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, 2003
Item 1. Reports to Stockholders.
The registrant's annual report to shareholders, for the period ended December
31, 2003, is hereby included.
Item 2. Code of Ethics.
On February 5, 2004, the registrant adopted a code of ethics that applies to the
registrant's principal executive and principal financial officers. A copy of the
code of ethics is attached as Exhibit 10(a)(1).
Item 3. Audit Committee Financial Expert.
The registrant's audit committee has determined that it does not currently have
an audit committee financial expert serving on its audit committee. Although no
single audit committee member possesses the attributes necessary for
qualification as an audit committee financial expert, several members have
significant experience in the management of their personal assets and the assets
of the businesses with which they are or have been associated. All members of
the audit committee are also financially literate and have the necessary
education and experience to be effective members of the audit committee. In
addition, the registrant's nominating committee intends to recommend the
appointment and election of an additional director who will qualify as an audit
committee financial expert and the registrant's board will consider this
nomination at a future meeting.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. The aggregate audit fees billed by the registrant's principal
accountant to the registrant were $114,229 for the fiscal year ended December
31, 2002 and $74,151 for the fiscal year ended December 31, 2003.
(b) Audit-Related Fees. The aggregate audit-related fees billed by the
registrant's principal accountant to the registrant were $45,000 for the fiscal
year ended December 31, 2002 and $40,000 for the fiscal year ended December 31,
2003. These fees were billed in connection with the preparation and issuance of
certification reports to rating agencies relating to the registrant's preferred
shares.
(c) Tax Fees. The aggregate tax fees billed by the registrant's principal
accountant to the registrant were $5,000 for the fiscal year ended December 31,
2002 and $9,300 for the fiscal year ended December 31, 2003. These fees were
billed in connection with the preparation of tax returns, calculation and
designation of dividends and other miscellaneous tax services.
(d) All Other Fees. There were no other fees billed by the registrant's
principal accountant to the registrant for the fiscal years ended December 31,
2002 and December 31, 2003.
For the fiscal year ended December 31, 2002, the aggregate fees billed by the
registrant's principal accountant to the registrant's investment adviser for
services provided by the principal accountant were $46,000. These fees were
billed in connection with internal control reviews and AIMR performance reviews
and were not required to be approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X since this portion of the Rule was not
effective until 2003.
For the fiscal year ended December 31, 2003, the aggregate fees billed by the
registrant's principal accountant to the registrant's investment adviser for
services provided by the principal accountant and approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X were $49,500. These fees were billed
in connection with internal control reviews and AIMR performance reviews.
(e)(1) Before the registrant's principal accountant is engaged to render audit
or non-audit services to the registrant and non-audit services to the
registrant's investment adviser and its affiliates, each engagement is approved
by the registrant's audit committee.
(e)(2) None.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the registrant's principal accountant
for services rendered to the registrant and the registrant's investment adviser
and its affiliates were $96,000 for the fiscal year ended December 31, 2002 and
$98,800 for the fiscal year ended December 31, 2003.
(h) This item was not applicable for the fiscal year ended December 31, 2003
since no such non-pre-approved services were rendered. For the fiscal year ended
December 31, 2002, the registrant's audit committee did consider whether the
provision of non-audit services that were rendered to the registrant's
investment adviser and its affiliates was compatible with maintaining the
principal accountant's independence. These non-audit services were not
pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X
since this portion of the Rule was not effective until 2003.
Item 5. Audit Committee of Listed Registrants.
The registrant has a standing audit committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act. The members of the committee are
Gregory C. Clark, Bonnie Cohen, George Grossman, Richard J. Norman and Willard
H. Smith Jr.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
COHEN & STEERS CAPITAL MANAGEMENT, INC.
STATEMENT OF POLICIES AND PROCEDURES REGARDING THE VOTING OF
SECURITIES
This statement sets forth the policies and procedures that Cohen & Steers
Capital Management, Inc. ("C&S") follows in exercising voting rights with
respect to securities held in our client portfolios. All proxy-voting rights
that are exercised by C&S shall be subject to this Statement of Policy and
Procedures.
I. Objectives
Voting rights are an important component of corporate governance. C&S has three
overall objectives in exercising voting rights:
A. Responsibility. C&S shall seek to ensure that there is an effective
means in place to hold companies accountable for their actions. While management
must be accountable to its board, the board must be accountable to a company's
shareholders. Although accountability can be promoted in a variety of ways,
protecting shareholder voting rights may be among our most important tools.
B. Rationalizing Management and Shareholder Concerns. C&S seeks to ensure
that the interests of a company's management and board are aligned with those of
the company's shareholders. In this respect, compensation must be structured to
reward the creation of shareholder value.
C. Shareholder Communication. Since companies are owned by their
shareholders, C&S seeks to ensure that management effectively communicates with
its owners about the company's business operations and financial performance. It
is only with effective communication that shareholders will be able to assess
the performance of management and to make informed decisions on when to buy,
sell or hold a company's securities.
II. General Principles
In exercising voting rights, C&S shall conduct itself in accordance with the
general principles set forth below.
1. The ability to exercise a voting right with respect to a security is a
valuable right and, therefore, must be viewed as part of the asset
itself.
2. In exercising voting rights, C&S shall engage in a careful evaluation
of issues that may materially affect the rights of shareholders and
the value of the security.
3. Consistent with general fiduciary principles, the exercise of voting
rights shall always be conducted with reasonable care, prudence and
diligence.
4. In exercising voting rights on behalf of clients, C&S shall conduct
itself in the same manner as if C&S were the constructive owner of the
securities.
5. To the extent reasonably possible, C&S shall participate in each
shareholder voting opportunity.
6. Voting rights shall not automatically be exercised in favor of
management-supported proposals.
7. C&S, and its officers and employees, shall never accept any item of
value in consideration of a favorable proxy voting decision.
III. General Guidelines
Set forth below are general guidelines that C&S shall follow in exercising proxy
voting rights:
Prudence
In making a proxy voting decision, C&S shall give appropriate consideration to
all relevant facts and circumstances, including the value of the securities to
be voted and the likely effect any vote may have on that value. Since voting
rights must be exercised on the basis of an informed judgment, investigation
shall be a critical initial step.
Third Party Views
While C&S may consider the views of third parties, C&S shall never base a proxy
voting decision solely on the opinion of a third party. Rather, decisions shall
be based on a reasonable and good faith determination as to how best to maximize
shareholder value.
Shareholder Value
Just as the decision whether to purchase or sell a security is a matter of
judgment, determining whether a specific proxy resolution will increase the
market value of a security is a matter of judgment as to which informed parties
may differ. In determining how a proxy vote may affect the economic value of a
security, C&S shall consider both short-term and long-term views about a
company's business and prospects, especially in light of our projected holding
period on the stock (e.g., C&S may discount long-term views on a short-term
holding).
IV. Specific Issues
Set forth below are guidelines as to how specific proxy voting issues shall be
analyzed and assessed. While these guidelines will provide a framework for our
decision making process, the
mechanical application of these guidelines can never address all proxy voting
decisions. When new issues arise or old issues present nuances not encountered
before, C&S must be guided by its reasonable judgment to vote in a manner that
C&S deems to be in the best interests of its clients.
A. Stock-Based Compensation
Approval of Plans or Plan Amendments. By their nature, compensation plans must
be evaluated on a case-by-case basis. As a general matter, C&S always favors
compensation plans that align the interests of management and shareholders. C&S
generally approves compensation plans under the following conditions:
10% Rule. The dilution effect of the newly authorized shares, plus the shares
reserved for issuance in connection with all other stock related plans,
generally should not exceed 10%.
Exercise Price. The minimum exercise price of stock options should be at least
equal to the market price of the stock on the date of grant.
Plan Amendments. Compensation plans should not be materially amended without
shareholder approval.
Non-Employee Directors. Awards to non-employee directors should not be subject
to management discretion, but rather should be made under non-discretionary
grants specified by the terms of the plan.
Repricing/Replacement of Underwater Options. Stock options generally should not
be re-priced, and never should be re-priced without shareholder approval. In
addition, companies should not issue new options, with a lower strike price, to
make up for previously issued options that are substantially underwater. C&S
will vote against the election of any slate of directors that, to its knowledge,
has authorized a company to re-price or replace underwater options during the
most recent year without shareholder approval.
Reload/Evergreen Features. We will generally vote against plans that enable the
issuance of reload options and that provide an automatic share replenishment
("evergreen") feature.
