UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act File Number: 811-10481
Cohen & Steers Quality Income Realty Fund, Inc.
(Exact name of registrant as specified in charter)
757 Third Avenue, New York, NY 10017
(Address of principal executive offices) (Zip code)
Robert H. Steers
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, New York 10017
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 832-3232
Date of fiscal year end: December 31
Date of reporting period: December 31, 2002
Item 1. Reports to Stockholders.
The registrant's annual report to shareholders, for the period ended
December 31, 2002, is hereby included.
Item 9. Controls and Procedures.
(b) There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Item 10. Exhibits.
(b) (1) Certification, dated as of February 26, 2003, of Robert H. Steers,
principal executive officer of the registrant.
(b) (2) Certification, dated as of February 26, 2003, of Martin Cohen, principal
financial officer of the registrant.
(b) (3) Certification, dated as of February 26, 2003, of Robert H. Steers, chief
executive officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) (4) Certification, dated as of February 26, 2003, of Martin Cohen, chief
financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
By: /s/ Robert H. Steers, Chairman
Date: February 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert H. Steers, Chairman, Secretary and principal executive officer
Date: February 26, 2003
By: /s/ Martin Cohen, President, Treasurer and principal financial officer
Date: February 26, 2003
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
February 7, 2003
To Our Shareholders:
We are pleased to submit to you our report for the period ended
December 31, 2002. The net asset value per common share at that date was $13.25.
During the quarter ended December 31, 2002, three $0.105 per share monthly
dividends were declared and paid to common shareholders.
INVESTMENT REVIEW
For the quarter, Cohen & Steers Quality Income Realty Fund had a total
return, based on income and change in net asset value, of - 0.8%. This
performance compares to the NAREIT Equity REIT Index's(a) total return of 0.4%.
From February 28, 2002 (commencement of operations) through December 31, 2002,
the fund's total return was - 2.7%, compared to the NAREIT Equity REIT Index's
total return of 2.0%.
For the third year in a row, REITs produced positive absolute returns in a
financial market environment that most equity investors found both challenging
and discouraging. Stock market losses over the past three years reached historic
proportions as expectations for stronger economic growth and, more importantly,
corporate profit growth dimmed continuously throughout the year.
The best performing REIT sectors were those that experienced the highest
earnings growth. Regional mall REITs had a total return of 24.6%, shopping
centers were up 17.8%, and the relatively healthy industrial sector rose 17.4%.
The worst performers were the office and apartment sectors, which returned
- 6.3% and - 6.2% respectively. For the second year in a row small
capitalization REITs outdistanced larger companies by roughly 9% to 2%, a
phenomenon that in our opinion was more the result of declining interest rates
than superior fundamentals.
While REIT share prices escaped the throes of the bear market for the year
as a whole, their fundamentals did not. By year end, prices started catching up
with earnings prospects. In the first half of the year, REITs had a 13.5% total
return. By midyear, however, fears of a return to recession, a decline in
earnings expectations, and the growing threats of war shook even REIT investors'
confidence. Toward year end, these fears became justified as vacancy rates began
to rise at a significant rate. Deterioration was experienced in all sectors with
the exception of retail. Consequently, REIT prices retreated, declining by 13.4%
in the four months from July through October. The prospect of a delayed recovery
in real estate fundamentals (and therefore, REIT earnings) until as late as 2004
dictated this correction in prices. Throughout the second half of the year,
earnings estimates for almost all REITs decayed to the point where a modest
decline in REIT industry earnings is expected for 2003.
-------------------
(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 QUALITY INCOME REALTY FUND, INC.
Given that the fund's inception date was February 28, 2002 and the initial
investment period was not complete until mid-April, the fund's performance
characteristics are reflective of the fact that REITs weakened throughout the
course of the year. The fund's best performing investments were in the regional
mall, shopping center and diversified sectors, which generated total returns of
9.5%, 12.6% and 4.2%, respectively. The common theme among these sectors was the
continued resilience of the consumer even as the economy continued to weaken
throughout the course of the year. Generationally low interest rates translated
into a mortgage refinancing boom, putting more money in consumers' pockets,
clearly a good sign for the retail industry. Conversely, this same phenomenon
had dramatically negative implications for the apartment sector, as home
affordability increased and the rate of home ownership reached its highest level
in history. As a result, the fund's apartment investments experienced a total
return of - 9.5% from inception through the end of the year.
For the first time in 10 years, expectations of a decline in earnings also
precipitated fears of weakening dividend safety. In fact, two multifamily REITs
reduced their dividends in the fourth quarter. It is expected by many that
several more such cuts, particularly in the apartment sector, are in the offing
this year. Again, the speed with which fundamentals deteriorated for some of
these companies was alarming. At year end 2001, REIT free cash flows covered
dividends by a ratio of 1.5, whereas by year end 2002 this ratio declined to
1.3. We believe it is unlikely to go much lower and, as a result, any notion of
widespread dividend cuts is totally unwarranted in our view. Despite this
cyclical downturn, we believe that our portfolio companies are extremely well
capitalized, well managed and well positioned for a cyclical recovery.
