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: June 30, 2004
Item 1. Reports to Stockholders.
The registrant's semi-annual report to shareholders, for the period ended June
30, 2004 is included herein.
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 10. 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 11. Exhibits.
(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: August 19, 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 officer and principal financial officer
Date: August 19, 2004
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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July 26, 2004
To Our Shareholders:
We are pleased to submit to you our report for the quarter and six months
ended June 30, 2004. The net asset value at that date was $18.49. In addition,
during the quarter, three $0.115 per share monthly dividends were declared and
paid to common shareholders.
INVESTMENT REVIEW
For the quarter, Cohen & Steers Quality Income Realty Fund had a total
return, based on income and change in net asset value, of -9.2%. This compares
to the NAREIT Equity REIT Index's(a) total return of -5.8%. For the six months
ended June 30, 2004, the fund's total return was 4.3%, compared to NAREIT's
5.5%.
The second quarter of 2004 brought further evidence of a strengthening U.S.
economic recovery. The release of the March report on U.S. non-farm payrolls in
early April forced many of the pessimistic economic naysayers to acknowledge
that the recovery was, in fact, for real.
The second quarter began with a dramatic decline in REIT stock prices,
followed by a dramatic rebound and, most importantly, in our view a decisive
rotation in leadership within the REIT market. By way of review, the March jobs
report took the capital markets by surprise on April 2 and sent the bond market
reeling, resulting in the worst quarter for the bond market since the first
quarter of 1994. REITs dropped 18% from their highs at the end of March, before
bottoming on May 10. We characterized this decline as technical in nature,
driven by the valuation concerns of some investors, and one that we believed
presented an attractive investment opportunity. In our view, the very jobs
report that set off the decline in REIT share prices was likely to contribute to
improving real estate fundamentals and greater cash flow for REITs.
We are pleased to report that since then REITs have rebounded significantly,
recording a 14% total return from May 10 through the end of June, and were one
of the best performing asset classes over this time period. The strong returns
of the last two months are certainly inconsistent with the notion put forward by
some pundits that REITs tipped into a bear market in the second quarter in
sympathy with the bond market. In fact, if the first half of 2004 is a proper
guide, we believe REITs are on pace to deliver the low- to mid-teens total
return profile that is consistent with the sector's long-term average.
While many observers focused on the uncharacteristic volatility in REIT
share prices, the more interesting story in the second quarter was a rotation of
leadership within the REIT market. The defensive issues, which had
-------------------
(a) The NAREIT Equity REIT Index is an unmanaged, market capitalization weighted
index of all publicly traded REITs that invest predominantly in the equity
ownership of real estate. The index is designed to reflect the performance
of all publicly traded equity REITs as a whole.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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led the REIT group since 2001, have ceded their market leadership to the more
cyclically inclined companies that we believe will respond to the economic
recovery most quickly and most dramatically. The broad distribution of returns
across sectors during the quarter highlights in greater detail this change in
leadership, as well as the above-average volatility experienced during the
quarter. The best performing sectors were apartment and hotel, which generated
total returns of 2.2% and -2.6% respectively. Conversely, the worst performing
sectors during the quarter were health care (-13.4% total return) and regional
mall (-11.5%). The obvious difference between the two groups is the short
lease duration and more variable demand patterns of the strong performing
cyclical sectors versus the long lease terms and relatively consistent demand
profiles of the laggards, which tend not to respond quickly to accelerating
economic growth.
The fund's best performing investments during the quarter were in the
apartment and industrial sectors, which produced total returns of 1.0% and
-1.8% respectively, while the worst performing sector for the fund was the
healthcare sector, which had a -14.8% total return. Apartment companies
AvalonBay Communities and AMLI Residential Properties were the fund's best
performing holdings, contributing total returns of 6.8% and 5.7% respectively.
Laggards during the quarter included Health Care REIT, with a total return of
-18.5% and Glimcher Realty Trust, which generated a total return of -16.6%.
Our performance during the quarter was also enhanced by our position in
Keystone Property Trust, a small-cap industrial REIT that announced it was being
acquired by a joint venture between ProLogis Trust and affiliates of Eaton Vance
Management for $23.80 per share in cash, a 14% premium to the previous day's
closing price. This transaction is significant for two reasons, among others.
One is that it highlights the fact that, in our view, Wall Street continues to
underestimate real estate values (the consensus net asset value estimate for
Keystone prior to the deal was approximately $18.50 per share). Additionally,
we believe the transaction represents another validation of our strategy, as
Keystone embodied many of the key attributes we look for in investment
candidates. Specifically, these attributes include companies that are relatively
under-followed, small to mid-cap in size with an above-average dividend yield,
and that are trading at a lower price/NAV ratio than their peers.
INVESTMENT OUTLOOK
In the wake of the REIT stock price decline in the second quarter, many
investors have asked us whether REITs can continue to perform well in what many
are concerned (overly so, in our view) may be a period of rising interest rates.