Measures to Increase Executive Long-Term Stock Ownership. We support measures to
increase the long-term stock ownership by a company's executives. These include
requiring senior executives to hold a minimum amount of stock in a company
(often expressed as a percentage of annual compensation), requiring stock
acquired through option exercise to be held for a certain minimum amount of
time, and issuing restricted stock awards instead of options. In this respect,
we support the expensing of option grants because it removes the incentive of a
company to issue options in lieu of restricted stock. We also support employee
stock purchase plans, although we generally believe the discounted purchase
price should be at least 85% of the current market price.
Vesting. Restricted stock awards normally should vest over at least a two-year
period.
Other stock awards. Stock awards other than stock options and restricted stock
awards should be granted in lieu of salary or a cash bonus, and the number of
shares awarded should be reasonable.
B. Change of Control Issues
While we recognize that a takeover attempt can be a significant distraction for
the board and management to deal with, the simple fact is that the possibility
of a corporate takeover keeps management focused on maximizing shareholder
value. As a result, C&S opposes measures that are designed to prevent or
obstruct corporate takeovers because they can entrench current management. The
following are C&S's guidelines on change of control issues:
Shareholder Rights Plans. C&S acknowledges that there are arguments for and
against shareholder rights plans, also known as "poison pills." Companies should
put their case for rights plans to shareholders. We generally vote against any
directors who, without shareholder approval, to our knowledge have instituted a
new poison pill plan, extended an existing plan, or adopted a new plan upon the
expiration of an existing plan during the past year.
Golden Parachutes. C&S opposes the use of accelerated employment contracts that
result in cash grants of greater than three times annual compensation (salary
and bonus) in the event of termination of employment following a change in
control of a company. In general, the guidelines call for voting against "golden
parachute" plans because they impede potential takeovers that shareholders
should be free to consider. We generally withhold our votes at the next
shareholder meeting for directors who to our knowledge approved golden
parachutes.
Approval of Mergers. C&S votes against proposals that require a super-majority
of shareholders to approve a merger or other significant business combination.
We support proposals that seek to lower super-majority voting requirements.
C. Routine Issues
Director Nominees in a Non-Contested Election - C&S generally votes in favor of
management proposals on director nominees.
Director Nominees in a Contested Election - By definition, this type of board
candidate or slate runs for the purpose of seeking a significant change in
corporate policy or control. Therefore, the economic impact of the vote in favor
of or in opposition to that director or slate must be analyzed using a higher
standard normally applied to changes in control. Criteria for evaluating
director nominees as a group or individually should include: performance;
compensation, corporate governance provisions and takeover activity; criminal
activity; attendance at meetings; investment in the company; interlocking
directorships; inside, outside and independent directors; whether the chairman
and CEO titles are held by the same person; number of other board seats;
and other experience. It is impossible to have a general policy regarding
director nominees in a contested election.
Board Composition - C&S supports the election of a board that consists of at
least a majority of independent directors. We generally withhold our support for
non-independent directors who serve on a company's audit, compensation and/or
nominating committees. We also generally withhold support for director
candidates who have not attended a sufficient number of board or committee
meetings to effectively discharge their duties as directors.
Classified Boards - Because a classified board structure prevents shareholders
from electing a full slate of directors at annual meetings, C&S generally votes
against classified boards. We vote in favor of shareholder proposals to
declassify a board of directors unless a company's charter or governing
corporate law allows shareholders, by written consent, to remove a majority of
directors at any time, with or without cause.
Barriers to Shareholder Action - We vote to support proposals that lower the
barriers to shareholder action. This includes the right of shareholders to call
a meeting and the right of shareholders to act by written consent.
Cumulative Voting - Having the ability to cumulate our votes for the election of
directors - that is, cast more than one vote for a director about whom they feel
strongly - generally increases shareholders' rights to effect change in the
management of a corporation. We generally support, therefore, proposals to adopt
cumulative voting.
Ratification of Auditors - Votes generally are cast in favor of proposals to
ratify an independent auditor, unless there is a reason to believe the auditing
firm is no longer performing its required duties or there are exigent
circumstances requiring us to vote against the approval of the recommended
auditor. For example, our general policy is to vote against an independent
auditor that receives more than 50% of its total fees from a company for
non-audit services.
D. Stock Related Items
Increase Additional Common Stock - C&S's guidelines generally call for approval
of increases in authorized shares, provided that the increase is not greater
than three times the number of shares outstanding and reserved for issuance
(including shares reserved for stock-related plans and securities convertible
into common stock, but not shares reserved for any poison pill plan).
Votes generally are cast in favor of proposals to authorize additional shares of
stock except where the proposal:
1. creates a blank check preferred stock; or
2. establishes classes of stock with superior voting rights.
Blank Check Preferred Stock - Votes generally are cast in opposition to
management proposals authorizing the creation of new classes of preferred stock
with unspecific voting, conversion, distribution and other rights, and
management proposals to increase the number of authorized
blank check preferred shares. C&S may vote in favor of this type of proposal
when it receives assurances to its reasonable satisfaction that (i) the
preferred stock was authorized by the board for the use of legitimate capital
formation purposes and not for anti-takeover purposes, and (ii) no preferred
stock will be issued with voting power that is disproportionate to the economic
interests of the preferred stock. These representations should be made either in
the proxy statement or in a separate letter from the company to C&S.
Preemptive Rights - Votes are cast in favor of shareholder proposals restoring
limited preemptive rights.
Dual Class Capitalizations - Because classes of common stock with unequal voting
rights limit the rights of certain shareholders, C&S votes against adoption of a
dual or multiple class capitalization structure.
E. Social Issues
C&S believes that it is the responsibility of the board and management to run a
company on a daily basis. With this in mind, in the absence of unusual
circumstances, we do not believe that shareholders should be involved in
determining how a company should address broad social and policy issues. As a
result, we generally vote against these types of proposals, which are generally
initiated by shareholders, unless we believe the proposal has significant
economic implications.
F. Other Situations
No set of guidelines can anticipate all situations that may arise. Our portfolio
managers and analysts will be expected to analyze proxy proposals in an effort
to gauge the impact of a proposal on the financial prospects of a company, and
vote accordingly. These policies are intended to provide guidelines for voting.
They are not, however, hard and fast rules because corporate governance issues
are so varied.
V. Proxy Voting Procedures
C&S shall maintain a record of all voting decisions for the period required by
applicable laws. In each case in which C&S votes contrary to the stated policies
set forth in these guidelines, the record shall indicate the reason for such a
vote.
The Investment Committee of C&S shall have responsibility for voting proxies,
under the supervision of Joseph Harvey, Senior Vice President and Director of
Research. Ed Lee shall be responsible for ensuring that the Investment Committee
is aware of all upcoming proxy voting opportunities. Mr. Lee shall ensure that
proxy votes are properly recorded and that the requisite information regarding
each proxy voting opportunity is maintained. Larry Stoller, Senior Vice
President and General Counsel of C&S, shall have overall responsibility for
ensuring that C&S complies with all proxy voting requirements and procedures.
VI. Recordkeeping
Mr. Lee shall be responsible for recording and maintaining the following
information with respect to each proxy voted by C&S:
* Name of the company
* Ticker symbol
* CUSIP number
* Shareholder meeting date
* Brief identification of each matter voted upon
* Whether the matter was proposed by management or a shareholder
* Whether C&S voted on the matter
* If C&S voted, then how C&S voted
* Whether C&S voted with or against management
Mr. Stoller shall be responsible for maintaining and updating this Policy and
Procedures, and for maintaining any records of written client requests for proxy
voting information and documents that were prepared by C&S and were deemed
material to making a voting decision or that memorialized the basis for the
decision.
C&S shall rely on the SEC's EDGAR filing system with respect to the requirement
to maintain proxy materials regarding client securities.
VII. Conflicts of Interest
There may be situations in which C&S may face a conflict between its interests
and those of its clients or fund shareholders. Potential conflicts are most
likely to fall into three general categories:
* Business Relationships - This type of conflict would occur if C&S or an
affiliate has a substantial business relationship with the company or a
proponent of a proxy proposal relating to the company (such as an employee
group) such that failure to vote in favor of management (or the proponent) could
harm the relationship of C&S or its affiliate with the company or proponent. In
the context of C&S, this could occur if Cohen & Steers Capital Advisors, a
wholly owned subsidiary of C&S ("Capital Advisors"), has a material business
relationship with a company that C&S has invested in on behalf of its clients,
and C&S is encouraged to vote in favor of management as an inducement to acquire
or maintain the Capital Advisors relationship.
