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, 2004
Item 1. Reports to Stockholders.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
February 21, 2005
To Our Shareholders:
We are pleased to submit to you our report for the quarter and year ended
December 31, 2004. The net asset value at that date was $22.50 per common share.
The total return, including income, for Cohen & Steers Quality Income Realty
Fund and its relevant benchmarks were:
NET ASSET VALUE(a) MARKET PRICE(a)
------------------- -------------------
QUARTER- YEAR- QUARTER- YEAR-
ENDED ENDED ENDED ENDED
12/31/04 12/31/04 12/31/04 12/31/04
-------- -------- -------- --------
Cohen & Steers Quality Income Realty
Fund(b)............................... 15.3% 32.2% 18.0% 25.1%
NAREIT Equity REIT Index(c)............. 15.2% 31.6% 15.2% 31.6%
Morgan Stanley REIT Preferred Index(d).. 2.7% 7.3% 2.7% 7.3%
During the quarter, three $0.115 share monthly dividends and one special
dividend of $0.08 per share were declared and paid. The special year-end
dividend consisted of long and short-term capital gains of $0.07 and $0.01 per
share, respectively.(e)
In addition, the fund's board of directors announced an increase of $0.025
per common share in the fund's regular monthly distribution, raising the monthly
distribution to $0.14 per common share. The new monthly distribution rate
represents a 22% increase to the prior monthly distribution rate. In connection
with this increase, the fund's board of directors announced the adoption of a
level rate distribution policy. The new distribution rate reflects both the
increased investment income that the fund's investment manager believes the fund
will earn and the decision by the board of directors to augment investment
income with the fund's capital, which has increased significantly since the
fund's initial public offering due to unrealized appreciation in the fund's
portfolio
-------------------
(a) As a closed-end investment company, the price of the fund's New York Stock
Exchange-traded shares will be set by market forces and at times may deviate
from the net asset value per share of the fund.
(b) For the year, the fund averaged 80% REIT common stock and 20% preferred
stock and other fixed income investments.
(c) The NAREIT Equity REIT Index ('Equity REITs') is an unmanaged
market-capitalization-weighted index of all tax-qualified Equity REITs
listed on the NYSE, AMEX, and the Nasdaq that have 75% or more of their
gross invested book assets invested directly or indirectly in the equity
ownership of real estate.
(d) The Morgan Stanley REIT Preferred Index is an unmanaged index of all
exchange-traded perpetual preferred securities of equity REITs, weighted by
capitalization and considered representative of real estate preferred stock
performance.
(e) Please note that distributions paid by the fund to shareholders are subject
to recharacterization for tax purposes. The final tax treatment of these
distributions is reported to shareholders after the close of each fiscal
year.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
investments. As of December 31, 2004, the fund had unrealized appreciation in
its portfolio investments equivalent to $9.16 per common share.
INVESTMENT REVIEW
One year ago, in our year-end letter to shareholders, we shared our belief
that REITs would experience 'a continuation of strong performance' as a result
of strong expected economic fundamentals. We predicted that GDP would increase
by at least 4% in 2004, creating 1.5 to 2.0 million jobs and leading to
improving real estate fundamentals and accelerating cash flow growth rates for
REITs. We are pleased to report that all of these predictions have been
realized.
Additionally, we believe that investors of all types -- individual and
institutional, in the United States and abroad -- continued to gravitate toward
REITs in recognition of their historical investment characteristics, including a
secure and growing dividend stream, diversification away from the broader stock
and bond markets, and competitive total returns. In addition, as more and more
investors came to appreciate the investment characteristics of real estate, REIT
merger and acquisition activity heated up. The prices paid for real estate
companies over the course of 2004 continued to validate the higher asset values
associated with high quality U.S. commercial real estate assets. For all these
reasons, the portfolio experienced another year of very strong absolute returns
while at the same time providing current income at levels that were superior to
that of the REIT market, as measured by the dividend yield of the NAREIT Equity
REIT Index.
Regional mall companies continued to lead the REIT industry in performance.