Our view has always been and continues to be that real estate fundamentals
are the primary driver of REIT returns over the long run. Still, we regularly
examine the extent to which REITs are correlated with other asset classes. We
have found that over the long term REIT share price behavior has not been
statistically related in any material way to the performance of bonds or
interest rates. In other words, over time, the performance of the bond market
has explained virtually none of the performance of REITs.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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Over the short term, REITs may appear to correlate with interest rates, as
we have seen recently. However, although we can say with certainty that rising
rates result in poor returns for bonds, the REIT return equation cannot be
solved using interest rates as the only input variable. Importantly, we have
also found that in the 12 months following periods of rising interest rates, as
the dampening effect of higher interest rates on security returns has subsided
and the acceleration of real estate fundamentals has kicked in, REIT performance
historically has been consistently very strong.
Nonetheless, we cannot ignore the fact that interest rates can have an
impact on REIT earnings and asset values. Higher interest rates will increase
the cost of REITs' debt capital over time, although the impact will be mitigated
by REITs' use of primarily long-term, fixed-rate debt. Higher interest rates may
also result in higher real estate capitalization rates, which would tend to
lower estimates of property values. However, we believe that if interest rates
are rising due to a stronger economy and attendant higher inflationary
expectations (which in the past have been favorable for real estate
fundamentals), this could serve to offset at least some of the impact that
higher interest rates would otherwise have on capitalization rates.
Higher interest rates can also have some beneficial effects on REITs. The
higher inflationary expectations, which are partially driving higher interest
rates, push up the price of building costs, especially inputs like steel,
concrete, lumber, labor and construction period interest. Thus the overall
replacement cost of real estate escalates, which flows through eventually in the
form of higher market rents. Already we are hearing reports that construction
costs have risen by as much as 25% over the past two years. If capitalization
rates were to rise, the return on assets that REITs could achieve on external
acquisitions of property should increase. Furthermore, higher debt costs will
tend to choke off development of new, competitive real estate. These higher debt
costs tend to have a greater impact on the private developers who typically
build the majority of new buildings and use a higher proportion of debt in their
capital structure.
Our conclusion is that, although changes in interest rates have a varied
impact on REITs, the positive and negative impacts have historically tended to
offset one another, such that the overall impact on REIT returns has not
generally been material, thus, the historical lack of correlation. What remains
material is the supply and demand for real estate and how that impacts building
occupancies and rents. The most important thing to recognize about the prospects
for REIT returns, in our view, is that the job growth that occurred in March of
this year was followed up with strong job growth reports for both April and May.
With this key economic driver in place, we believe the prospects for higher
building occupancies and rents, and thus for higher cash flows for REITs, are
excellent.
At this point, with the first dose of Fed tightening already under our belts
and a further rise in interest rates widely anticipated among economists and
investors alike, it is safe to say that whatever impact investors believe rising
interest rates may have on REITs has been well digested by the stock market. The
net effect has been to bring REIT valuations in line with historical averages.
In our view, the favorable prospects for accelerating cash
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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flow growth over the next couple of years in combination with these valuations
give us confidence that REITs can continue to generate attractive total returns.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
GREG E. BROOKS
GREG E. BROOKS
Portfolio Manager
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Cohen & Steers is online at 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.
ONLINE ACCESS is available for shareholders of Cohen &
Steers funds whose accounts are held directly with Boston
Financial Data Services, the fund's transfer agent. After
registering, you will be able to manage your entire account
online including purchasing or redeeming shares, updating
account information, and checking your portfolio holdings.
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.
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OUR LEVERAGE STRATEGY
(UNAUDITED)
While we do not attempt to predict what future interest
rates will be, it has been our philosophy to utilize
interest rate swap transactions to seek to reduce the
interest rate risk inherent in our utilization of leverage.
Our leverage strategy involves issuing auction market
preferred shares (AMPS) to raise additional capital for the
fund, with an objective of increasing the net income
available for shareholders. As of June 30, 2004, AMPS
represented 32% of the fund's managed net assets.
Considering that AMPS have variable dividend rates, we seek
to lock in the rate on a majority of this additional capital
through interest rate swap agreements (where we effectively
convert our variable rate obligation to a fixed rate
obligation for the term of the swap agreements).
Specifically, we have fixed the rate on 70% of our
borrowings at an average interest rate of 4.9%, for an
average remaining period of 3.0 years (when we first entered
into the swaps, the average term was 5 years). By locking in
a large portion of our leveraging costs, we have endeavored
to adequately protect the dividend-paying ability of the
fund, which is one of the reasons the fund has been able to
increase its monthly dividend on several occasions. The use
of leverage increases the volatility of the fund's net asset
value in both up and down markets. However, we believe that
locking in a portion of the fund's leveraging costs for the
term of the swap agreements partially protects the fund from
any impact that an increase in short-term interest rates may
have as a result of the use of leverage.