In other developments in 2002, net inflows into REIT mutual funds, at
$3.4 billion, plus another $2.3 billion in closed-end REIT funds, were the
highest since 1998 and were consistent throughout the year. This was in contrast
to the persistent flow out of other equity mutual funds. However, despite
favorable investor sentiment REITs raised very little equity capital. There was
only one sizable initial public offering of note, made by Heritage Property
Investment Trust, and $5.8 billion was raised in all other REIT common stock
offerings. Even though interest rates reached and remained at generational lows,
REITs in aggregate did not borrow more in 2002 than in 2001. We believe this
lack of appetite for capital is the result of a shortage of compelling
investment opportunities coupled with a strong investment and capital markets
discipline. Property prices generally rose throughout the year, the result of
the strength of demand for realty investments by those who remained unfazed by
moderating rental income growth. This permitted REITs to transact a record
volume of property sales while at the same time validating our belief that, in
general, REIT stocks continue to trade at discounts to the value of their
underlying assets.
INVESTMENT OUTLOOK
As has been our outlook for the past year, we believe that economic growth
will continue at a moderate pace over the coming quarters and well into 2004.
With unprecedented fiscal and monetary stimulus already in the
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
system, recently introduced additional stimulus, a weakening dollar and the
upcoming presidential election in 2004, this case has only grown stronger.
Perhaps the largest uncertainties that remain ahead are the war on terror (which
will likely last for a long time) and the potential war in Iraq (which, if it
happens, could be fairly short). Our sense is that these concerns are already
discounted in REIT share prices and perhaps the overall stock market as well.
Nonetheless, they will likely increase the popularity of a more conservative,
income-oriented approach to investing that emphasizes absolute returns -- an
approach that we believe will favor REITs.
Currently, we face two misperceptions in our industry. The first is that
REIT share prices are disconnected from real estate and REIT fundamentals. On
the contrary, the previously noted REIT market decline in the second half of
last year most likely discounted currently weak fundamentals. We believe that
REIT share prices remain connected with net asset values, which have been buoyed
by the robust private market. Looking forward, the key to investment success in
2003 will be to accurately project the outlook for profit growth in 2004.
Because real estate is an asset class that has considerable visibility, any
profit recovery will be evident well in advance. In our opinion, the key factors
are economic and job growth, and how they translate into improving health for
real estate markets. Just as there was a collapse in demand for space in the
past two years, we expect to see an improvement in demand as the economic
recovery continues to unfold. Because the supply of new space has been
relatively low for many property types, our expectation is that as the year
progresses we will see sequential improvement in occupancy rates, rental rates
and profits for just about every sector of the REIT industry. If the economy
responds as strongly as we expect, real estate fundamentals in some sectors may
potentially recover as fast as they deteriorated last year.
The second misperception is that if stocks do well in 2003, REITs will not.
History simply does not corroborate this assertion and the diversification
benefits of REITs are extant irrespective of the stock market cycle. Whereas
many analysts have tried to predict REIT performance relative to the stock
market, we believe that this is simply not an appropriate comparison. In
addition, the stock market debacle of the past three years has disillusioned
many investors and encouraged greater investment in what are viewed as more
predictable asset classes, such as real estate. The continued demand for
property investments has stabilized private market values, and there are a
growing number of institutional and individual investors seeking to increase
their exposure to the real estate asset class. The proven success of the REIT
format has attracted much of this capital to the public market. Early estimates
indicate that in 2002 REITs garnered over 20% of institutional investor real
estate commitments, more than double that in 2001. Real estate values should
hold up as long as the economy grows, interest rates do not soar, and the demand
for property investment remains strong -- all of which we expect to happen.
Finally, with interest rates and total return expectations generally very low,
achieving one's investment objective primarily through current income, rather
than significant capital appreciation, may well attract even more investors to
REITs.
The persistent strength of real estate prices has left REITs with very
limited new investment opportunities in many sectors. One result is that we have
seen a return to substantial share buybacks by many REITs. In addition,
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
if REIT share prices languish, we would fully expect that REITs themselves would
be targets of opportunistic investors. Indeed, toward the close of last year,
Simon Property Group, the nation's largest owner of shopping centers, launched a
hostile acquisition campaign for Taubman Centers. While the outcome of this
contest is still undecided, it is representative of the discounts from asset
value at which many public companies today are selling. We believe that for the
companies with the best quality properties, anything more than a modest discount
from NAV will invite corporate action to close that gap, thereby mitigating a
great deal of downside risk.
In terms of portfolio positioning, we enter 2003 with our largest absolute
and relative weighting in the office sector. The major office owners today are
among the most undervalued in our universe, with excellent balance sheets that
afford them significant financial flexibility. They are selling at the greatest
discounts from net asset value, even greater discounts from replacement cost,
and have high dividend yields that we believe are adequately covered by cash
flows. We are maintaining an underweight position in the apartment sector
because of the persistence of new construction despite continually declining
demand. It is unlikely that we will change this view until we see a meaningful
improvement in the employment picture, preferably coupled with a slowdown in the
surge of single-family home ownership. Our expectations for a stronger economy
warrant a significant representation in both the regional mall and industrial
sectors. We are continuing to avoid the hotel sector until the companies are in
a position to begin paying normalized dividends again.
If there are any lingering doubts about REIT investment characteristics,
REITs' performance in 2002 should have laid them to rest. While some investors
may be tempted to become 'market timers' in response to the high volatility and
poor returns from stocks over the past several years, we believe that they would
be much better served by practicing portfolio diversification. The ability of
REITs to produce attractive absolute returns -- with the majority of returns
coming from income -- has earned them an important role in many investors'
portfolios.