* Personal Relationships - C&S or an affiliate could have a personal
relationship with other proponents of proxy proposals, participants in proxy
contests, corporate directors or director nominees.
* Familial Relationships - C&S or an affiliate could have a familial
relationship relating to a company (e.g., spouse or other relative who serves as
a director or nominee of a public company).
The next step is to identify if a conflict is material. A material matter is one
that is reasonably likely to be viewed as important by the average shareholder.
Materiality will be judged under a two-step approach:
* Financial Based Materiality - C&S presumes a conflict to be non-material
unless it involves at least $500,000.
* Non-Financial Based Materiality - Non-financial based materiality would impact
the members of the C&S Investment Committee, who are responsible for making
proxy voting decisions.
Finally, if a material conflict exists, C&S shall vote in accordance with the
advice of a proxy voting service. C&S currently uses ISS to provide advice on
proxy voting decisions.
Mr. Stoller shall have responsibility for supervising and monitoring conflicts
of interest in the proxy voting process according to the following process:
1. Identifying Conflicts - Mr. Stoller is responsible for monitoring the
relationships of Capital Advisors for purposes of C&S's Inside Information
Policy and Procedures. Mr. Stoller (or his designee) maintains a watch list and
a restricted list. The Investment Committee is unaware of the content of the
watch list and therefore it is only those companies on the restricted list,
which is made known to everyone at C&S, for which potential concerns might
arise. When a company is placed on the restricted list, Mr. Stoller (or his
designee) shall promptly inquire of Mr. Lee as to whether there is a pending
proxy voting opportunity with respect to that company, and continue to inquire
on a weekly basis until such time as the company is no longer included on the
restricted list. When there is a proxy voting opportunity with respect to a
company that has been placed on the restricted list, Mr. Stoller shall inform
the Investment Committee that no proxy vote is to be submitted for that company
until Mr. Stoller completes the conflicts analysis.
For purposes of monitoring personal or familial relationships, Mr. Stoller (or
his designee) shall receive on at least an annual basis from each member of the
Investment Committee written disclosure of any personal or familial
relationships with public company directors that could raise potential conflict
of interest concerns. Investment Committee members also shall agree in writing
to advise Mr. Stoller if (i) there are material changes to any previously
furnished information, (ii) a person with whom a personal or familial
relationship exists is subsequently nominated as a director or (iii) a personal
or familial relationship exists with any proponent of a proxy proposal or a
participant in a proxy contest.
2. Identifying Materiality - Mr. Stoller (or his designee) shall be responsible
for determining whether a conflict is material. He shall evaluate financial
based materiality in terms of both actual and potential fees to be received.
Non-financial based items impacting a member of the Investment Committee shall
be presumed to be material.
3. Communication with Investment Committee; Voting of Proxy - If Mr. Stoller
determines that the relationship between Capital Advisors and a company is
financially material, he shall
communicate that information to the members of the Investment Committee and
instruct them, and Mr. Lee, that C&S will vote its proxy based on the advice of
ISS or other consulting firm then engaged by C&S. Any personal or familial
relationship, or any other business relationship, that exists between a company
and any member of the Investment Committee shall be presumed to be material, in
which case C&S again will vote its proxy based on the advice of ISS or other
consulting firm then engaged by C&S. The fact that a member of the Investment
Committee personally owns securities issued by a company will not disqualify C&S
from voting common stock issued by that company, since the member's personal and
professional interests will be aligned.
In cases in which C&S will vote its proxy based on the advice of ISS or other
consulting firm then engaged by C&S, Mr. Stoller (or his designee) shall be
responsible for ensuring that Mr. Lee votes proxies in this manner. Mr. Stoller
will maintain a written record of each instance when a conflict arises and how
the conflict is resolved (e.g., whether the conflict is judged to be material,
the basis on which the materiality is decision is made and how the proxy is
voted).
VIII. Cohen & Steers Funds
Proxies relating to portfolio securities held by any Cohen & Steers Fund shall
be voted in accordance with this Statement of Policies and Procedures. For this
purpose, the Board of Directors of the Cohen & Steers Funds has delegated to C&S
the responsibility for voting proxies on behalf of the Funds. Mr. Stoller shall
make an annual presentation to the Board regarding this Statement of Policy and
Procedures, including whether any revisions are recommended, and shall report to
the Board at each regular, quarterly meeting with respect to any conflict of
interest situation that arose regarding the proxy voting process.
Item 8. [Reserved]
Item 9. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial officer
have concluded that the registrant's disclosure controls and procedures are
sufficient to ensure that information required to be disclosed by the registrant
in this Form N-CSR was recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, based upon such officers' evaluation of these controls and procedures as
of a date within 90 days of the filing date of this report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10. Exhibits.
(a) (1) Code of Ethics for Principal Executive and Principal Financial Officers
(a) (2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(a) under the Investment Company Act of 1940.
(b) Certifications of chief executive officer and chief financial officer as
required by Rule 30a-2(b) under the Investment Company Act of 1940.
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
---------------------------------
Name: Robert H. Steers
Title: Chairman
Date: February 27, 2004
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 By: /s/ Martin Cohen
--------------------------------- -----------------------------------
Name: Robert H. Steers Name: Martin Cohen
Title: Chairman, Secretary Title: President, Treasurer
and principal executive and principal financial
officer officer
Date: February 27, 2004
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
February 17, 2004
To Our Shareholders:
We are pleased to submit to you our report for the quarter and year ended
December 31, 2003. The net asset value at that date was $18.43 per common share.
In addition, during the quarter, three $0.11 per share monthly dividends and one
$0.12 per share special dividend were declared and paid.
2003 REVIEW
For the quarter, Cohen & Steers Quality Income Realty Fund had a total
return, based on income and change in net asset value, of 15.3%, bringing the
total return for the year to 52.6%. This compares to NAREIT Equity REIT
Index's(a) return of 10.0% and 37.1% for the quarter and year ended December 31,
2003, respectively. Given the very strong performance of REIT share prices in
2003, we are pleased to report that we are generating investment income in
excess of our monthly distribution rate, as evidenced by the year-end
distributions described above.
Exceeding even the most optimistic expectations, and frustrating many
skeptics, 2003 was simply the best year for REIT investors in the modern era
(since 1991). This was the year that REITs gained wider acceptance as both an
important asset class and a financial instrument. We have long believed that
REITs' investment characteristics -- namely high current yield, low correlation
to other asset classes and strong total return potential -- were highly
desirable. Record low returns on fixed-income investments made REIT current
income and dividend growth capabilities all the more attractive. In our view,
their low correlation to other asset classes, particularly following a major
bear market in equities, offered a welcomed respite to investors whose risk
tolerance has been dramatically reduced. The resilience of REIT cash flows and
asset values, despite the sluggish economy and weak real estate markets,
contributed to investors' confidence in their ability to produce healthy growth
once these macro trends began to reverse, as they did in the second half of the
year.
While almost all REITs were winners in 2003, there were some interesting
trends with respect to sector performance. The health care sector produced the
best returns both in the fourth quarter (17.2%) and full year (53.6%). Health
care fundamentals were better than expected due to a surprise increase in
nursing home reimbursement in 2003, in spite of federal and local budget
deficits. During the fourth quarter, the hotel sector fared second best (14.2%),
followed by regional malls (12.5%). The full year runner-up to health care was
the
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(a) The NAREIT 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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1
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
mall sector, delivering 52.2%. As was the case in the past several years,
underperformers for both the quarter and full year were apartment and office
building owners.
Our results for the year reflected the industry's strong gains, which were
magnified by our use of leverage. The fund's best performing investments during
the year were in the health care, regional mall and shopping center sectors.
Lagging sectors for the fund were mixed office/industrial and office. In terms
of individual securities, our best-performing holding was Ventas Inc., a health
care REIT that produced a total return of 106% for the year. Other significant
contributors include regional mall owner Mills Corp., which produced a total
return of 60.3%, and office and shopping center owner Vornado Realty Trust,
which generated a total return of 57.7%. The fund's poorest performing holdings
included Apartment Investment & Management Company, which generated a total
return of 0.2% for the year, as well as Crescent Real Estate Equities, which
generated a total return of 13.4%.