LEVERAGE FACTS
Leverage (as % of managed net assets)........... 32%
% Fixed Rate.................................... 70%
% Variable Rate................................. 30%
Average Rate on Swaps........................... 4.9%
Average Term on Swaps........................... 3.0 years
Current Rate on AMPS............................ 1.5%
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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SCHEDULE OF INVESTMENTS
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD(a)
--------- -------------- ------------
EQUITIES 147.54%(b)
COMMON STOCK 116.69%
DIVERSIFIED 13.76%
Colonial Properties Trust............. 582,300 $ 22,436,019 6.96%
Crescent Real Estate Equities Co...... 1,396,200 22,506,744 9.31
iStar Financial....................... 400,500 16,020,000 6.98
Vornado Realty Trust.................. 663,443 37,889,230 4.97
--------------
98,851,993
--------------
HEALTH CARE 17.59%
Health Care Property Investors........ 1,190,400 28,617,216 6.95
Health Care REIT...................... 969,625 31,512,812 7.38
LTC Properties........................ 131,200 2,177,920 6.63
Nationwide Health Properties.......... 1,205,300 22,780,170 7.83
Ventas................................ 1,766,500 41,247,775 5.57
--------------
126,335,893
--------------
HOTEL 2.29%
Hospitality Properties Trust.......... 389,200 16,463,160 6.81
--------------
INDUSTRIAL 3.15%
First Industrial Realty Trust......... 614,500 22,662,760 7.43
--------------
MORTGAGE 2.83%
Newcastle Investment Corp............. 678,528 20,321,914 8.01
--------------
OFFICE 33.62%
Arden Realty.......................... 826,800 24,316,188 6.87
Brandywine Realty Trust............... 1,140,900 31,021,071 6.47
CarrAmerica Realty Corp............... 1,010,600 30,550,438 6.62
Equity Office Properties Trust........ 1,314,400 35,751,680 7.35
Highwoods Properties.................. 670,400 15,754,400 7.23
HRPT Properties Trust................. 635,400 6,360,354 7.99
Kilroy Realty Corp. .................. 142,600 4,862,660 5.81
Mack-Cali Realty Corp. ............... 1,073,800 44,433,844 6.09
Maguire Properties.................... 604,800 14,980,896 6.46
Prentiss Properties Trust............. 1,000,200 33,526,704 6.68
--------------
241,558,235
--------------
-------------------
(a) Dividend yield is computed by dividing the security's current annual
dividend rate by the last sale price on the principal exchange or market,
on which such security trades.
(b) Percentages indicated are based on the net assets of the fund.
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
OFFICE/INDUSTRIAL 9.00%
Liberty Property Trust................ 1,065,200 $ 42,831,692 6.02%
Reckson Associates Realty Corp. ...... 794,100 21,805,986 6.18
--------------
64,637,678
--------------
RESIDENTIAL 15.21%
APARTMENT 14.69%
AMLI Residential Properties Trust..... 77,000 2,259,180 6.54
Archstone-Smith Trust................. 754,100 22,117,753 5.86
AvalonBay Communities................. 307,200 17,362,944 4.95
Camden Property Trust................. 366,600 16,790,280 5.55
Gables Residential Trust.............. 586,900 19,942,862 7.09
Home Properties....................... 361,600 14,095,168 6.36
Mid-America Apartment Communities..... 309,400 11,723,166 6.18
Town & Country Trust.................. 50,000 1,262,000 6.81
--------------
105,553,353
--------------
MANUFACTURED HOME 0.52%
Affordable Residential Communities.... 225,200 3,738,320 7.53
--------------
TOTAL RESIDENTIAL..................... 109,291,673
--------------
SELF STORAGE 0.46%
Sovran Self Storage................... 87,300 3,333,114 6.31
--------------
SHOPPING CENTER 18.78%
COMMUNITY CENTER 6.74%
Cedar Shopping Centers................ 200,000 2,298,000 7.83
Heritage Property Investment Trust.... 449,100 12,152,646 7.76
Kramont Realty Trust.................. 1,293,300 20,692,800 8.13
New Plan Excel Realty Trust........... 222,700 5,202,272 7.06
Urstadt Biddle Properties -- Class A.. 544,000 8,056,640 5.81
--------------
48,402,358
--------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
REGIONAL MALL 12.04%
Glimcher Realty Trust................. 605,200 $ 13,387,024 8.69%
Macerich Co........................... 807,857 38,672,115 5.10
Mills Corp............................ 737,400 34,436,580 5.10
--------------
86,495,719
--------------
TOTAL SHOPPING CENTER................. 134,898,077
--------------
TOTAL COMMON STOCK
(Identified cost --
$660,580,498).................. 838,354,497
--------------
PREFERRED STOCK 30.85%
DIVERSIFIED 5.90%
Colonial Properties Trust, 8.125%,
Series D........................... 64,900 1,663,387 7.93
Crescent Real Estate Equities Co.,
6.75%, Series A (Convertible)(a)... 1,826,000 36,483,480 8.45
iStar Financial, 7.80%, Series F...... 94,600 2,242,020 8.23
iStar Financial, 7.65%, Series G...... 80,000 1,938,000 7.90
--------------
42,326,887
--------------
HEALTH CARE 0.14%
Omega Healthcare Investors, 8.375%,
Series D........................... 40,000 1,004,000 8.34
--------------
HOTEL 6.41%
FelCor Lodging Trust, 9.00%, Series
B.................................. 652,500 16,312,500 9.00
Host Marriott Corp., 10.00%, Series
A.................................. 7,000 178,850 9.77
Host Marriott Corp., 10.00%, Series
B.................................. 14,100 363,921 9.69
Host Marriott Corp., 10.00%, Series
C.................................. 30,700 807,410 9.51
Host Marriott Corp., 8.875%, Series
E.................................. 10,000 254,500 8.72
Innkeepers USA Trust, 8.00%, Series
C.................................. 56,000 1,349,600 8.30
LaSalle Hotel Properties, 10.25%,
Series A........................... 1,000,000 26,775,000 9.57
--------------
46,041,781
--------------
INDUSTRIAL 0.23%
Keystone Property Trust, 9.125%,
Series D........................... 64,400 1,667,960 8.81
--------------
MORTGAGE 0.21%
Newcastle Investment Corp., 9.75%,
Series B........................... 56,000 1,534,400 8.90
--------------
-------------------
(a) 410,000 shares segregated as collateral for interest rate swap transactions.
