300 2,850,665 7.89
Health Care REIT................................ 906,125 25,299,010 8.38
Nationwide Health Properties.................... 1,360,300 27,410,045 9.13
Ventas.......................................... 755,100 9,552,015 7.51
------------
65,111,735
------------
INDUSTRIAL 0.96%
First Industrial Realty Trust................... 51,300 1,757,025 7.94
ProLogis Trust.................................. 158,100 3,691,635 6.08
------------
5,448,660
------------
OFFICE 25.24%
Arden Realty.................................... 230,200 6,537,680 7.11
Brandywine Realty Trust......................... 504,000 12,045,600 7.36
Crescent Real Estate Equities Co. .............. 100,000 1,940,000 7.73
Equity Office Properties Trust.................. 689,100 20,666,109 6.67
Highwoods Properties............................ 844,300 23,716,387 8.33
Mack-Cali Realty Corp. ......................... 489,200 16,965,456 7.15
Prentiss Properties Trust....................... 740,700 21,865,464 7.25
Vornado Realty Trust............................ 884,543 39,061,419 5.98
------------
142,798,115
------------
OFFICE/INDUSTRIAL 1.67%
Kilroy Realty Corp. ............................ 46,000 1,297,660 7.02
Liberty Property Trust.......................... 58,200 1,876,950 7.32
Reckson Associates Realty Corp. -- Class B...... 243,200 6,264,832 10.09
------------
9,439,442
------------
5
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 2002 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD*
----------- ------------ --------
SHOPPING CENTER 22.41%
COMMUNITY CENTER 8.83%
Developers Diversified Realty Corp. ............ 1,747,378 $ 36,694,938 7.24%
Federal Realty Investment Trust................. 23,400 600,678 7.48
New Plan Excel Realty........................... 122,000 2,446,100 8.23
Weingarten Realty............................... 198,098 10,182,237 6.48
------------
49,923,953
------------
REGIONAL MALL 13.58%
Macerich Co. ................................... 1,180,257 35,584,749 7.30
Mills Corp. .................................... 1,090,909 30,501,816 7.83
Taubman Centers................................. 713,800 10,749,828 6.77
------------
76,836,393
------------
TOTAL SHOPPING CENTER........................... 126,760,346
------------
TOTAL COMMON STOCK (Identified
cost -- $397,281,145).................... 412,204,931
------------
PREFERRED STOCK 16.37%
Apartment Investment & Management Co., 10.10%,
Series R...................................... 950,000 24,462,500 9.71
#Developers Diversified Realty Corp., 9.44%,
Series F...................................... 1,000,000 24,350,000 8.83
FelCor Lodging Trust, 9.00%, Series B........... 3,100 76,508 9.12
#Highwoods Properties, 8.625%, Series A......... 10,000 9,455,000 9.12
Home Properties of New York, 9.00%, Series F.... 200,000 4,925,000 9.14
LaSalle Hotel Properties, 10.25%, Series A...... 1,000,000 26,100,000 9.81
Mid-America Apartment Communities, 8.875%,
Series B...................................... 16,800 416,640 8.95
PS Business Parks, 8.75%, Series F.............. 5,200 127,972 8.90
#ProLogis Trust, 8.54%, Series C................ 4,000 191,500 8.92
Taubman Centers, 8.30%, Series A................ 108,900 2,504,700 9.04
------------
TOTAL PREFERRED STOCK (Identified
cost -- $92,336,904)..................... 92,609,820
------------
TOTAL EQUITIES (Identified
cost -- $489,618,049).................... 504,814,751
------------
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
MARCH 31, 2002 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
----------- ------------
COMMERCIAL PAPER 14.86%
American General, 1.60%, due 4/01/02............ $22,000,000 $ 22,000,000
Citicorp, 1.60%, due 4/01/02.................... 22,000,000 22,000,000
Household Finance, 1.60%, due 4/01/02........... 22,000,000 22,000,000
Union Bank of Switzerland Finance, 1.60%, due
4/01/02....................................... 18,038,000 18,038,000
------------
TOTAL COMMERCIAL PAPER (Identified
cost -- $84,038,000)..................... 84,038,000
------------
TOTAL INVESTMENTS (Identified
cost -- $573,656,049) ......................... 104.09% 588,852,751
LIABILITIES IN EXCESS OF OTHER ASSETS ........... (4.09)% (23,132,943)
------ ------------
NET ASSETS -- COMMON STOCK (Equivalent to $15.00 per
share based on 37,707,000 shares of capital stock
outstanding) ................................. 100.00% $565,719,808
------ ------------
------ ------------
-------------------
* Dividend yield is computed by dividing the security's current annual dividend
rate by the last sale price on the principal exchange, or market, 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.
7
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS
MARCH 31, 2002 (UNAUDITED)
NET ASSET VALUE
TOTAL NET ASSETS PER SHARE
--------------------------- ---------------
NET ASSET VALUE:
Beginning of period: 2/28/02**............. $ 101,976## $14.57
Net investment income.................. $ 2,265,933 $ 0.06
Net realized and unrealized gain on
investments......................... 15,269,299 0.40
Offering costs charged to paid-in
capital............................. (1,131,000) (0.03)
------
Capital stock transactions:
Sold.............................. 549,213,600
------------
Net increase in net asset value............ 565,617,832 0.43
------------ ------
End of period: 3/31/2002................... $565,719,808 $15.00
------------ ------
------------ ------
-------------------
* Financial information included in this report has been taken from the records
of the Fund without examination by independent accountants.
** Commencement of operations.
## Amount of seed capital includes an additional contribution of $1,701 from
Cohen & Steers Capital Management, Inc.
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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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8
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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.
9
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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
George Grossman Equiserve Trust Company
Director 150 Royall Street
Canton, MA 02021
Richard J. Norman (800) 426-5523
Director
LEGAL COUNSEL
Willard H. Smith Jr. Simpson Thacher & Bartlett
Director 425 Lexington Avenue
New York, NY 10017
Greg E. Brooks
Vice President New York Stock Exchange Symbol: RQI
Adam Derechin Website: www.cohenandsteers.com
Vice President and Assistant
Treasurer This report is for shareholder
information. This is not a prospectus
Lawrence B. Stoller intended for use in the purchase or sale
Assistant Secretary 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.
10
COHEN & STEERS
QUALITY INCOME REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
--------------------------
QUALITY INCOME REALTY FUND
QUARTERLY REPORT
MARCH 31, 2002