THE TAXATION OF DIVIDENDS
The centerpiece of the Bush administration's recently announced economic
stimulus plan is to eliminate the double taxation of corporate dividends by
making them tax-free at the shareholder level. It is a proposal that, depending
on how it is adopted, could have wide ranging implications for the financial
markets and corporate dividend policies. Although details have not yet been
formulated, it is generally believed that REIT dividends would not be eligible
for this tax-exempt status because REITs do not pay taxes. It is also generally
believed that if REIT dividends remain subject to taxation, REITs would be
somewhat less tax-advantaged than they have been historically with respect to
some parts of the investor universe.
Without knowing the final details (such as whether there will be any
limitations on this exclusion), which indeed we may not know until a bill is
signed into law, it is very difficult to draw any firm conclusions. However,
there are a few points worth making. First, this provision would not remove any
of the intrinsic advantages that REITs currently enjoy -- it essentially leaves
them unchanged. Second is that the majority of shareholders at large,
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
including REIT shareholders, are already tax-exempt. For pension funds,
endowments and retirement accounts, as examples, the high dividends of REITs
will remain at least as attractive, if not more so, no matter what the tax
status is for other securities. And third, we believe the major determinant of
all security prices, including those of REITs, will be fundamentals. Thus,
whatever the outcome of this tax bill, our primary focus will continue to be the
analysis and assessment of real estate fundamentals, and the impact of these
fundamentals on REIT share prices.
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 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 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 QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2002
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD(a)
---------- ------------- --------
EQUITIES 156.64%
COMMON STOCK 115.53%
DIVERSIFIED 3.03%
Colonial Properties Trust..................... 457,100 $ 15,513,974 7.78%
-------------
HEALTH CARE 16.46%
Health Care Property Investors................ 535,200 20,498,160 8.67
Health Care REIT.............................. 982,825 26,585,416 8.65
Nationwide Health Properties.................. 1,459,100 21,784,363 12.32
Ventas........................................ 1,347,500 15,428,875 8.30
-------------
84,296,814
-------------
INDUSTRIAL 3.87%
First Industrial Realty Trust................. 465,600 13,036,800 9.79
Keystone Property Trust....................... 397,900 6,752,363 7.66
-------------
19,789,163
-------------
OFFICE 42.09%
Arden Realty.................................. 784,100 17,367,815 9.12
Brandywine Realty Trust....................... 960,900 20,957,229 8.07
CarrAmerica Realty Corp....................... 654,100 16,385,205 7.98
Crescent Real Estate Equities Co.............. 1,476,500 24,568,960 9.01
Equity Office Properties Trust................ 1,188,500 29,688,730 8.01
Highwoods Properties.......................... 980,100 21,660,210 10.59
Mack-Cali Realty Corp......................... 978,500 29,648,550 8.32
Prentiss Properties Trust..................... 853,800 24,145,464 7.92
Vornado Realty Trust.......................... 834,543 31,045,000 7.31
-------------
215,467,163
-------------
OFFICE/INDUSTRIAL 9.51%
Kilroy Realty Corp............................ 142,600 3,286,930 8.59
Liberty Property Trust........................ 956,400 30,547,416 7.51
Reckson Associates Realty Corp. -- Class B.... 663,800 14,869,120 11.56
-------------
48,703,466
-------------
-------------------
(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. The dividend yield has not been audited by
PricewaterhouseCoopers LLP.
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 2002
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
---------- ------------- --------
RESIDENTIAL -- APARTMENT 11.45%
Apartment Investment & Management Co.
--Class A................................... 336,900 $ 12,627,012 8.75%
Archstone-Smith Trust......................... 347,600 8,182,504 7.26
Camden Property Trust......................... 69,600 2,296,800 7.70
Gables Residential Trust...................... 514,700 12,831,471 9.67
Home Properties of New York................... 383,000 13,194,350 7.08
Post Properties............................... 259,200 6,194,880 7.53
Summit Properties............................. 183,800 3,271,640 7.58
-------------
58,598,657
-------------
SHOPPING CENTER 29.12%
COMMUNITY CENTER 12.68%
Developers Diversified Realty Corp............ 1,253,178 27,557,384 6.91
Federal Realty Investment Trust............... 441,200 12,406,544 6.90
Kramont Realty Trust.......................... 1,293,300 18,946,845 8.87
Urstadt Biddle Properties--Class A............ 544,000 6,027,520 7.58
-------------
64,938,293
-------------
REGIONAL MALL 16.44%
Glimcher Realty Trust......................... 281,300 4,993,075 10.82