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
OFFICE 2.64%
HRPT Properties Trust, 8.75%, Series
B.................................. 120,000 $ 3,156,000 8.32%
Highwoods Properties, 8.625%, Series
A.................................. 13,195 13,227,988 8.60
Maguire Properties, 7.625%, Series
A.................................. 106,600 2,574,390 7.89
--------------
18,958,378
--------------
OFFICE/INDUSTRIAL 0.05%
PS Business Parks, 8.75%, Series F.... 4,100 107,830 8.32
ProLogis, 8.54%, Series C............. 4,000 225,500 7.57
--------------
333,330
--------------
RESIDENTIAL -- APARTMENT 4.74%
Apartment Investment & Management Co.,
8.75%, Series D.................... 5,530 138,858 8.71
Apartment Investment & Management Co.,
10.10%, Series R................... 950,000 25,042,000 9.48
Home Properties, 9.00%, Series F...... 196,000 5,424,300 8.23
Mid-America Apartment Communities,
8.30%, Series H.................... 138,100 3,473,215 8.25
--------------
34,078,373
--------------
SHOPPING CENTER 10.53%
COMMUNITY CENTER 5.25%
Developers Diversified Realty Corp.,
8.60%, Series F.................... 1,039,400 26,868,490 8.33
Federal Realty Investment Trust,
8.50%, Series B.................... 310,300 8,207,435 8.03
Urstadt Biddle Properties, 8.50%,
Series C........................... 24,000 2,628,000 7.76
--------------
37,703,925
--------------
FREE STANDING 0.09%
Commercial Net Lease Realty, 9.00%,
Series A........................... 25,000 658,000 8.55
--------------
OUTLET CENTER 0.11%
Chelsea Property Group, 8.375%, Series
A.................................. 14,000 793,625 7.39
--------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
REGIONAL MALL 5.08%
CBL & Associates Properties, 8.75%,
Series B........................... 430,000 $ 22,704,000 8.29%
Glimcher Realty Trust, 8.75%, Series
F.................................. 40,000 1,012,000 8.65
Glimcher Realty Trust, 8.125%, Series
G.................................. 40,000 950,000 8.55
Mills Corp., 9.00%, Series B.......... 55,300 1,473,192 8.45
Mills Corp., 9.00%, Series C.......... 159,600 4,233,390 8.52
Mills Corp., 8.75%, Series E.......... 84,000 2,201,640 8.35
Simon Property Group, 8.75%, Series F. 30,000 786,000 8.35
Taubman Centers, 8.30%, Series A...... 127,600 3,170,860 8.35
36,531,082
--------------
TOTAL SHOPPING CENTER................. 75,686,632
--------------
TOTAL PREFERRED STOCK
(Identified cost --
$210,286,023)................. 221,631,741
--------------
TOTAL EQUITIES
(Identified cost --
$870,866,521)................. 1,059,986,238
--------------
PRINCIPAL
AMOUNT
----------
COMMERCIAL PAPER 0.40%
State Street Corp., 1.10%, due 07/01/04
(Identified cost -- $2,851,000)...... $2,851,000 2,851,000
-------------
TOTAL INVESTMENTS (Identified
cost -- $873,717,521)............... 147.94% 1,062,837,238
LIABILITIES IN EXCESS OF OTHER
ASSETS.............................. (0.61)% (4,388,460)
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)....................... (38.98)% (280,000,000)
LIQUIDATION VALUE OF AUCTION MARKET
PREFERRED SHARES: SERIES M28
(Equivalent to $25,000 per share
based on 2,400 shares
outstanding)........................ (8.35)% (60,000,000)
------ -------------
NET ASSETS APPLICABLE TO COMMON SHARES
(Equivalent to $18.49 per share
based on 38,856,074 shares of
capital stock outstanding).......... 100.00% $ 718,448,778
------ -------------
------ -------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2004 (UNAUDITED)
ASSETS:
Investments in securities, at value (Identified
cost -- $873,717,521) (Note 1)........................ $1,062,837,238
Cash.................................................... 330
Dividends receivable.................................... 5,495,603
Unrealized appreciation on interest rate swap
transactions (Notes 1 and 6).......................... 568,264
Other assets............................................ 65,760
--------------
Total Assets........................................ 1,068,967,195
--------------
LIABILITIES:
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6).......................... 9,089,970
Payable to investment manager........................... 453,833
Payable for dividends declared on common shares......... 337,192
Payable for investment securities purchased............. 293,878
Payable for dividends declared on preferred shares...... 212,552
Payable to administrator................................ 30,607
Other liabilities....................................... 100,385
--------------
Total Liabilities................................... 10,518,417
--------------
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................ $ 718,448,778
--------------
--------------
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)...................... $ 541,318,970
Distributions in excess of net investment income........ (6,197,802)
Accumulated net realized gain on investments............ 2,729,599
Net unrealized appreciation on investments and interest
rate swap transactions................................ 180,598,011
--------------
$ 718,448,778
--------------
--------------
NET ASSET VALUE PER COMMON SHARE:
($718,448,778[div]38,856,074 shares outstanding).......... $ 18.49
--------------
--------------
MARKET PRICE PER COMMON SHARE............................... $ 16.70
--------------
--------------
MARKET PRICE PREMIUM/(DISCOUNT) TO NET ASSET VALUE PER
COMMON SHARE.............................................. (9.68)%
--------------
--------------
See accompanying notes to financial statements.