We believe that REITs became an important component of many investment
portfolios in 2003. Pension, endowment and charitable funds, along with many
insurance companies found them to be attractive instruments with which to
satisfy liabilities and other obligations. Investors shifting their investment
objectives from pure growth to income and growth, particularly those approaching
retirement age, found REITs to be one an appealing alternative. REITs were
included more than ever in portfolios of income-oriented and diversified
investment vehicles and funds, both public and private, leveraged and
unleveraged. For many investors who began to anticipate an increase in inflation
and interest rates, REITs may have become a perceived safe haven from both, as
REITs have historically performed well in high inflation and high interest rate
environments. The consistent strong returns from REITs even attracted the
attention of many die-hard direct real estate investors who had trouble finding
bargains in the private market.
To be sure, there were a fair number of fundamental reasons for REITs to
have done well in 2003. Real estate has undergone a re-pricing over the past
year, appreciating in value despite rising vacancies and softness in rents.
Investors in both the public and private markets seemed to ignore recent market
conditions, and instead valued property based on expected future cash flows.
This strong real estate pricing bolstered REIT asset values. Low interest rates
have clearly added to this pricing situation as it has enabled leveraged buyers
to purchase properties at lower current returns than would be possible, or
prudent, in a higher rate environment. Nonetheless, we are still not convinced
that private real estate buyers in general have fully adapted, as much as REITs
have, to the extraordinary credit market conditions that have prevailed.
Over the past two years low interest rates and ready access to the financial
markets have enabled most REITs to re-price their liabilities by retiring or
refinancing high cost debt, or by adding to their leverage without assuming
meaningfully higher risk. This phenomenon has not necessarily been fully
appreciated by the investment community, in our opinion, but has undoubtedly
enhanced equity values. In addition to stabilizing balance sheets and extending
debt maturities, this has improved both the absolute level and, in our view, the
quality of REIT
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2
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
earnings. As a result, REIT earnings performance overall in 2003 greatly
exceeded what one would have expected in light of soft real estate markets. For
example, the weighted average earnings per share of the 110 largest REITs
declined by approximately 2.0%. More surprisingly, the dividends per share of
the same group of companies grew by approximately 3.8% on average.
As REITs consistently performed well throughout the year (rising in 11 out
of 12 months), investor expectations for improving fundamentals were vindicated
by economic statistics. The 8.2% rise in third quarter GDP was the highest rate
of economic growth in 20 years. Following this showing, the expected 5.0% fourth
quarter growth rate in our view should essentially dispel any lingering doubts
about the durability of the U.S. economic recovery. Moreover, robust profit
growth of corporate America validated the across-the-board rise in stock prices.
The bottom line for investors in 2003 is that all major equity market indexes
ended the year at annual highs in price, and REITs ended the year at record high
share prices.
INVESTMENT OUTLOOK
We believe that the key to REIT performance in 2004 will be the course of
the U.S. economy. Not interest rates. Not Wall Street estimates of NAVs. Not
valuations based on last year's earnings. A strong economy is essential to
supporting real estate fundamentals. And strong fundamentals are essential to
supporting REIT earnings growth and share prices. We remain optimistic about the
course of the economy. In light of the return of business and consumer
confidence, soaring profitability, ongoing fiscal stimulus and
still-accommodative monetary policy, we believe the economy will remain strong.
Our expectation is that in 2004 GDP will increase by at least 4%.
We also believe that for the first time since the economic recovery began,
the U.S. will experience strong job growth. We expect that 1.5 to 2.0 million
jobs will be created this year. To the extent that this occurs, several dynamics
of the real estate markets are likely to change significantly, primarily in the
office and apartment sectors. Growth in service jobs will directly benefit
owners of office buildings, particularly in larger cities such as New York,
Boston, and Washington. We are already seeing vacancy rates begin to decline,
coincident with companies now shifting from layoffs to new hiring, such as those
in the financial service industry. Because a relatively high percentage of new
jobholders tend to rent apartments, the strong job growth we expect should
benefit owners of multi-family properties. Our apartment holdings are
concentrated in those markets that are expected to be at the forefront of the
expected job growth (particularly, in the southeast and southwest), as well as
companies that have a strong presence in the northeast and western states where
there is a higher tendency to rent apartments due to high population density and
high home prices. We believe the hotel industry should benefit from increased
business travel and increased tourism due to the weak dollar. However, our
current weight in the hotel sector is unlikely to increase unless or until more
companies reinstate their dividends and we believe they are sustainable.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
Generally speaking, we expect the retail sector to continue to exhibit
strong fundamentals in 2004. With ongoing economic growth, we expect consumers
to continue their recent spending patterns. Both regional mall and shopping
center owners should benefit from these trends. However, while mall valuations
remain generally attractive (as opposed to the shopping center sector, which is
trading at a significant premium), both sectors currently offer lower than
average dividend yields. Thus, we will continue to be underweight in the retail
sector.
Following the extraordinary returns that REITs delivered in 2003, it is
natural to ask whether they can continue to perform well this year. As shown in
the table below, the years following those in which REITs have turned in their
best total returns have historically shown a continuation of strong performance.
Thus, one should not assume that one year of very strong performance is
necessarily followed by a subpar year. If the past is any guide to what
investors may see in 2004, it appears that strong trends tend to remain in
place.
NAREIT EQUITY REIT RETURNS FOLLOWING BEST PERFORMING YEARS
TOTAL RETURN IN THE FOLLOWING:
TOTAL -------------------------------------
YEAR RETURN 3 MOS. 6 MOS. 9 MOS. 12 MOS.
---- ------ ------ ------ ------ -------
1976 47.6% 7.6% 14.0% 15.0% 22.4%
1979 35.9% -4.4% 7.1% 17.0% 24.4%
1983 30.6% 4.4% 3.8% 13.8% 20.9%
1991 35.7% 0.7% 3.3% 10.4% 14.6%
1996 35.3% 0.7% 5.7% 18.2% 20.3%
2000 26.4% 0.4% 11.4% 8.5% 13.9%
2003 37.1% -- -- -- --
Past performance is no guarantee of future results. Returns are historical,
include changes in share price and reflect reinvestment of all distributions.
This information is presented for illustrative purposes only and does not
represent the past performance of the fund. Investors cannot invest in this
unmanaged index.
Whereas REIT share prices are much higher than we believe they were one year
ago, the health of the industry and the outlook for profit growth are stronger
as well. In our experience, bear markets rarely, if ever, commence at this stage
of economic and real estate cycles. In fact, the strengthening real estate
markets are attracting an increasing amount of investment capital -- it is our
understanding that a record amount of capital has been allocated to direct
property ownership. We expect this to help to maintain strong pricing in most
real estate markets. In our opinion, the rise in REIT prices has not changed the
investment characteristics that investors are increasingly seeking.
It remains our belief that while REITs are no longer as undervalued as they
were over the past several years, the conditions to sustain continued strength
and growth in this asset class are firmly in place. While we can rationally
expect there to be share price corrections along the way -- as there always
are -- we believe that REITs
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
can still deliver solid, long-term returns to investors. In light of these
strong fundamentals, combined with the valuation of REITs in comparison to many
other asset classes, we believe that REITs will continue to appeal to investors
seeking the potential for portfolio diversification, a high level of current
income and attractive total returns.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
GREG E. BROOKS
GREG E. BROOKS
Portfolio Manager
Cohen & Steers is online at 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, 2003
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)(a)
---------- -------------- ------------
EQUITIES 148.01%(b)
COMMON STOCK 115.40%
DIVERSIFIED 16.56%
Colonial Properties Trust................. 582,300 $ 23,059,080 6.72%
Crescent Real Estate Equities Co. ........ 1,396,200 23,916,906 8.76
iStar Financial........................... 400,500 15,579,450 6.81
Newcastle Investment Corp. ............... 678,528 18,388,109 7.38
Vornado Realty Trust...................... 687,443 37,637,504 5.19
--------------
118,581,049
--------------
HEALTH CARE 17.82%
Health Care Property Investors............ 595,200 30,236,160 6.54
Health Care REIT.......................... 969,625 34,906,500 6.50
Nationwide Health Properties.............. 1,205,300 23,563,615 7.57
Ventas.................................... 1,766,500 38,863,000 4.86
--------------
127,569,275
--------------
HOTEL 2.00%
Hospitality Properties Trust.............. 346,400 14,299,392 6.98
--------------
INDUSTRIAL 4.39%
First Industrial Realty Trust............. 614,500 20,739,375 8.12
Keystone Property Trust................... 484,900 10,711,441 5.98
--------------
31,450,816
--------------
OFFICE 32.51%
Arden Realty.............................. 826,800 25,085,112 6.66
Brandywine Realty Trust................... 1,140,900 30,541,893 6.57
CarrAmerica Realty Corp. ................. 1,010,600 30,095,668 6.72
Equity Office Properties Trust............ 1,314,400 37,657,560 6.98
Highwoods Properties...................... 670,400 17,028,160 6.69
Mack-Cali Realty Corp. ................... 1,073,800 44,691,556 6.05
Maguire Properties........................ 604,800 14,696,640 6.58
Prentiss Properties Trust................. 1,000,200 32,996,598 6.79
--------------
232,793,187
--------------
-------------------
(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.