Macerich Co................................... 1,280,757 39,383,278 7.41
Mills Corp.................................... 1,198,900 35,175,726 7.46
Taubman Centers............................... 283,000 4,593,090 6.41
-------------
84,145,169
-------------
TOTAL SHOPPING CENTER......................... 149,083,462
-------------
TOTAL COMMON STOCK (Identified
cost--$626,043,727).................... 591,452,699
-------------
PREFERRED STOCK 41.11%
HEALTH CARE 0.14%
Health Care Property Investments, 8.70%,
Series B.................................... 10,000 254,000 8.58
Health Care Property Investments, 8.60%,
Series C.................................... 18,800 470,000 8.60
-------------
724,000
-------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 2002
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
---------- ------------- --------
HOTEL 10.38%
FelCor Lodging Trust, 9.00%, Series B(a)...... 1,004,800 $ 24,718,080 9.15%
Innkeepers USA Trust, 8.625%, Series A........ 80,300 1,943,260 8.93
LaSalle Hotel Properties, 10.25%, Series A(b). 1,000,000 26,500,000 9.66
-------------
53,161,340
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INDUSTRIAL 0.04%
Centerpoint Properties Trust, 8.48%,
Series A.................................... 8,300 211,401 8.32
-------------
OFFICE 10.41%
CarrAmerica Realty Corp., 8.55%, Series C..... 46,600 1,178,048 8.47
Crescent Real Estate Equities Co., 6.75%,
Series A (Convertible)(c)................... 1,888,900 36,455,770 8.76
HRPT Properties Trust, 8.75%, Series B........ 120,000 3,064,800 8.57
Highwoods Properties, 8.625%, Series A........ 13,195 12,592,978 9.04
-------------
53,291,596
-------------
OFFICE/INDUSTRIAL 0.18%
PS Business Parks, 9.25%, Series A............ 10,800 279,180 8.94
PS Business Parks, 8.75%, Series F............ 4,100 109,265 8.22
ProLogis, 8.54%, Series C..................... 4,000 202,750 8.42
ProLogis, 8.75%, Series E..................... 13,000 336,050 8.47
-------------
927,245
-------------
RESIDENTIAL--APARTMENT 6.03%
Apartment Investment & Management Co., 8.75%,
Series D.................................... 8,600 212,850 8.85
Apartment Investment & Management Co., 10.10%,
Series R.................................... 950,000 24,937,500 9.52
Home Properties of New York, 9.00%,
Series F.................................... 196,000 5,174,400 8.52
Mid-America Apartment Communities, 8.875%,
Series B.................................... 21,800 542,820 8.92
-------------
30,867,570
-------------
SHOPPING CENTER 13.93%
COMMUNITY CENTER 7.47%
Commercial Net Lease Realty, 9.00%,
Series A.................................... 25,000 640,000 8.79
Developers Diversified Realty Corp., 8.60%,
Series F.................................... 1,039,400 26,816,520 8.33
Federal Realty Investment Trust, 8.50%,
Series B.................................... 310,300 7,990,225 8.27
New Plan Excel Realty Trust, 8.625%,
Series B.................................... 110,100 2,774,520 8.57
-------------
38,221,265
-------------
-------------------
(a) 323,000 shares segregated as collateral for the interest rate swap
transactions (Note 6).
(b) 157,000 shares segregated as collateral for the interest rate swap
transactions (Note 6).
(c) 295,000 shares segregated as collateral for the interest rate swap
transactions (Note 6).
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 2002
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
---------- ------------- --------
OUTLET CENTER 0.13%
Chelsea Property Group, 8.375%, Series A...... 14,000 $ 667,625 8.79%
-------------
REGIONAL MALL 6.33%
CBL & Associates Properties, 8.75%,
Series B.................................... 430,000 22,317,000 8.44
Mills Corp., 9.00%, Series B.................. 55,300 1,423,975 8.74
Mills Corp., 9.00%, Series C(d)............... 159,600 3,990,000 9.00
Rouse Capital, 9.25%, Series Z................ 30,000 760,500 9.11
Simon Property Group, 8.75%, Series F......... 30,000 803,100 8.18
Taubman Centers, 8.30%, Series A.............. 127,600 3,107,060 8.54
-------------
32,401,635
-------------
TOTAL SHOPPING CENTER......................... 71,290,525
-------------
TOTAL PREFERRED STOCK (Identified
cost--$203,377,557).................... 210,473,677
-------------
TOTAL EQUITIES (Identified
cost--$829,421,284).................... 801,926,376
-------------
PRINCIPAL
AMOUNT
----------
COMMERCIAL PAPER 0.95%
United Bank of Switzerland Financial, 1.13%,
due 01/02/03
(Identified cost--$4,841,848)............... $4,842,000 4,841,848
-------------
TOTAL INVESTMENTS (Identified
cost--$834,263,132)......................... 157.59% 806,768,224
LIABILITIES IN EXCESS OF OTHER ASSETS ........ (2.90)% (14,816,368)
LIQUIDATION VALUE OF 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 per class) .........(54.69)% (280,000,000)
----- -------------
NET ASSETS--COMMON STOCK (Equivalent to $13.25 per
share based on 38,636,322 shares of capital stock
outstanding) ................................ 100.00% $ 511,951,856
------ -------------
------ -------------
-------------------
(d) The fund prices this security at fair value using procedures approved by the
fund's board of directors.