-------------------------------------------------------------------------------
11
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
-------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
Investment Income (Note 1):
Dividend income......................................... $25,279,246
Interest income......................................... 25,030
-----------
Total Income....................................... 25,304,276
-----------
Expenses:
Investment management fees (Note 2)..................... 4,486,517
Preferred remarketing fees.............................. 423,078
Administration fees (Note 2)............................ 189,490
Reports to shareholders................................. 168,000
Professional fees....................................... 73,980
Custodian fees and expenses............................. 46,675
Directors' fees and expenses (Note 2)................... 20,976
Transfer agent fees and expenses........................ 10,817
Miscellaneous........................................... 62,094
-----------
Total Expenses..................................... 5,481,627
Reduction of Expenses (Note 2).......................... (1,689,042)
-----------
Net Expenses....................................... 3,792,585
-----------
Net Investment Income....................................... 21,511,691
-----------
Net Realized and Unrealized Gain/(Loss) on Investments (Note
1):
Net realized gain on investments........................ 7,667,289
Net realized loss on interest rate swap transactions.... (4,515,027)
Net change in unrealized appreciation on investments.... (198,838)
Net change in unrealized depreciation on interest rate
swap transactions.................................... 6,031,257
-----------
Net realized and unrealized gain/(loss) on
investments..................................... 8,984,681
-----------
Net Increase Resulting from Operations...................... 30,496,372
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (2,025,340)
-----------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $28,471,032
-----------
-----------
See accompanying notes to financial statements.
-------------------------------------------------------------------------------
12
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
-------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES (UNAUDITED)
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31, 2003
---------------- -----------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income............................ $ 21,511,691 $ 40,209,268
Net realized gain on investments and interest
rate swap transactions......................... 3,152,262 8,538,886
Net change in unrealized
appreciation/(depreciation) on investments and
interest rate swap transactions................ 5,832,419 212,314,764
------------ ------------
Net increase in net assets resulting from
operations................................. 30,496,372 261,062,918
------------ ------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income............................ (2,025,340) (2,449,183)
Net realized gain on investments................. -- (1,294,045)
------------ ------------
Total dividends and distributions to
preferred shareholders..................... (2,025,340) (3,743,228)
------------ ------------
Net increase in net assets from operations
applicable to common shares................ 28,471,032 257,319,690
------------ ------------
Less Dividends and Distributions to Common
Shareholders from:
Net investment income............................ (26,227,850) (29,555,562)
Net realized gain on investments................. -- (15,615,873)
Tax return of capital............................ -- (10,118,665)
------------ ------------
Total dividends and distributions to common
shareholders............................... (26,227,850) (55,290,100)
------------ ------------
Capital Stock Transactions (Note 5):
Increase in net assets from shares issued to
common shareholders for reinvestment of
dividends...................................... -- 3,038,014
Increase in net assets from preferred offering
cost adjustment................................ 121,909 --
Decrease in net assets from underwriting
commissions and offering expenses from issuance
of preferred shares............................ -- (935,773)
------------ ------------
Net increase in net assets from capital stock
transactions............................... 121,909 2,102,241
------------ ------------
Total increase in net assets applicable to
common shares.............................. 2,365,091 204,131,831
Net Assets Applicable to Common Shares:
Beginning of period.............................. 716,083,687 511,951,856
------------ ------------
End of period(a)................................. $718,448,778 $716,083,687
------------ ------------
------------ ------------
-------------------
(a) Includes distributions in excess of net investment income of $6,197,802 at
June 30, 2004 and undistributed net investment income of $543,697 at
December 31, 2003.
See accompanying notes to financial statements.