(b) Percentages indicated are based on the net assets of the fund.
See accompanying notes to financial statements.
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6
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
---------- -------------- ------------
OFFICE/INDUSTRIAL 8.69%
Kilroy Realty Corp. ...................... 142,600 $ 4,670,150 6.05
Liberty Property Trust.................... 1,065,200 41,436,280 6.22
Reckson Associates Realty Corp............ 663,800 16,130,340 6.99
--------------
62,236,770
--------------
RESIDENTIAL -- APARTMENT 14.44%
AMLI Residential Properties Trust......... 77,000 2,063,600 7.16
Apartment Investment & Management Co. .... 114,500 3,950,250 6.96
Archstone-Smith Trust..................... 754,100 21,099,718 6.11
AvalonBay Communities..................... 307,200 14,684,160 5.86
Camden Property Trust..................... 366,600 16,240,380 5.73
Gables Residential Trust.................. 586,900 20,388,906 6.94
Home Properties........................... 361,600 14,605,024 6.14
Mid-America Apartment Communities......... 309,400 10,389,652 6.97
--------------
103,421,690
--------------
SELF STORAGE 0.45%
Sovran Self Storage....................... 87,300 3,243,195 6.49
--------------
SHOPPING CENTER 18.54%
COMMUNITY CENTER 6.70%
Cedar Shopping Centers.................... 200,000 2,484,000 7.25
Heritage Property Investment Trust........ 449,100 12,776,895 7.38
Kramont Realty Trust...................... 1,293,300 23,408,730 7.18
New Plan Excel Realty Trust............... 65,800 1,623,286 6.69
Urstadt Biddle Properties -- Class A...... 544,000 7,697,600 5.94
--------------
47,990,511
--------------
REGIONAL MALL 11.84%
CBL & Associates Properties............... 50,000 2,825,000 5.13
Glimcher Realty Trust..................... 605,200 13,544,376 8.58
Macerich Co. ............................. 807,857 35,949,637 5.48
Mills Corp. .............................. 737,400 32,445,600 5.14
--------------
84,764,613
--------------
TOTAL SHOPPING CENTER..................... 132,755,124
--------------
TOTAL COMMON STOCK (Identified
cost -- $661,283,955).............. 826,350,498
--------------
See accompanying notes to financial statements.
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7
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
---------- -------------- ------------
PREFERRED STOCK 32.61%
DIVERSIFIED 7.06%
Colonial Properties Trust, 8.125%,
Series D................................ 64,900 $ 1,762,684 7.47%
Crescent Real Estate Equities Co., 6.75%,
Series A (Convertible)(a)............... 1,826,000 42,710,140 7.23
iStar Financial, 7.80%, Series F.......... 94,600 2,473,790 7.46
iStar Financial, 7.65%, Series G.......... 80,000 2,020,000 7.56
Newcastle Investment Corp., 9.75%,
Series B................................ 56,000 1,558,480 8.77
--------------
50,525,094
--------------
HEALTH CARE 0.29%
LTC Properties, 8.50%, Series E........... 65,600 2,057,872 6.79
--------------
HOTEL 6.90%
FelCor Lodging Trust, 9.00%, Series B..... 652,500 16,351,650 8.98
Host Marriott Corp., 10.00%, Series A..... 7,000 187,180 9.35
Host Marriott Corp., 10.00%, Series B..... 14,100 380,700 9.26
Host Marriott Corp., 10.00%, Series C..... 30,700 837,189 9.17
Innkeepers USA Trust, 8.625%, Series A.... 68,200 1,712,502 8.60
Innkeepers USA Trust, 8.00%, Series C..... 56,000 1,416,800 7.91
LaSalle Hotel Properties, 10.25%,
Series A................................ 1,000,000 28,550,000 8.97
--------------
49,436,021
--------------
INDUSTRIAL 0.28%
Keystone Property Trust, 9.125%,
Series D................................ 75,000 2,036,250 8.40
--------------
OFFICE 2.33%
HRPT Properties Trust, 8.75%, Series B.... 120,000 3,342,000 7.86
Highwoods Properties, 8.625%, Series A.... 13,195 13,359,938 8.52
--------------
16,701,938
--------------
OFFICE/INDUSTRIAL 0.09%
PS Business Parks, 9.25%, Series A........ 10,800 274,968 9.07
PS Business Parks, 8.75%, Series F........ 4,100 110,126 8.15
ProLogis, 8.54%, Series C................. 4,000 233,500 7.31
--------------
618,594
--------------
-------------------
(a) 410,000 shares segregated as collateral for the interest rate swap
transactions.
See accompanying notes to financial statements.
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8
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
---------- -------------- ------------
RESIDENTIAL -- APARTMENT 4.88%
Apartment Investment & Management Co.,
8.75%, Series D......................... 5,530 $ 139,634 8.67%
Apartment Investment & Management Co.,
10.10%, Series R........................ 950,000 25,811,500 9.20
Home Properties, 9.00%, Series F.......... 196,000 5,399,800 8.17
Mid-America Apartment Communities, 8.30%,
Series H................................ 138,100 3,607,172 7.96
--------------
34,958,106
--------------
SHOPPING CENTER 10.78%
COMMUNITY CENTER 5.52%
Commercial Net Lease Realty, 9.00%,
Series A................................ 25,000 685,000 8.21
Developers Diversified Realty Corp.,
8.60%, Series F......................... 1,039,400 27,751,980 8.05
Federal Realty Investment Trust, 8.50%,
Series B................................ 310,300 8,533,250 7.75
Urstadt Biddle Properties, 8.50%,
Series C................................ 24,000 2,526,000 8.08
--------------
39,496,230
--------------
OUTLET CENTER 0.11%
Chelsea Property Group, 8.375%,
Series A................................ 14,000 772,625 7.59
--------------
REGIONAL MALL 5.15%
CBL & Associates Properties, 8.75%,
Series B(b)............................. 430,000 23,564,000 7.99
Glimcher Realty Trust, 8.75%, Series F.... 40,000 1,059,200 8.27
Mills Corp., 9.00%, Series B.............. 55,300 1,522,962 8.17
Mills Corp., 9.00%, Series C.............. 159,600 4,412,142 8.14
Mills Corp., 8.75%, Series E.............. 84,000 2,276,400 8.08
Simon Property Group, 8.75%, Series F..... 30,000 819,000 8.02
Taubman Centers, 8.30%, Series A.......... 127,600 3,243,591 8.18
--------------
36,897,295
--------------
TOTAL SHOPPING CENTER..................... 77,166,150
--------------
TOTAL PREFERRED STOCK (Identified
cost -- $209,248,013).............. 233,500,025
--------------
TOTAL EQUITIES (Identified
cost -- $870,531,968).............. 1,059,850,523
--------------
-------------------
(b) 158,000 shares segregated as collateral for the interest rate swap
transactions.
See accompanying notes to financial statements.
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9
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003
DIVIDEND
PRINCIPAL VALUE YIELD
AMOUNT (NOTE 1) (UNAUDITED)
---------- -------------- ------------
COMMERCIAL PAPER 0.92%
UBS Financial, 0.75%, due 01/02/04
(Identified cost -- $6,605,862)......... $6,606,000 6,605,862
--------------
TOTAL INVESTMENTS (Identified cost --
$877,137,830)......... .................. 148.93% 1,066,456,385
LIABILITIES IN EXCESS OF OTHER ASSETS .... (1.45)% (10,372,698)
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 for Series T,
Series W, Series TH, and Series F).... (39.10)% (280,000,000)
LIQUIDATION VALUE OF AUCTION MARKET
PREFERRED SHARES:
SERIES M28 (Equivalent to $25,000 per
share based on 2,400 shares outstanding). (8.38)% (60,000,000)
--------------
NET ASSETS -- APPLICABLE TO COMMON SHARES
(Equivalent to $18.43 per share based on
38,856,074 shares of capital stock
outstanding) ............................ 100.00% $ 716,083,687
------ --------------
------ --------------
See accompanying notes to financial statements.