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2002
ASSETS:
Investments in securities, at value (Identified
cost -- $834,263,132) (Note 1)........................ $806,768,224
Cash.................................................... 526
Dividends and interest receivable....................... 5,592,562
Receivable for investment securities sold............... 29,141
Other assets............................................ 30,606
------------
Total Assets....................................... 812,421,059
------------
LIABILITIES:
Payable for investment securities purchased............. 375,649
Unrealized depreciation on interest rate swap
transactions (Note 6)................................. 18,447,623
Payable for dividends declared on common shares......... 537,741
Interest payable on interest rate swap transactions..... 466,131
Payable to investment adviser........................... 354,166
Payable for dividends declared on preferred shares...... 169,652
Other liabilities....................................... 118,241
------------
Total Liabilities.................................. 20,469,203
------------
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................ $511,951,856
------------
------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES consist of:
Common stock ($0.001 par value, 38,636,322 shares issued
and outstanding) (Notes 1 and 5)...................... $549,213,484
Accumulated net realized gain on investments............ 8,680,903
Net unrealized depreciation on investments and interest
rate swap transactions................................ (45,942,531)
------------
$511,951,856
------------
------------
NET ASSET VALUE PER COMMON SHARE:
($511,951,856[div]38,636,322 shares outstanding)........ $ 13.25
------------
------------
MARKET PRICE PER COMMON SHARE............................... $ 13.05
------------
------------
MARKET PRICE PREMIUM/(DISCOUNT) TO NET ASSET VALUE PER
COMMON SHARE.............................................. (1.51)%
------------
------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2002(a)
Investment Income (Note 1):
Dividend income......................................... $ 51,366,933
Interest income......................................... 833,477
------------
Total Income....................................... 52,200,410
------------
Expenses:
Investment Management Fees (Note 2)..................... 5,597,395
Interest expense on interest rate swap transactions
(Note 6)............................................. 5,029,510
Auction agent fees...................................... 549,933
Administration fees (Note 2)............................ 270,488
Professional fees....................................... 121,867
Reports to shareholders................................. 102,610
Custodian fees and expenses............................. 81,331
Directors' fees and expenses (Note 2)................... 38,700
Transfer agent fees and expenses........................ 16,951
Miscellaneous........................................... 79,458
------------
Total Expenses..................................... 11,888,243
Reduction of Expenses (Note 2).......................... (2,107,254)
------------
Net Expenses....................................... 9,780,989
------------
Net Investment Income....................................... 42,419,421
------------
Net Realized and Unrealized Loss on Investments:
Net realized loss on investments........................ (2,358,962)
Net change in unrealized depreciation on investments.... (27,494,908)
Net change in unrealized depreciation on interest rate
swap transactions.................................... (18,447,623)
------------
Net realized and unrealized loss on investments.... (48,301,493)
------------
Net Decrease Resulting from Operations...................... (5,882,072)
------------
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (3,509,955)
Net realized gain on investments........................ (434,405)
------------
Total dividends and distributions to preferred
shareholders.................................... (3,944,360)
------------
Net Decrease in Net Assets from Operations Applicable to
Common Shares............................................. $ (9,826,432)
------------
------------
-------------------
(a) The fund commenced operations on February 28, 2002.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
11
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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(a)
THROUGH
DECEMBER 31, 2002
-------------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income.............................. $ 42,419,421
Net realized loss on investments................... (2,358,962)
Net change in unrealized depreciation on
investments and interest rate swap transactions. (45,942,531)
------------
Net decrease resulting from operations........ (5,882,072)
------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income.............................. (3,509,955)
Net realized gain on investments................... (434,405)
------------
Total dividends and distributions to preferred
shareholders................................ (3,944,360)
------------
Net decrease in net assets from operations
applicable to common shares..................... (9,826,432)
------------
Less Dividends and Distributions to Common Shareholders
from:
Net investment income.............................. (24,413,662)
Net realized gain on investments................... (3,021,534)
Tax return of capital.............................. (8,942,086)
------------
Total dividends and distributions to common
shareholders................................ (36,377,282)
------------
Capital Stock Transactions (Note 5):
Increase in net assets from common share
transactions.................................... 557,997,269
Increase in net assets from shares issued to common
shareholders for reinvestment of dividends...... 3,417,272
Decrease in net assets from underwriting
commissions and offering expenses from issuance
of preferred shares............................. (3,360,947)
------------
Net increase in net assets from capital stock
transactions................................ 558,053,594
------------
Total increase in net assets applicable to
common shares............................... 511,849,880
Net Assets Applicable to Common Shares:
Beginning of period................................ 101,976
------------
End of period...................................... $511,951,856
------------
------------
-------------------
(a) Commencement of Operations.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
12
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a common 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(b)
THROUGH
PER SHARE OPERATING PERFORMANCE: DECEMBER 31, 2002
-------------------------------- -------------------
Net asset value per common share, beginning of period....... $ 14.57
----------
Income from investment operations:
Net investment income................................... 1.00
Net realized and unrealized loss on investments......... (1.12)
----------
Total loss from investment operations............... (0.12)
----------
Less dividends and distributions to preferred shareholders
from:
Net investment income................................. (0.09)
Net realized gain on investments...................... (0.01)
----------
Total dividends and distributions to preferred
shareholders...................................... (0.10)
----------
Total from investment operations applicable to
common shares..................................... (0.22)
----------
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.............. (0.03)
----------
Total offering and organization costs............... (0.15)
----------
Less: dividends and distributions to common shareholders
from:
Net investment income................................. (0.64)
Net realized gain on investments...................... (0.08)
Tax return of capital................................. (0.23)
----------
Total dividends and distributions to common
shareholders...................................... (0.95)
----------
Net decrease in net asset value per common share............ (1.32)
----------
Net asset value, per common share, end of period............ $ 13.25
----------
----------
Market value, per common share, end of period............... $ 13.05
----------
----------
Net asset value total return(c)............................. - 2.73%(d)
----------
----------
Market value return(c)...................................... - 6.95%(d)
----------
----------
-------------------
(b) Commencement of operations.