-------------------------------------------------------------------------------
13
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
-------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
The following table includes selected data for a common share outstanding
throughout each 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 FOR THE FEBRUARY 28, 2002(a)
SIX MONTHS ENDED YEAR ENDED THROUGH
PER SHARE OPERATING PERFORMANCE: JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------------- ---------------- ----------------- -------------------
Net asset value per common share, beginning of period... $18.43 $13.25 $14.57
------ ------ ------
Income from investment operations:
Net investment income................................ 0.55(b) 1.04(b) 0.78
Net realized and unrealized gain/(loss) on
investments and interest rate swap transactions.... 0.24 5.69 (0.90)
------ ------ ------
Total income from investment operations.......... 0.79 6.73 (0.12)
------ ------ ------
Less dividends and distributions to preferred
shareholders from:
Net investment income................................ (0.05) (0.07) (0.09)
Net realized gain on investments..................... -- (0.03) (0.01)
------ ------ ------
Total dividends and distributions to preferred
shareholders................................... (0.05) (0.10) (0.10)
------ ------ ------
Total from investment operations applicable to
common shares.................................. 0.74 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)
Preferred Offering Cost Adjustment................. --(c) -- --
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................................ (0.68) (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................................... (0.68) (1.43) (0.95)
------ ------ ------
Net increase/(decrease) in net asset value per common
share.................................................. 0.06 5.18 (1.32)
------ ------ ------
Net asset value, per common share, end of period........ $18.49 $18.43 $13.25
------ ------ ------
------ ------ ------
Market value, per common share, end of period........... $16.70 $17.85 $13.05
------ ------ ------
------ ------ ------
Net asset value total return(d)......................... 4.26%(e) 52.61% - 2.73%(e)
------ ------ ------
------ ------ ------
Market value return(d).................................. -2.77%(e) 50.07% - 6.95%(e)
------ ------ ------
------ ------ ------
-------------------
(a) Commencement of operations.
(b) Calculation based on average shares outstanding.
(c) Less than $.005 per share. See Note 5.
(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 (UNAUDITED) -- (CONTINUED)
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(f)
SIX MONTHS ENDED YEAR ENDED THROUGH
RATIOS/SUPPLEMENTAL DATA: JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------------- ---------------- ----------------- -------------------
Net assets applicable to common shares, end of period
(in millions).......................................... $ 718.4 $ 716.1 $ 512.0
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets applicable
to common shares (before expense reduction)(k)......... 1.53%(h) 1.57% 1.52%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets applicable
to common shares (net of expense reduction)(k)......... 1.06%(h) 1.09% 1.05%(h)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average daily net
assets applicable to common shares (before expense
reduction)(k).......................................... 5.53%(h) 6.39% 6.82%(h)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average daily net
assets applicable to common shares (net of expense
reduction)(k).......................................... 6.00%(h) 6.88% 7.29%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed assets
(before expense reduction)(g,k)........................ 1.04%(h) 1.04% 1.04%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed assets
(net of expense reduction)(g,k)........................ 0.72%(h) 0.72% 0.72%(h)
-------- -------- --------
-------- -------- --------
Portfolio turnover rate................................. 2.05%(i) 20.51% 12.37%(i)
-------- -------- --------
-------- -------- --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)............. $340,000 $340,000 $280,000
-------- -------- --------
-------- -------- --------
Total shares outstanding (in 000's)..................... 14 14 11
-------- -------- --------
-------- -------- --------
Asset coverage per share................................ $ 77,827 $ 77,653 $ 70,710
-------- -------- --------
-------- -------- --------
Liquidation preference per share........................ $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
Average market value per share(j)....................... $ 25,000 $ 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) Annualized.
(i) Not annualized.
(j) Based on weekly prices.
(k) 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 (UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Quality Income Realty Fund, Inc. (the fund) was incorporated
under the laws of the State of Maryland on August 22, 2001 and is registered
under the Investment Company Act of 1940, as amended, as a nondiversified,
closed-end management investment company.
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.
Interest Rate Swaps: The fund uses interest rate swaps in connection with
the sale of 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
--------------------------------------------------------------------------------
16
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 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. Unrealized gains are reported as an asset and unrealized
losses are reported as a liability on the Statement of Assets and Liabilities.
The change in value of swaps, including the periodic amounts of interest to be
paid or received on swaps, is reported as unrealized gains or losses in the
Statement of Operations. A realized gain or loss is recorded upon payment or
receipt of a periodic payment or termination of swap agreements. 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.
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 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 an increase to
unrealized appreciation/(depreciation) on investments as necessary once the
issuers provide information about the actual composition of the distributions.
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.
-------------------------------------------------------------------------------
17
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 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 six months ended
June 30, 2004, the fund incurred investment management fees of $4,486,517.
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 six months ended
June 30, 2004, the investment manager waived management fees of $1,689,042.
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 six months ended June 30, 2004, the fund incurred $105,565 in
administration fees.
-------------------------------------------------------------------------------
18
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 he six months ended June 30, 2004, fees and related expenses accrued for
nonaffiliated directors totaled $20,976.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments for the
six months ended June 30, 2004, totaled $24,246,705 and $21,808,617,
respectively.