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10
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
ASSETS:
Investments in securities, at value (Identified
cost -- $877,137,830) (Note 1)........................ $1,066,456,385
Cash.................................................... 63
Dividends receivable.................................... 6,906,282
Receivable for investment securities sold............... 294,738
Unrealized appreciation on interest rate swap
transactions (Notes 1 and 6).......................... 128,059
Other assets............................................ 40,126
--------------
Total Assets........................................ 1,073,825,653
--------------
LIABILITIES:
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6).......................... 14,681,022
Payable for investment securities purchased............. 1,400,000
Payable for dividends declared on common shares......... 772,846
Payable to investment manager........................... 468,125
Payable for dividends declared on preferred shares...... 206,900
Other liabilities....................................... 213,073
--------------
Total Liabilities................................... 17,741,966
--------------
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
Auction market preferred shares, Series M28 ($25,000
liquidation value, $0.001 par value, 2,400 shares
issued and outstanding) (Notes 1 and 5)............... 60,000,000
--------------
340,000,000
--------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES................ $ 716,083,687
--------------
--------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES consist of:
Common stock ($0.001 par value, 38,856,074 shares issued
and outstanding) (Notes 1 and 5)...................... $ 541,197,061
Undistributed net investment income..................... 543,697
Accumulated net realized loss on investments............ (422,663)
Net unrealized appreciation/(depreciation) on
investments and interest rate swap transactions....... 174,765,592
--------------
$ 716,083,687
--------------
--------------
NET ASSET VALUE PER COMMON SHARE:
($716,083,687[div]38,856,074 shares outstanding)........ $ 18.43
--------------
--------------
MARKET PRICE PER COMMON SHARE............................... $ 17.85
--------------
--------------
MARKET PRICE DISCOUNT TO NET ASSET VALUE PER COMMON SHARE... (3.15)%
--------------
--------------
See accompanying notes to financial statements.
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11
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003(a)
Investment Income (Note 1):
Dividend income......................................... $ 46,451,092
Interest income......................................... 126,415
------------
Total Income....................................... 46,577,507
------------
Expenses:
Investment management fees (Note 2)..................... 7,499,290
Preferred remarketing fees.............................. 744,384
Administration fees (Note 2)............................ 340,661
Reports to shareholders................................. 212,620
Professional fees....................................... 101,814
Custodian fees and expenses............................. 86,286
Directors' fees and expenses (Note 2)................... 42,312
Transfer agent fees and expenses........................ 22,338
Miscellaneous........................................... 141,796
------------
Total Expenses..................................... 9,191,501
Reduction of Expenses (Note 2).......................... (2,823,262)
------------
Net Expenses....................................... 6,368,239
------------
Net Investment Income....................................... 40,209,268
------------
Net Realized and Unrealized Gain/(Loss) on Investments
(Note 1):
Net realized gain on investments........................ 16,665,842
Net realized loss on interest rate swap transactions.... (8,126,956)
Net change in unrealized appreciation on investments.... 207,953,973
Net change in unrealized depreciation on interest rate
swap transactions.................................... 4,360,791
------------
Net realized and unrealized gain/(loss) on
investments..................................... 220,853,650
------------
Net Increase Resulting from Operations...................... 261,062,918
------------
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (3,743,228)
------------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $257,319,690
------------
------------
-------------------
(a) See Note 1.
See accompanying notes to financial statements.
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12
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES
FOR THE PERIOD
FOR THE FEBRUARY 28, 2002(a)
YEAR ENDED THROUGH
DECEMBER 31, 2003(b) DECEMBER 31, 2002(b)
-------------------- --------------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income.................... $ 40,209,268 $ 32,953,127
Net realized gain on investments and
interest rate swap transactions....... 8,538,886 (1,286,027)
Net change in unrealized
appreciation/(depreciation) on
investments and interest rate swap
transactions.......................... 212,314,764 (37,549,172)
------------ ------------
Net increase/(decrease) in net
assets resulting from
operations........................ 261,062,918 (5,882,072)
------------ ------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income.................... (2,449,183) (3,509,955)
Net realized gain on investments......... (1,294,045) (434,405)
------------ ------------
Total dividends and distributions to
preferred shareholders............ (3,743,228) (3,944,360)
------------ ------------
Net increase/(decrease) in net assets
from operations applicable to common
shares................................ 257,319,690 (9,826,432)
------------ ------------
Less Dividends and Distributions to Common
Shareholders from:
Net investment income.................... (29,555,562) (24,413,662)
Net realized gain on investments......... (15,615,873) (3,021,534)
Tax return of capital.................... (10,118,665) (8,942,086)
------------ ------------
Total dividends and distributions to
common shareholders............... (55,290,100) (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............. 3,038,014 3,417,272
Decrease in net assets from underwriting
commissions and offering expenses from
issuance of preferred shares.......... (935,773) (3,360,947)
------------ ------------
Net increase in net assets from
capital stock transactions........ 2,102,241 558,053,594
------------ ------------
Total increase in net assets
applicable to common shares....... 204,131,831 511,849,880
Net Assets Applicable to Common Shares:
Beginning of period...................... 511,951,856 101,976
------------ ------------
End of period............................ $716,083,687 $511,951,856
------------ ------------
------------ ------------
-------------------
(a) Commencement of operations.
(b) See Note 1.
See accompanying notes to financial statements.
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13
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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
FOR THE FEBRUARY 28, 2002(a)
YEAR ENDED THROUGH
PER SHARE OPERATING PERFORMANCE: DECEMBER 31, 2003(b) DECEMBER 31, 2002(b)
-------------------------------- -------------------- --------------------
Net asset value per common share, beginning of period...... $ 13.25 $ 14.57
------- -------
Income from investment operations:
Net investment income................................... 1.04(c) 0.78
Net realized and unrealized gain/(loss) on
investments.............................................. 5.69 (0.90)
------- -------
Total income from investment operations............ 6.73 (0.12)
------- -------
Less dividends and distributions to preferred shareholders
from:
Net investment income................................... (0.07) (0.09)
Net realized gain on investments........................ (0.03) (0.01)
------- -------
Total dividends and distributions to preferred
shareholders..................................... (0.10) (0.10)
------- -------
Total from investment operations applicable to
common shares.................................... 6.63 (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.............................. (0.02) (0.09)
Dilutive effect of common share offering................ -- (0.03)
------- -------
Total offering and organization costs.............. (0.02) (0.15)
------- -------
Less dividends and distributions to common shareholders
from:
Net investment income................................... (0.76) (0.64)
Net realized gain on investments........................ (0.41) (0.08)
Tax return of capital................................... (0.26) (0.23)
------- -------
Total dividends and distributions to common
shareholders..................................... (1.43) (0.95)
------- -------
Net increase/(decrease) in net asset value per common
share.................................................... 5.18 (1.32)
------- -------
Net asset value, per common share, end of period........... $ 18.43 $ 13.25
------- -------
------- -------
Market value, per common share, end of period.............. $ 17.85 $ 13.05
------- -------
------- -------
--------------------------------------------------------------------------------------------------
Net asset value total return(d)............................ 52.61% - 2.73%(e)
------- -------
------- -------
Market value return(d)..................................... 50.07% - 6.95%(e)
------- -------
------- -------
--------------------------------------------------------------------------------------------------
-------------------
(a) Commencement of operations.
(b) See Note 1.
(c) Calculation based on average shares outstanding.
(d) 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.