Benefiting from strong sales growth, rapid consolidation of ownership (resulting
in greater leverage with retailers), strong demand for space by retailers, and a
relatively fixed supply of franchise assets, regional malls returned 45.1%.
Mills Corporation was our best performing mall stock, returning 52.4%. Shopping
centers benefited from some of the same trends in retailing and returned 37.0%.
Though we maintained a significant weighting in both these sectors, our
underweight positions -- due to the lack of available yield opportunities in of
these sectors -- detracted from the fund's overall performance.
The industrial and apartment sectors, both cyclical in nature, benefited
from a strong economy and generated 34.1% and 34.7% respectively. AvalonBay
Communities, for example, was the best performing stock in the fund generating a
65.0% total return.
Office companies trailed the index on average by a wide margin, returning
23.4% as a group. Office fundamentals, however, varied widely across the U.S.
Although the dividend yields in this sector are generally well above average,
our overweight here was a drag on the fund's total return performance. The
fund's best office holding was Kilroy Realty with a 37.6% total return while the
worst performer was Equity Office Properties with a total returned of 9.1%. The
worst performing stock in the fund was Affordable Residential Communities, a
manufactured housing company -- lower apartment rents and affordable for-sale
housing have continued to disadvantage this low-priced housing alternative.
Affordable Residential Communities returned - 4.8%, one of only a small handful
of REITs with a negative total return in 2004.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
INVESTMENT OUTLOOK
We anticipate that economic fundamentals in 2005 will be similar to 2004 and
in a few ways even better. We believe that GDP growth will be in the 3.5% range
with job growth of about 2 million. In our view, barring any large, exogenous
economic shocks, this will result in continuing improvement in the unemployment
rate and real wage gains. In short, we believe the economic recovery should
become self-sustaining and somewhat steadier.
This should provide a continued positive backdrop for real estate
fundamentals, characterized by higher occupancies, rents and cash flows for most
property types and in most regions of the country. As a result, our estimates
indicate that REIT cash flow and dividend growth will continue to acceleration
through 2005 and 2006. We expect REIT cash flow to increase 9.2% and 9.5% while
dividend growth is projected at 5.9% and 6.2% in 2005 and 2006, respectively. We
believe the growth in earnings and dividends will support strong REIT
valuations. Further, we believe this growth to be superior to what may be
expected from most other sectors of the equity market.
Although past performance is no guarantee of future results, history has
shown that accelerating cash flow and dividend growth rates, which we anticipate
for at least the next two years, can have a salutary effect on stock prices. For
REITs as with other stocks, it has generally been when growth rates peaked and
began declining that stock prices peaked. Not coincidentally, when REIT cash
flow growth rates last peaked in early 1998, the REIT index peaked as well, and
total returns turned negative. By 1998, real estate in the United States had
been in recovery for several years and growth rates had been accelerating. But
with rents having escalated dramatically in 1996 and 1997, an explosion of new
construction in 1998 began to attenuate the dramatic market rental rate
increases that commercial landlords had been experiencing. In short, real estate
had fully recovered and even though demand from the economy was growing nicely,
supply had risen to meet that demand, causing earnings growth rates to peak.
Accordingly, if the current real estate cycle continues to improve and
economic growth remains steady in the 2.5% to 4% range, we believe that real
estate stocks can continue to perform well, until such time as market rents rise
to the level where developers are induced to build new buildings and rental
increases are stifled by new competitive product. We believe that this
eventuality is still a couple of years away. Rents, though rising in most
markets, are generally nowhere near levels that would justify new construction
and will not be for some time in our view. In most instances, we believe that it
will be several years before new construction makes sense, given that the price
of building a building has also escalated dramatically in accordance with the
price of steel, concrete, lumber and labor.
In summary, we anticipate that a steadily growing economy will support
demand for real estate and that muted new construction will constrain the supply
of real estate in many markets. With respect to REITs, we believe that cash flow
growth will continue to accelerate along with dividend growth. We further
believe that correctly anticipating these changing growth rates will be the key
to REIT stock price performance again in 2005. Valuations are somewhat above
historical averages, partially reflecting some of these positives in our view.