NOTE 4. INCOME TAXES
At June 30, 2004 the cost of investments and net unrealized appreciation for
federal income tax purposes were as follows:
Aggregate cost.................................... $873,717,521
------------
------------
Gross unrealized appreciation..................... $191,074,571
Gross unrealized depreciation..................... (1,954,854)
------------
Net unrealized appreciation on investments........ 189,119,717
Net unrealized depreciation on interest rate swap
transactions.................................... (8,521,706)
------------
Net unrealized appreciation....................... $180,598,011
------------
------------
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 six months ended June 30, 2004, the fund issued no shares of
common stock for the reinvestment of dividends. An adjustment of $121,909
related to preferred offering costs was credited to common stock during the six
months ended June 30, 2004.
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.
During the year ended December 31, 2003, the fund issued 219,752 shares of
common stock for the reinvestment of dividends.
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,
-------------------------------------------------------------------------------
19
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(2) maintain the 1940 Act preferred shares asset coverage, or (3) file a
required certificate related to asset coverage on time, the preferred shares
will be subject to a mandatory redemption at the redemption price of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon to the
date fixed for redemption. To the extent permitted under the 1940 Act and
Maryland Law, the fund at its option may without consent of the holders of
preferred shares, redeem preferred shares having a dividend period of one year
or less, In whole, or in part, on the business day after the last day of such
dividend period upon not less than 15 calendar days and not more than 40
calendar days prior to notice. The optional redemption price is $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon to the
date fixed for redemption. The fund's common shares and preferred shares have
equal voting rights of one vote per share and vote together as a single class.
In addition, the affirmative vote of the holders a majority, as defined in the
1940 Act, of the outstanding preferred shares shall be required to (1) approve
any plan of reorganization that would adversely affect the taxable auction
market preferred shares and (2) 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 National Bank, 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 June 30, 2004 are as follows:
UNREALIZED
NOTIONAL FLOATING RATE(a) TERMINATION APPRECIATION/
COUNTERPARTY AMOUNT FIXED RATE (RESET MONTHLY) DATE (DEPRECIATION)
--------------------------------- ----------- ---------- ---------------- ---------------- --------------
Merrill Lynch Derivative
Products....................... $46,000,000 4.5600% 1.150% April 5, 2005 $ (948,638)
Merrill Lynch Derivative
Products....................... $46,000,000 5.2100% 1.150% April 5, 2007 (2,225,784)
Merrill Lynch Derivative
Products....................... $46,000,000 5.5800% 1.150% April 5, 2009 (2,944,853)
UBS AG........................... $24,000,000 4.4500% 1.238% April 15, 2005 (468,907)
UBS AG........................... $24,000,000 5.1200% 1.238% April 15, 2007 (1,082,982)
UBS AG........................... $24,000,000 5.4950% 1.238% April 15, 2009 (1,418,806)
Fleet National Bank.............. $14,000,000 3.2125% 1.113% October 2, 2008 400,087
Royal Bank of Canada............. $14,000,000 3.6800% 1.280% October 22, 2008 168,177
-----------
$(8,521,706)
-----------
-----------
-------------------
(a) Based on LIBOR (London Interbank Offered Rate). Represents rates in effect
at June 30, 2004.
-------------------------------------------------------------------------------
20
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
-------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS(a)
(PERIODS ENDED JUNE 30, 2004) (UNAUDITED)
SINCE INCEPTION
ONE YEAR (8/30/02)
-------- ---------
4.26% 19.90%
The performance data quoted represents past performance. Past performance is no
guarantee of future results. The rate of return will vary and the principal
value of an investment will fluctuate and shares, if sold, may be worth more or
less than their original cost. Current performance may be lower or higher than
the performance data quoted.
------------------------------------------------------------------
REINVESTMENT PLAN
We urge shareholders who want to take advantage of this plan
and whose shares are held in 'street name' to consult your
broker as soon as possible to determine if you must change
registration into your own name to participate.
------------------------------------------------------------------
------------------------------------------------------------------
Notice is hereby given in accordance with Section 23(c) of
the Investment Company Act of 1940 that the fund may
purchase, from time to time, shares of its common stock in
the open market.
------------------------------------------------------------------
------------------------------------------------------------------
A description of the policies and procedures that the fund
uses to determine how to vote proxies relating to portfolio
securities is available (i) without charge, upon request, by
calling 1-800-330-7348, (ii) on our Web site at
cohenandsteers.com or (iii) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
------------------------------------------------------------------
-------------------
(a) Based on net asset value.