(e) Not annualized.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
14
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS -- (CONTINUED)
FOR THE PERIOD
FOR THE FEBRUARY 28, 2002(f)
YEAR ENDED THROUGH
RATIOS/SUPPLEMENTAL DATA: DECEMBER 31, 2003(h) DECEMBER 31, 2002(h)
------------------------- -------------------- -------------------
Net assets applicable to common shares, end of period
(in millions)............................................ $ 716.1 $ 512.0
-------- --------
-------- --------
Ratio of expenses to average daily net assets applicable to
common shares (before expense reduction)(l).............. 1.57% 1.52%(i)
-------- --------
-------- --------
Ratio of expenses to average daily net assets applicable to
common shares (net of expense reduction)(l).............. 1.09% 1.05%(i)
-------- --------
-------- --------
Ratio of net investment income to average daily net assets
applicable to common shares (before expense
reduction)(l)............................................ 6.39% 6.82%(i)
-------- --------
-------- --------
Ratio of net investment income to average daily net assets
applicable to common shares (net of expense reduction)(l) 6.88% 7.29%(i)
-------- --------
-------- --------
Ratio of expenses to average daily managed assets (before
expense reduction)(g),(l)................................ 1.04% 1.04%(i)
-------- --------
-------- --------
Ratio of expenses to average daily managed assets (net of
expense reduction)(g),(l)................................ 0.72% 0.72%(i)
-------- --------
-------- --------
Portfolio turnover rate.................................... 20.51% 12.37%(j)
-------- --------
-------- --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)................ $340,000 $280,000
-------- --------
-------- --------
Total shares outstanding (in 000's)........................ 14 11
-------- --------
-------- --------
Asset coverage per share................................... $ 77,653 $ 70,710
-------- --------
-------- --------
Liquidation preference per share........................... $ 25,000 $ 25,000
-------- --------
-------- --------
Average market value per share(k).......................... $ 25,000 $ 25,000
-------- --------
-------- --------
-------------------
(f) Commencement of operations.
(g) Average daily managed assets represent the net assets applicable to common
shares plus the liquidation preference of preferred shares.
(h) See Note 1.
(i) Annualized.
(j) Not annualized.
(k) Based on weekly prices.
(l) Ratios do not reflect the effects of dividend payments to preferred
shareholders.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
15
--------------------------------------------------------------------------------
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 official closing 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.
--------------------------------------------------------------------------------
16
--------------------------------------------------------------------------------
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. The interest rate swaps are
intended to reduce or eliminate the risk that an increase in short-term interest
rates could have on the performance of the fund's common shares as a result of
the floating rate nature of leverage. 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.
Swap agreements involve, to varying degrees, elements of market and
counterparty risk, and exposure to loss in excess of the related amounts
reflected in the Statement of Assets and Liabilities.
Revision of Financial Information: As a result of a recent FASB Emerging
Issues Task Force consensus, which requires that periodic payments under
interest rate swap transactions be reported as a component of realized and
unrealized gains/losses in the fund's Statement of Operations, the fund has
reclassified amounts previously reported as interest expense on interest rate
swap transactions, thereby revising certain amounts in the Statement of Changes
in Net Assets and the Financial Highlights. For the year ended December 31, 2003
net investment income was increased by $8,204,532 ($0.21 per share), and net
realized loss on interest rate swap transactions and net change in unrealized
depreciation on interest rate swap transactions were increased by $8,126,956 and
$77,576, respectively (a total of $0.21 per share). For the period ended
December 31, 2002, net investment income was increased by $5,029,510 ($0.13 per
share), and net realized loss on interest rate swap transactions and net change
in unrealized depreciation on interest rate swap transactions were increased by
$4,563,379 and $466,131, respectively (a total of $0.13 per share).
Additionally, the ratio of net investment income to average daily net assets
applicable to common shares (before expense reduction and net of expense
reduction) increased 1.40% and 1.11% for the year ended December 31, 2003 and
the period ended December 31, 2002, respectively; the ratio of expenses to
average daily net assets applicable to common shares (before expense reduction
and net of expense reduction) decreased 1.40% and 1.11% for the year ended
December 31, 2003 and the period ended December 31, 2002, respectively; and the
ratio of expenses to average daily managed assets (before expense reduction and
net of expense reduction) decreased 0.93% and 0.75% for the year ended
December 31, 2003 and the period ended December 31, 2002, respectively. The
reclassifications had no effect on net assets or the net increase in net assets
from operations applicable to common shares.
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. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. The fund
records distributions received in excess of income from underlying investments
as a reduction of cost of investments and/or realized gain. Such
--------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
amounts are based on estimates if actual amounts are not available, and actual
amounts of income, realized gain and return of capital may differ from the
estimated amounts. The fund adjusts the estimated amounts of the components of
distributions (and consequently its net investment income) as necessary once the
issuers provide information about the actual composition of the distributions.
Revision of Financial Information: Due to the nature of commercial real
estate and the REIT structure, which generally is not subject to corporate tax,
REIT dividends can be characterized as a combination of net income, capital
gains (from asset dispositions) and return of capital (which generally relates
to property depreciation). To date, it has been the fund's policy to distribute
to its shareholders all dividends received, regardless of dividend
characterization, from the securities it holds in the year that such dividends
were received. The fund has reclassified a portion of its net investment income
as an increase to net realized gain on investments and as an increase to
unrealized appreciation/(depreciation) on investments for the current year and
for prior periods. These reclassifications are being done to recognize the
return of capital and realized gains that have been reported by the securities
held in the portfolio of investments. These changes for the year ended
December 31, 2002 are reflected in the Statement of Changes in Net Assets as
follows:
PREVIOUSLY AS
REPORTED REVISED
-------- -------
Net investment income................................... $42,419,421 $ 32,953,127
Net realized gains on investments and interest rate swap
transactions.......................................... (2,358,962) (1,286,027)
Net change in unrealized appreciation/(depreciation) on
investments and interest rate swap transactions....... (45,942,531) (37,549,172)
----------- ------------
Net increase/(decrease) in net assets resulting from
operations....................................... $(5,882,072) $ (5,882,072)
----------- ------------
----------- ------------
On the Financial Highlights, the net investment income per share figures
have been reduced and the net realized gain/(loss) on investments per share have
been correspondingly increased. In addition, the ratios of net investment income
have been reduced. These reclassifications do not change the actual dividends
that were received by the fund, nor do they alter any taxpayer records, as such
adjustments have historically been captured in the fund's tax reporting to its
shareholders.
--------------------------------------------------------------------------------
18
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The reclassifications for the Financial Highlights are as follows:
DECREASE IN
RATIOS OF NET
INCREASE IN INVESTMENT
NET REALIZED INCOME TO
AND AVERAGE DAILY
UNREALIZED NET ASSETS
DECREASE IN NET GAIN/(LOSS) (BEFORE EXPENSE
INVESTMENT ON REDUCTION AND
YEAR ENDED INCOME INVESTMENTS NET OF EXPENSE
DECEMBER 31, PER SHARE PER SHARE REDUCTION)
------------ --------- --------- ----------
2002 $0.35 $0.35 3.20%
These reclassifications had no effect on net assets or the net increase in
net assets resulting from operations or cash received from the underlying
investments.
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 from generally accepted accounting principles.
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 declared
and recorded 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 M28 and Series W preferred shares pay dividends based on a variable
interest rate set at auctions, normally held every 28 days. Dividends for Series
M28 and Series W preferred shares are declared and recorded 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.
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
--------------------------------------------------------------------------------
19
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 year ended December 31,
2003, the fund incurred investment management fees of $7,499,290.
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 waiver continues, it may lower
the fund's expenses and increase its total return. For the year ended
December 31, 2003, the investment manager waived management fees of $2,823,262.
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 year ended December 31, 2003, the fund incurred $176,454 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 year ended December 31, 2003, fees and related expenses accrued for
nonaffiliated directors totaled $42,312.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments for the
year ended December 31, 2003, totaled $237,550,482 and $179,574,976,
respectively.
NOTE 4. INCOME TAXES
The fund had a return of capital of $10,118,665 ($0.26 per common share) for
year ended December 31, 2003 which has been deducted from paid-in capital.
Short-term capital gains are reflected in the financial statements as realized
gains on investments but are typically treated as ordinary income for tax
purposes.