(c) 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.
(d) Not annualized.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
13
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS -- (CONTINUED)
FOR THE PERIOD
FEBRUARY 28, 2002(a)
THROUGH
DECEMBER 31, 2002
-------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period (in
millions)................................................. $ 512.0
----------
----------
Ratio of expenses to average daily net assets applicable to
common shares (before expense reduction).................. 2.63%(c)
----------
----------
Ratio of expenses to average daily net assets applicable to
common shares (net of expense reduction).................. 2.16%(c)
----------
----------
Ratio of net investment income to average daily net assets
applicable to common shares (before expense reduction).... 8.91%(c)
----------
----------
Ratio of net investment income to average daily net assets
applicable to common shares (net of expense reduction).... 9.38%(c)
----------
----------
Ratio of expenses to average daily managed assets (before
expense reduction)(b)..................................... 1.79%(c)
----------
----------
Ratio of expenses to average daily managed assets (net of
expense reduction)(b)..................................... 1.47%(c)
----------
----------
Portfolio turnover rate..................................... 12.37%(d)
----------
----------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)................. $ 280,000
----------
----------
Total shares outstanding (in 000's)......................... 11
----------
----------
Asset coverage per share.................................... $ 70,710
----------
----------
Liquidation preference per share............................ $ 25,000
----------
----------
Average market value per share(e)........................... $ 25,000
----------
----------
-------------------
(a) Commencement of operations.
(b) Represents net assets applicable to common shares plus liquidation
preference of preferred shares.
(c) Annualized.
(d) Not annualized.
(e) Based on weekly prices.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
14
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
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 made a capital contribution of
$1,701 to the fund. 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 generally accepted 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 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.
--------------------------------------------------------------------------------
15
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 ex-dividend date. A portion of the fund's
dividend may consist of amounts in excess of net investment income derived from
nontaxable 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.
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.
--------------------------------------------------------------------------------
16
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 December 31, 2002, the fund incurred investment management fees of
$5,597,395.
The investment manager has contractually agreed to waive investment
management fees in the amount of 0.32% of average daily managed asset value for
the first five fiscal years of the fund's operations, 0.26% of average daily
managed asset value in year six, 0.20% of average daily managed asset value in
year seven, 0.14% of average daily managed asset value in year eight, 0.08% of
average daily managed asset value in year nine 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 December 31, 2002, the investment
manager waived management fees of $2,107,254.
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
December 31, 2002, the fund incurred $131,703 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 for their services.
For the period February 28, 2002 (commencement of operations) through December
31, 2002, fees and related expenses accrued for nonaffiliated directors totaled
$38,700.
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 December 31, 2002,
totaled $920,173,862 and $88,393,615, respectively.
NOTE 4. INCOME TAXES
The fund had a return of capital of $8,942,086 ($0.23 per common share) for
the period February 28, 2002 (commencement of operations) through December 31,
2002 which has been deducted from paid-in capital. Short-
--------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
term capital gains are reflected in the financial statements as realized gains
on investments but are typically reclassified as ordinary income for tax
purposes.
For the period February 28, 2002 (commencement of operations) through
December 31, 2002 the dividends and distributions to shareholders are
characterized for tax purposes as follows:
Preferred shareholders:
Ordinary income........................................ $ 3,509,955
Long-term capital gains................................ 434,405
-----------
Total dividends and distributions to preferred
shareholders................................... $ 3,944,360
-----------
-----------
Common shareholders:
Ordinary income........................................ $24,413,662
Long-term capital gains................................ 3,021,534
Tax return of capital.................................. 8,942,086
-----------
Total dividends and distributions to common
shareholders................................... $36,377,282
-----------
-----------
At December 31, 2002 the cost of investments and net unrealized appreciation
for federal income tax purposes were as follows:
Aggregate cost.................................... $825,582,228
------------
------------
Gross unrealized appreciation..................... $ 27,477,525
Gross unrealized depreciation..................... (46,291,529)
------------
Net unrealized depreciation on investments........ (18,814,004)
Net unrealized depreciation on interest rate swap
transactions.................................... (18,447,623)
------------
Net unrealized depreciation....................... $(37,261,627)
------------
------------
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. During the period February 28, 2002 (commencement of
operations) through December 31, 2002 the fund decreased undistributed net
investment income by $14,495,804, and increased accumulated net realized gain on
investments by $14,495,804.
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.
--------------------------------------------------------------------------------
18
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On March 8, 2002, the fund completed a subsequent offering of 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 exercised an option to purchase
an additional 1,700,000 shares. 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 exercised an option to purchase
an additional 681,983 shares. Proceeds paid to the fund amounted to $9,914,669
after deduction of underwriting commissions and offering expenses of $315,076.
During the period February 28, 2002 (commencement of operations) through
December 31, 2002, the fund issued 247,339 shares of common stock for the
reinvestment of dividends.