-------------------------------------------------------------------------------
21
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
-------------------------------------------------------------------------------
PROXY RESULTS
During the six month period ended June 30, 2004, Cohen & Steers Quality
Income Realty Fund, Inc. shareholders voted on the following proposals at the
annual meeting held on April 29, 2004. The description of each proposal and
number of shares voted are as follows:
Common Shares
---------------------------------------------------------------------------------------
SHARES VOTED AUTHORITY
FOR WITHHELD
---------------------------------------------------------------------------------------
1. To elect Directors
Richard J. Norman........................................ 37,443,054 392,390
Frank K. Ross............................................ 37,430,220 405,224
---------------------------------------------------------------------------------------
SHARES VOTED SHARES VOTED SHARES VOTED
FOR AGAINST ABSTAIN
---------------------------------------------------------------------------------------
2. To ratify PricewaterhouseCoopers LLP as the
fund's independent registered public
accountants.................................. 37,300,644 279,729 255,069
Preferred Shares
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SHARES VOTED AUTHORITY
FOR WITHHELD
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1. To elect Directors
Martin Cohen............................................. 9,441 11
Richard J. Norman........................................ 9,441 11
Frank K. Ross............................................ 9,441 11
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SHARES VOTED SHARES VOTED SHARES VOTED
FOR AGAINST ABSTAIN
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2. To ratify PricewaterhouseCoopers LLP as the
fund's independent registered public
accountants.................................. 9,315 21 116
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22
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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PRIVACY POLICY
The fund is committed to maintaining the privacy of its
shareholders and to safeguarding their personal information.
The following is provided to help you understand what
personal information the fund collects, how we protect that
information, and why in certain cases we may share this
information with others.
The fund does not receive any personal information relating
to shareholders who purchase shares through an intermediary
that acts as the record owner of the shares. In the case of
shareholders who are record owners of the fund, to conduct
and process your business in an accurate and efficient
manner, we must collect and maintain certain personal
information about you. This is the information we collect on
applications or other forms, and from the transactions you
make with us.
The fund does not disclose any personal information about
its shareholders or former shareholders to anyone, except as
required or permitted by law or as is necessary to service
shareholder accounts. We will share information with
organizations, such as the fund's transfer agent, that
assist the fund in carrying out its daily business
operations. These organizations will use this information
only for purposes of providing the services required or as
otherwise as may be required by law. These organizations are
not permitted to share or use this information for any other
purpose. In addition, the fund restricts access to personal
information about its shareholders to employees of the
adviser who have a legitimate business need for the
information.
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23
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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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
REITS
A, B, C AND I SHARES AVAILABLE
SYMBOL: CSRSX
SYMBOLS: CSEIX, CSBIX, CSCIX, CSDIX
ALSO AVAILABLE: COHEN & STEERS INSTITUTIONAL
REALTY SHARES (CSRIX) REQUIRES A HIGHER
MINIMUM PURCHASE, BUT OFFERS A LOWER TOTAL
EXPENSE RATIO
FOR TOTAL RETURN: FOR CAPITAL APPRECIATION:
COHEN & STEERS COHEN & STEERS
UTILITY FUND SPECIAL EQUITY FUND
IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL IDEAL FOR INVESTORS SEEKING MAXIMUM CAPITAL
RETURN THROUGH BOTH CURRENT INCOME AND APPRECIATION, INVESTING IN A LIMITED NUMBER
CAPITAL APPRECIATION, INVESTING PRIMARILY IN OF REITS AND OTHER REAL ESTATE COMPANIES
UTILITIES CONCENTRATED, HIGHLY FOCUSED PORTFOLIO
SYMBOLS: CSUAX, CSUBX, CSUCX, CSUIX SYMBOL: CSSPX
FOR MORE INFORMATION ABOUT ANY COHEN & STEERS FUND
OR TO OBTAIN A PROSPECTUS PLEASE CONTACT US AT:
1-800-330-7348, OR VISIT OUR WEB SITE AT cohenandsteers.com
PLEASE CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES OF THE FUND CAREFULLY BEFORE
INVESTING. A PROSPECTUS CONTAINING THIS AND OTHER INFORMATION ABOUT THE FUND MAY BE OBTAINED BY
FOLLOWING THE INSTRUCTIONS ABOVE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
COHEN & STEERS SECURITIES, LLC, DISTRIBUTOR
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24
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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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
Bonnie Cohen FUND SUBADMINISTRATOR AND CUSTODIAN
Director State Street Bank and Trust Company
225 Franklin Street
George Grossman Boston, MA 02110
Director
Richard J. Norman TRANSFER AGENT -- COMMON SHARES
Director Equiserve Trust Company
250 Royall Street
Frank K. Ross Canton, MA 02021
Director (800) 426-5523
Willard H. Smith Jr. TRANSFER AGENT -- PREFERRED SHARES
Director The Bank of New York
100 Church Street
Greg E. Brooks New York, NY 10007
Vice president
LEGAL COUNSEL
Adam Derechin Simpson Thacher & Bartlett LLP
Vice president and assistant treasurer 425 Lexington Avenue
New York, NY 10017
Joseph M. Harvey
Vice president New York Stock Exchange Symbol: RQI
Lawrence B. Stoller Web site: cohenandsteers.com
Assistant secretary
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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25
COHEN & STEERS
QUALITY INCOME REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
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QUALITY INCOME REALTY FUND
SEMIANNUAL REPORT
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JUNE 30, 2004
STATEMENT OF DIFFERENCES
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The division sign shall be expressed as.................................. [div]
The section symbol shall be expressed as ................................ 'SS'