However, valuations are not at levels that indicate to us a peak in stock
prices. As it relates to REIT preferred stocks, we will
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
adhere to the proven strategy of maintaining an allocation to REIT preferred
stocks which provide a premium yield, enhance the stability of the overall
portfolio, and generally provide a total return that we believe is attractive in
what we generally believe will be a low return environment. As a result, we
believe the fund's overall portfolio may deliver attractive total returns in
2005, although investors are cautioned not to assume that returns will continue
at the pace of the past two years.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
JOSEPH M. HARVEY JAMES S. CORL
JOSEPH M. HARVEY JAMES S. CORL
Portfolio Manager Portfolio Manager
VISIT COHEN & STEERS ONLINE AT COHENANDSTEERS.COM
For more information about any of our funds, visit
cohenandsteers.com, where you'll find daily net asset
values, fund fact sheets and portfolio highlights. You can
also access newsletters, education tools and market updates
covering the REIT, utility and preferred securities sectors.
In addition, our Web site contains comprehensive information
about our firm, including our most recent press releases,
profiles of our senior investment professionals, and an
overview of our investment approach.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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 December 31, 2004, AMPS
represented 33% 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 55% of our
borrowings at an average interest rate of 4.9%, for an
average remaining period of 2.5 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(a)
Leverage (as % of managed net assets)............... 33%
% Fixed Rate........................................ 55%
% Variable Rate..................................... 45%
Average Rate on Swaps............................... 4.9%
Average Term on Swaps............................... 2.5 years
Current Rate on AMPS................................ 2.5%
-------------------
(a) Data as of December 31, 2004. Information subject to change.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
DECEMBER 31, 2004
TOP TEN HOLDINGS
(UNAUDITED)
MARKET % OF
VALUE MANAGED ASSETS
SECURITY ----------- --------------
1. Macerich Co......................................... $50,733,420 3.88%
2. Vornado Realty Trust................................ 50,507,916 3.86
3. Mack-Cali Realty Corp............................... 49,427,014 3.78
4. Ventas.............................................. 48,419,765 3.70
5. Mills Corp.......................................... 47,016,624 3.59
6. Liberty Property Trust.............................. 46,016,640 3.52
7. Crescent Real Estate Equities Co., 6.75% Series A... 40,701,540 3.11
8. Equity Office Properties Trust...................... 38,275,328 2.93
9. Prentiss Properties Trust........................... 38,207,640 2.92
10. Health Care REIT.................................... 36,991,194 2.83
SECTOR BREAKDOWN
(Based on Managed Assets)
(Unaudited)
[PIE CHART]
Office/Industrial 29.81%
Shopping Center 20.05%
Residential 13.00%
Diversified 12.16%
Health Care 11.57%
Hotel 5.27%
Cash & Liabilities in
Excess of Other Assets 4.75%
Mortgage 2.88%
Self Storage 0.51%
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2004
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)(a)
--------- -------------- ------------
EQUITIES 142.54%(b)
COMMON STOCK 114.46%
DIVERSIFIED 12.78%
Capital Trust -- Class A.............. 66,100 $ 2,029,931 6.51%
Colonial Properties Trust............. 582,300 22,866,921 6.82
Crescent Real Estate Equities Co...... 996,900 18,203,394 8.21
iStar Financial....................... 400,500 18,126,630 6.16
Vornado Realty Trust.................. 663,443 50,507,916 3.99
--------------
111,734,792
--------------
HEALTH CARE 17.11%
Health Care Property Investors........ 1,190,400 32,962,176 6.03
Health Care REIT...................... 969,625 36,991,193 6.29
LTC Properties........................ 131,200 2,612,192 6.03
Nationwide Health Properties.......... 1,205,300 28,625,875 6.23
Ventas................................ 1,766,500 48,419,765 4.74
--------------
149,611,201
--------------
HOTEL 2.39%
Hospitality Properties Trust.......... 389,200 17,903,200 6.26
Strategic Hotel Capital............... 183,400 3,026,100 5.33
--------------
20,929,300
--------------
INDUSTRIAL 2.86%
First Industrial Realty Trust......... 614,500 25,028,585 6.83
--------------
MORTGAGE 4.13%
Gramercy Capital Corp................. 785,000 14,553,900 3.24
Newcastle Investment Corp............. 678,528 21,563,620 7.87
--------------
36,117,520
--------------
-------------------
(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.