On April 4, 2002, the fund issued 2,800 taxable auction market preferred
shares, Series T (par value $0.001), 2,800 taxable auction market preferred
shares, Series W (par value $0.001), 2,800 taxable auction market preferred
shares, Series TH (par value $0.001), and 2,800 taxable auction market preferred
shares, Series F (par value $0.001) (together referred to as preferred shares).
Proceeds paid to the fund amounted to $276,639,053 after deduction of
underwriting commissions and offering expenses of $3,360,947. 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 taxable auction market preferred
shares and (2) any matter that materially and adversely affects the rights,
preferences, or powers of that series.
--------------------------------------------------------------------------------
19
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS
The fund has entered into interest rate swap agreements with Merrill Lynch
Derivative Products and UBS Warburg. Under the agreements the fund receives a
floating rate of interest and pays a respective fixed rate of interest on the
nominal value of the swaps. Details of the swaps at December 31, 2002 are as
follows:
NOTIONAL FLOATING RATE(a) UNREALIZED
COUNTERPARTY AMOUNT FIXED RATE (RESET MONTHLY) TERMINATION DATE (DEPRECIATION)
------------ ------ ---------- --------------- ---------------- --------------
Merrill Lynch Derivative Products $46,000,000 4.560% 1.440% April 5, 2005 $ (2,589,448)
Merrill Lynch Derivative Products $46,000,000 5.210% 1.440% April 5, 2007 (4,297,632)
Merrill Lynch Derivative Products $46,000,000 5.580% 1.440% April 5, 2009 (5,440,526)
UBS Warburg $24,000,000 4.450% 1.420% April 15, 2005 (1,295,999)
UBS Warburg $24,000,000 5.120% 1.420% April 16, 2007 (2,139,051)
UBS Warburg $24,000,000 5.495% 1.420% April 15, 2009 (2,684,967)
------------
$(18,447,623)
------------
------------
-------------------
(a) Based on LIBOR (London Interbank Offered Rate).
--------------------------------------------------------------------------------
20
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Cohen & Steers Quality Income Realty Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Cohen & Steers Quality Income
Realty Fund, Inc. (the 'Fund') at December 31, 2002, the results of its
operations, the changes in its net assets and the financial highlights for the
period February 28, 2002 (commencement of operations) to December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as 'financial statements') are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at December 31, 2002 by correspondence with the
custodian and brokers, provides a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 7, 2003
--------------------------------------------------------------------------------
21
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
DIVIDEND REINVESTMENT PLAN
The fund has a dividend reinvestment plan (the plan) commonly referred to as
an 'opt-out' plan. Each shareholder will have all distributions of dividends and
capital gains automatically reinvested in additional common shares by EquiServe
Trust Company, NA as agent for common shareholders pursuant to the plan (the
plan agent), unless they elect to receive cash. The plan agent will either
(i) effect purchases of common shares under the plan in the open market or
(ii) distribute newly issued common shares of the fund. Shareholders who elect
not to participate in the plan will receive all distributions in cash paid by
check mailed directly to the shareholder of record (or if the shares are held in
street or other nominee name, then to the nominee) by the plan agent, as
dividend disbursing agent. Shareholders whose common shares are held in the name
of a broker or nominee should contact the broker or nominee to determine whether
and how they may participate in the plan.
The plan agent serves as agent for the common shareholders in administering
the plan. After the fund declares a dividend or makes a capital gain
distribution, the plan agent will, as agent for the participants, either
(i) receive the cash payment and use it to buy common shares in the open market,
on the NYSE or elsewhere, for the participants' accounts or (ii) distribute
newly issued common shares of the fund on behalf of the participants. The plan
agent will receive cash from the fund with which to buy common shares in the
open market if, on the determination date, the net asset value per share exceeds
the market price per share plus estimated brokerage commissions on that date.
The plan agent will receive the dividend or distribution in newly issued common
shares of the fund if, on the determination date, the market price per share
plus estimated brokerage commissions equals or exceeds the net asset value per
share of the fund on that date. The number of shares to be issued will be
computed at a per share rate equal to the greater of (i) the net asset value or
(ii) 95% of the closing market price per share on the payment date.
Participants in the plan may withdraw from the plan upon written notice to
the plan agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a distribution record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the plan or upon termination of the plan as provided below, certificates
for whole common shares credited to his or her account under the plan will be
issued and a cash payment will be made for any fraction of a common share
credited to such account. In the alternative, upon receipt of the participant's
instructions, common shares will be sold and the proceeds sent to the
participant less brokerage commissions and any applicable taxes.
The plan agent maintains each common shareholder's account in the plan and
furnishes confirmations of all acquisitions made for the participant as soon as
practicable but no later than 60 days. Common shares in the account of each plan
participant will be held by the plan agent on behalf of the participant. Proxy
material relating to shareholders' meetings of the fund will include those
shares purchased as well as shares held pursuant to the plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
common shares for others who are the beneficial owners, the plan agent will
administer the plan on the basis of the number of common shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are participants in the plan. Common
--------------------------------------------------------------------------------
22
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
shares may be purchased through any of the underwriters, acting as broker or,
after the completion of this offering, dealer.
The plan agent's fees for the handling of reinvestment of dividends and
other distributions will be paid by the fund. Each participant will pay a pro
rata share of brokerage commissions incurred with respect to the plan agent's
open market purchases in connection with the reinvestment of distributions.
There are no other charges to participants for reinvesting dividends or capital
gain distributions. See 'Taxation.'