--------------------------------------------------------------------------------
20
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended December 31, 2003 the dividends and distributions to
shareholders are characterized for tax purposes as follows:
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
2003 2002
---- ----
Preferred shareholders:
-----------------------
Ordinary income.............................. $ 2,449,183 $ 3,509,955
Long-term capital gains...................... 1,294,045 434,405
----------- -----------
Total dividends and distributions to
preferred shareholders............... $ 3,743,228 $ 3,944,360
----------- -----------
----------- -----------
Common shareholders:
--------------------
Ordinary income.............................. $29,555,562 $24,413,662
Long-term capital gains...................... 15,615,873 3,021,534
Tax return of capital........................ 10,118,665 8,942,086
----------- -----------
Total dividends and distributions to
common shareholders.................. $55,290,100 $36,377,282
----------- -----------
----------- -----------
At December 31, 2003 the cost of investments and net unrealized appreciation
for federal income tax purposes were as follows:
Aggregate cost.................................... $877,016,796
------------
------------
Gross unrealized appreciation..................... $192,448,512
Gross unrealized depreciation..................... (3,008,923)
------------
Net unrealized appreciation on investments........ 189,439,589
Net unrealized depreciation on interest rate swap
transactions.................................... (14,552,963)
------------
Net unrealized depreciation....................... $174,886,626
------------
------------
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to differing treatments of interest rate swap
payments and wash sales on Portfolio Securities. To the extent such differences
are permanent in nature, such amounts are reclassified within the capital
accounts. During the year ended December 31, 2003 the fund decreased
undistributed net investment income by $7,660,825 and increased accumulated net
realized gain on investments by $7,660,825.
The components of distributable earnings on a tax basis consist of
undistributed ordinary income of $0 and undistributed captial gains of $0.
--------------------------------------------------------------------------------
21
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. CAPITAL STOCK
The fund is authorized to issue 100 million shares of common stock at a par
value of $0.001 per share.
During the year ended December 31, 2003, the fund issued 219,752 shares of
common stock for the reinvestment of dividends.
On February 28, 2002, the fund completed the initial public offering of
34,000,000 shares of common stock. Proceeds paid to the fund amounted to
$494,292,000 after deduction of underwriting commissions and offering expenses
of $15,708,000.
On March 8, 2002, the fund 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 September 15, 2003, the fund issued 2,400 auction market preferred
shares, Series M28 (par value $0.001). Proceeds paid to the fund amounted to
$59,064,267 after deduction of underwriting commissions and offering expenses of
$935,733. This issue has received a 'AAA/Aaa' rating from Standard & Poor's and
Moody's.
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. These issues have
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
--------------------------------------------------------------------------------
22
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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) approve any matter that materially and adversely affects the
rights, preferences, or powers of that series.
NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS
The fund has entered into interest rate swap agreements with Merrill Lynch
Derivative Products, UBS AG, Fleet Global Markets, and Royal Bank of Canada.
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, 2003 are as follows:
UNREALIZED
NOTIONAL FLOATING RATE(a) APPRECIATION/
COUNTERPARTY AMOUNT FIXED RATE (RESET MONTHLY) TERMINATION DATE (DEPRECIATION)
------------ ------ ---------- --------------- ---------------- --------------
Merrill Lynch Derivative Products $46,000,000 4.5600% 1.1700% April 5, 2005 $ (1,812,882)
Merrill Lynch Derivative Products $46,000,000 5.2100% 1.1700% April 5, 2007 (3,517,438)
Merrill Lynch Derivative Products $46,000,000 5.5800% 1.1700% April 6, 2009 (4,425,903)
UBS AG $24,000,000 4.4500% 1.1620% April 15, 2005 (900,935)
UBS AG $24,000,000 5.1200% 1.1620% April 15, 2007 (1,731,909)
UBS AG $24,000,000 5.4950% 1.1620% April 15, 2009 (2,151,539)
Fleet Global Markets $14,000,000 3.2125% 1.1700% October 22, 2008 128,059
Royal Bank of Canada $14,000,000 3.6800% 1.1488% October 22, 2008 (140,416)
------------
$(14,552,963)
------------
------------
-------------------
(a) Based on LIBOR (London Interbank Offered Rate). Represents rates in effect
at December 31, 2003.
--------------------------------------------------------------------------------
23
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
REPORT OF INDEPENDENT AUDITORS
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, 2003, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for the year then ended and the period February 28, 2002
(commencement of operations) through 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 audits. We conducted our audits 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 audits, which included
confirmation of securities at December 31, 2003 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
As explained in Note 1, the Fund has revised amounts previously reported as
net investment income to reflect the reclassification of distributions received
in excess of income from underlying investments. Also as explained in Note 1, as
a result of a recent FASB Emerging Issues Task Force consensus which requires
that periodic payments under interest rate swap transactions be reported as a
component of realized and unrealized gains/losses in the Fund's statement of
operations, the Fund has reclassified amounts previously reported as interest
expense on interest rate swap transactions. These reclassifications had no
effect on net assets or the net increase in net assets resulting from
operations.
PricewaterhouseCoopers LLP
New York, New York
February 17, 2004
--------------------------------------------------------------------------------
24
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
AVERAGE ANNUAL TOTAL RETURNS (a)
(PERIODS ENDED DECEMBER 31, 2003) (UNAUDITED)
SINCE INCEPTION
ONE YEAR (2/28/02)
-------- ---------
52.61% 25.60%
TAX INFORMATION -- 2003 (UNAUDITED)
During the year ended December 31, 2003 the fund had post May 5th long term
capital gains distributions of $12,153,422 and qualified dividend income
distributions of $2,593,732. Pursuant to the Jobs and Growth Tax Relief
Reconciliation Act of 2003, this dividend is eligible for a maximum allowable
rate of 15% for individuals.
For the year ended December 31, 2003 the fund had long term capital gains
distributions of $16,909,928.
Shareholders are advised to consult with their own tax advisors as to the
Federal, State, and local tax status of the income received.
REINVESTMENT PLAN
We urge shareholders who want to take advantage of this plan and whose shares
are held in 'street name' to consult your broker, as soon as possible to
determine if you must change registration into your own name to participate.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the fund may purchase, from time to time, shares of its
common stock in the open market.
-------------------
(a) Based on net asset value.
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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 10 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
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
shares may be purchased through any of the underwriters, acting as broker or,
after the completion of 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).
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.
A portion of the fund's dividends and distributions may not be tied to the
fund's investment income and capital gains and could represent a return of the
fund's capital. Any return of capital would not represent yield or investment on
the fund's investment portfolio.
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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 investment manager
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 2006 Since Co-chairman and co-chief 10
757 Third Avenue and secretary inception executive officer of
New York, New York Cohen & Steers Capital
Age: 50 Management, Inc., the
fund's investment
manager since 2003.
Prior thereto, chairman
of Cohen & Steers
Capital Management, Inc.
Martin Cohen ............. Director, 2004 Since Co-chairman and co-chief 10
757 Third Avenue president and inception executive officer of
New York, New York treasurer Cohen & Steers Capital
Age: 55 Management, Inc., the
fund's investment
manager. Prior thereto,
President of Cohen &
Steers Capital
Management Inc.
Gregory C. Clark ......... Director 2005 Since Private Investor. Prior 10
99 Jane Street inception thereto, President of
New York, New York Wellspring Management
Age: 56 Group (investment
advisory firm).
Bonnie Cohen ............. Director 2005 Since Consultant. Prior 10
1824 Phelps Place, N.W. inception thereto, Undersecretary
Washington, D.C. of State, United States
Age: 61 department of state.
George Grossman .......... Director 2006 Since Attorney-at-law. 10
17 Elm Place inception
Rye, New York
Age: 50
Richard J. Norman ........ Director 2004 Since Private investor. Prior 10
7520 Hackamore Drive inception thereto, investment
Potomac, Maryland representative of Morgan
Age: 60 Stanley Dean Witter.
Willard H. Smith, Jr. ... Director 2005 Since Director. Board member 10
7231 Encelia Drive inception of Essex Property Trust,
La Jolla, California Inc., Highwoods
Age: 67 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: 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 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.
757 Third Avenue
Martin Cohen New York, NY 10017
Director and president (212) 832-3232
Gregory C. Clark FUND SUBADMINISTRATOR AND CUSTODIAN
Director State Street Bank and Trust Company
225 Franklin Street
Bonnie Cohen Boston, MA 02110
Director
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
Adam Derechin LEGAL COUNSEL
Vice president and assistant treasurer Simpson Thacher & Bartlett
425 Lexington Avenue
Lawrence B. Stoller New York, NY 10017
Assistant secretary
New York Stock Exchange Symbol: RQI
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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31
COHEN & STEERS
QUALITY INCOME REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
QUALITY INCOME REALITY FUND
ANNUAL REPORT
DECEMBER 31, 2003
STATEMENT OF DIFFERENCES
The division sign shall be expressed as............................. [div]
The section symbol shall be expressed as............................ 'SS'