The dividend yield has not been audited.
(b) Percentages indicated are based on the net assets applicable to common
shares of the fund.
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2004
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------------- ------------
OFFICE 33.60%
Arden Realty.......................... 826,800 $ 31,186,896 5.36%
BioMed Realty Trust................... 59,000 1,310,390 4.86
Brandywine Realty Trust............... 1,140,900 33,531,051 5.99
CarrAmerica Realty Corp............... 1,010,600 33,349,800 6.06
Equity Office Properties Trust........ 1,314,400 38,275,328 6.87
Highwoods Properties.................. 415,300 11,503,810 6.14
HRPT Properties Trust................. 635,400 8,152,182 6.55
Kilroy Realty Corp.................... 142,600 6,096,150 4.63
Mack-Cali Realty Corp................. 1,073,800 49,427,014 5.47
Maguire Properties.................... 604,800 16,607,808 5.83
Prentiss Properties Trust............. 1,000,200 38,207,640 5.86
Reckson Associates Realty Corp........ 794,100 26,054,421 5.18
--------------
293,702,490
--------------
OFFICE/INDUSTRIAL 5.26%
Liberty Property Trust................ 1,065,200 46,016,640 5.65
--------------
RESIDENTIAL 15.27%
APARTMENT 14.90%
AMLI Residential Properties Trust..... 77,000 2,464,000 6.00
American Campus Communities........... 130,800 2,941,692 6.00
Archstone-Smith Trust................. 754,100 28,882,030 4.49
AvalonBay Communities................. 307,200 23,132,160 3.72
Camden Property Trust................. 366,600 18,696,600 4.98
GMH Communities Trust................. 243,500 3,433,350 6.45
Gables Residential Trust.............. 586,900 21,005,151 6.73
Home Properties....................... 361,600 15,548,800 5.86
Mid-America Apartment Communities..... 309,400 12,753,468 5.68
Town & Country Trust.................. 50,000 1,381,500 6.23
--------------
130,238,751
--------------
MANUFACTURED HOME 0.37%
Affordable Residential Communities.... 225,200 3,231,620 8.71
--------------
TOTAL RESIDENTIAL..................... 133,470,371
--------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2004
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------------- ------------
SELF STORAGE 0.77%
Sovran Self Storage................... 87,300 $ 3,678,822 5.74%
U-Store-It Trust...................... 173,600 3,011,960 6.46
--------------
6,690,782
--------------
SHOPPING CENTER 20.29%
COMMUNITY CENTER 7.19%
Cedar Shopping Centers................ 200,000 2,860,000 6.29
Heritage Property Investment Trust.... 449,100 14,411,619 6.54
Kramont Realty Trust.................. 1,293,300 30,263,220 5.56
New Plan Excel Realty Trust........... 222,700 6,030,716 6.09
Urstadt Biddle Properties --
Class A............................ 544,000 9,275,200 5.16
--------------
62,840,755
--------------
REGIONAL MALL 13.10%
Glimcher Realty Trust................. 605,200 16,770,092 6.93
Macerich Co........................... 807,857 50,733,420 4.14
Mills Corp............................ 737,400 47,016,624 3.73
--------------
114,520,136
--------------
TOTAL SHOPPING CENTER................. 177,360,891
--------------
TOTAL COMMON STOCK
(Identified cost --
$665,445,753).................. 1,000,662,572
--------------
PREFERRED STOCK 28.08%
DIVERSIFIED 5.43%
Colonial Properties Trust, 8.125%,
Series D........................... 64,900 1,723,095 7.65
Crescent Real Estate Equities Co.,
6.75%, Series A (Convertible)(a)... 1,826,000 40,701,540 7.58
iStar Financial, 7.80%, Series F...... 106,000 2,756,000 7.50
iStar Financial, 7.65%, Series G...... 86,100 2,221,380 7.40
--------------
47,402,015
--------------
-------------------
(a) 410,000 shares segregated as collateral for the interest rate swap
transactions.