The automatic reinvestment of dividends and other distributions will not
relieve participants of any income tax that may be payable or required to be
withheld on such dividends or distributions.
Experience under the plan may indicate that changes are desirable.
Accordingly, the fund reserves the right to amend or terminate the plan as
applied to any distribution paid subsequent to written notice of the change sent
to all shareholders of the fund at least 90 days before the record date for the
dividend or distribution. The plan also may be amended or terminated by the plan
agent by at least 90 days' written notice to all shareholders of the fund. All
correspondence concerning the plan should be directed to the plan agent at
(telephone 800-426-5523).
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.
ADDITIONAL INFORMATION
During the period, there have been no material changes in the fund's
investment objectives or fundamental policies that have not been approved by the
shareholders. There have been no changes in the fund's charter or by-laws that
would delay or prevent a change in control of the fund which have not been
approved by shareholders. There have been no changes in the principal risk
factors associated with the investment in the fund.
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COHEN & STEERS QUALITY INCOME 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 QUALITY INCOME REALTY FUND, INC.
INFORMATION ABOUT FUND DIRECTORS
NUMBER OF
PORTFOLIOS
OVERSEEN
WITHIN THE
POSITION(S) HELD TERM OF LENGTH OF PRINCIPAL OCCUPATION(S) FUND
NAME, ADDRESS AND AGE WITH FUND OFFICE TIME SERVED DURING PAST FIVE YEARS COMPLEX
-------------------------- ------------------ ----------- ----------- ------------------------ ----------
Robert H. Steers ......... Director, chairman Until next Since Chairman of Cohen & 8
757 Third Avenue and secretary election of inception Steers Capital
New York, New York directors Management, Inc., the
Age: 49 fund's investment
manager.
Martin Cohen ............. Director, Until next Since President of Cohen & 8
757 Third Avenue president and election of inception Steers Capital
New York, New York treasurer directors Management, Inc., the
Age: 54 fund's investment
manager.
Gregory C. Clark ......... Director Until next Since Private Investor. Prior 8
99 Jane Street election of inception thereto, President of
New York, New York directors Wellspring Management
Age: 55 Group (investment
advisory firm).
Bonnie Cohen ............. Director Until next Since Consultant. Prior 8
1824 Phelps Place, N.W. election of inception thereto, Undersecretary
Washington, D.C. directors of State, United States
Age: 60 Department of State.
George Grossman .......... Director Until next Since Attorney-at-law. 8
17 Elm Place election of inception
Rye, New York directors
Age: 49
Richard J. Norman ........ Director Until next Since Private Investor. Prior 8
7520 Hackamore Drive election of inception thereto, Investment
Potomac, Maryland directors Representative of Morgan
Age: 59 Stanley Dean Witter.
Willard H. Smith, Jr. .... Director Until next Since Director. Board member 8
7231 Encelia Drive election of inception of Essex Property Trust,
La Jolla, California directors Inc., Highwoods
Age: 66 Properties, Inc. and
Realty Income
Corporation. Managing
director at Merrill
Lynch & Co., Equity
Capital Markets Division
from 1983 to 1995.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
MEET THE COHEN & STEERS FAMILY OF OPEN-END FUNDS:
FOR HIGH CURRENT INCOME 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 FUNDS 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 REITS AND OTHER REAL ESTATE COMPANIES CAPITAL APPRECIATION, INVESTING PRIMARILY IN
CONCENTRATED, HIGHLY FOCUSED PORTFOLIO REITS
SYMBOL: CSSPX OFFERS LOW TOTAL EXPENSE RATIO
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 WEB SITE AT COHENANDSTEERS.COM
THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT EACH FUND INCLUDING ALL CHARGES
AND EXPENSES, AND SHOULD BE READ CAREFULLY BEFORE YOU INVEST.
COHEN & STEERS SECURITIES, LLC, DISTRIBUTOR
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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.
Martin Cohen 757 Third Avenue
Director and president New York, NY 10017
(212) 832-3232
Gregory C. Clark
Director FUND SUBADMINISTRATOR AND CUSTODIAN
State Street Bank and Trust Company
Bonnie Cohen 225 Franklin Street
Director Boston, MA 02110
George Grossman TRANSFER AGENT -- COMMON SHARES
Director Equiserve Trust Company
150 Royall Street
Richard J. Norman Canton, MA 02021
Director (800) 426-5523
Willard H. Smith Jr. TRANSFER AGENT -- PREFERRED SHARES
Director The Bank of New York
100 Church Street
Greg E. Brooks New York, NY 10007
Vice president
LEGAL COUNSEL
Adam Derechin Simpson Thacher & Bartlett
Vice president and assistant 425 Lexington Avenue
treasurer New York, NY 10017
Lawrence B. Stoller New York Stock Exchange Symbol: RQI
Assistant secretary
Web site: cohenandsteers.com
This report is for shareholder
information. This is not a prospectus
intended for use in the purchase or sale
of fund shares. Past performance is of
course no guarantee of future results and
your investment may be worth more or less
at the time you sell.
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COHEN & STEERS
QUALITY INCOME REALTY FUND
ANNUAL REPORT
DECEMBER 31, 2002
COHEN & STEERS
QUALITY INCOME REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................ 'SS'
The division sign shall be expressed as...................................[div]