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2004
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------------- ------------
HEALTH CARE 0.20%
Health Care REIT, 7.625%, Series F.... 28,300 $ 714,575 7.56%
Omega Healthcare Investors, 8.375%,
Series D........................... 40,000 1,056,000 7.92
--------------
1,770,575
--------------
HOTEL 5.48%
FelCor Lodging Trust, 9.00%,
Series B........................... 652,500 16,723,575 8.78
Host Marriott Corp., 10.00%,
Series B........................... 14,100 363,780 9.69
Host Marriott Corp., 10.00%,
Series C........................... 30,700 809,559 9.48
Host Marriott Corp., 8.875%,
Series E........................... 10,000 277,750 7.99
Innkeepers USA Trust, 8.00%,
Series C........................... 92,000 2,369,000 7.77
LaSalle Hotel Properties, 10.25%,
Series A........................... 1,000,000 27,400,000 9.34
--------------
47,943,664
--------------
MORTGAGE 0.17%
Newcastle Investment Corp., 9.75%,
Series B........................... 56,000 1,517,040 9.01
--------------
OFFICE 2.85%
Cousins Properties, 7.50%,
Series B........................... 200,000 5,024,000 7.48
HRPT Properties Trust, 8.75%,
Series B........................... 120,000 3,318,600 7.92
Highwoods Properties, 8.625%,
Series A........................... 13,195 13,821,762 8.23
Maguire Properties, 7.625%,
Series A........................... 106,600 2,728,960 7.46
--------------
24,893,322
--------------
OFFICE/INDUSTRIAL 0.04%
PS Business Parks, 8.75%, Series F.... 4,100 110,188 8.15
ProLogis, 8.54%, Series C............. 4,000 235,000 7.27
--------------
345,188
--------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2004
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------------- ------------
RESIDENTIAL -- APARTMENT 4.19%
Apartment Investment & Management Co.,
8.75%, Series D.................... 2,561 $ 64,025 8.76%
Apartment Investment & Management Co.,
10.10%, Series R................... 950,000 25,298,500 9.39
Associated Estates Realty Corp.,
8.70%, Series B.................... 90,000 2,335,500 8.40
Home Properties, 9.00%, Series F...... 196,000 5,370,400 8.21
Mid-America Apartment Communities,
8.30%, Series H.................... 138,100 3,590,600 8.00
--------------
36,659,025
--------------
SHOPPING CENTER 9.72%
COMMUNITY CENTER 4.35%
Developers Diversified Realty Corp.,
8.60%, Series F.................... 1,039,400 27,928,678 8.00
Federal Realty Investment Trust,
8.50%, Series B.................... 276,300 7,496,019 7.85
Urstadt Biddle Properties, 8.50%,
Series C........................... 24,000 2,586,000 7.89
--------------
38,010,697
--------------
FREE STANDING 0.08%
Commercial Net Lease Realty, 9.00%,
Series A........................... 25,000 676,500 8.31
--------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2004
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------------- ------------
REGIONAL MALL 5.29%
CBL & Associates Properties, 8.75%,
Series B........................... 430,000 $ 23,220,000 8.11%
CBL & Associates Properties, 7.375%,
Series D........................... 310,000 7,703,500 7.40
Glimcher Realty Trust, 8.75%,
Series F........................... 40,000 1,042,000 8.41
Glimcher Realty Trust, 8.125%,
Series G........................... 40,000 1,031,600 7.87
Mills Corp., 9.00%, Series B.......... 55,300 1,531,810 8.12
Mills Corp., 9.00%, Series C.......... 159,600 4,436,880 8.09
Mills Corp., 8.75%, Series E.......... 84,000 2,382,240 7.72
Simon Property Group, 8.75%,
Series F........................... 30,000 807,300 8.14
Simon Property Group, 8.375%,
Series J........................... 14,000 799,400 7.34
Taubman Centers, 8.30%, Series A...... 127,600 3,255,076 8.15
--------------
46,209,806
--------------
TOTAL SHOPPING CENTER................. 84,897,003
--------------
TOTAL PREFERRED STOCK
(Identified cost --
$224,828,408).................. 245,427,832
--------------
TOTAL EQUITIES (Identified
cost -- $890,274,161).......... 1,246,090,404
--------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2004
PRINCIPAL VALUE
AMOUNT (NOTE 1)
----------- --------------
COMMERCIAL PAPER 7.37%
State Street Corp., 1.70%, due
01/03/05............................ $14,387,000 $ 14,385,641
UBS Financial, 1.70%, due 01/03/05..... 50,000,000 49,995,278
--------------
(Identified cost -- $64,380,919)..... 64,380,919
--------------
TOTAL INVESTMENTS (Identified
cost -- $954,655,080).............. 149.91% 1,310,471,323
LIABILITIES IN EXCESS OF OTHER
ASSETS............................. (0.26)% (2,230,580)
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)....................... (32.03)% (280,000,000)
LIQUIDATION VALUE OF AUCTION MARKET
PREFERRED SHARES: SERIES M28 AND
SERIES M7 (Equivalent to $25,000
per share based on 2,400 shares
outstanding for Series M28 and
3,760 shares outstanding for
Series M7)......................... (17.62)% (154,000,000)
------ --------------
NET ASSETS APPLICABLE TO COMMON
SHARES (Equivalent to $22.50 per
share based on 38,856,074 shares of
capital stock outstanding)......... 100.00% $ 874,240,743
------ --------------
------ --------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004
ASSETS:
Investments in securities, at value (Identified
cost -- $954,655,080) (Note 1)........................ $1,310,471,323
Cash.................................................... 562
Dividends receivable.................................... 7,398,661
Unrealized appreciation on interest rate swap
transactions (Notes 1 and 6).......................... 260,533
Other assets............................................ 37,961
--------------
Total Assets........................................ 1,318,169,040
--------------
LIABILITIES:
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6).......................... 8,008,771
Payable to investment manager........................... 580,941
Payable for dividends declared on common shares......... 541,014
Payable for dividends declared on preferred shares...... 424,464
Payable for preferred offering costs.................... 125,078
Payable for investment securities purchased............. 48,221
Payable to administrator................................ 21,924
Payable for directors fees.............................. 6,290
Other liabilities....................................... 171,594
--------------
Total Liabilities................................... 9,928,297
--------------
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
Taxable auction market preferred shares, Series M7
($25,000 liquidation value, $0.001 par value, 3,760
shares issued and outstanding) (Notes 1 and 5)........ 94,000,000
--------------
434,000,000
--------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES................ $ 874,240,743
--------------
--------------
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)...................... $ 526,667,180
Distributions in excess of net investment income........ (71,770)
Accumulated net realized loss on investments............ (422,672)
Net unrealized appreciation on investments and interest
rate swap transactions................................ 348,068,005
--------------
$ 874,240,743
--------------
--------------
NET ASSET VALUE PER COMMON SHARE:
($874,240,743[div]38,856,074 shares outstanding)........ $ 22.50
--------------
--------------
MARKET PRICE PER COMMON SHARE............................... $ 20.62
--------------
--------------
MARKET PRICE PREMIUM/(DISCOUNT) TO NET ASSET VALUE PER
COMMON SHARE.............................................. (8.36)%
--------------
--------------
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
14
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
Investment Income (Note 1):
Dividend income......................................... $ 46,874,813
Interest income......................................... 229,738
------------
Total Income....................................... 47,104,551
------------
Expenses:
Investment management fees (Note 2)..................... 9,387,060
Preferred remarketing fees.............................. 876,612
Administration fees (Note 2)............................ 389,621
Reports to shareholders................................. 277,600
Professional fees....................................... 155,768
Custodian fees and expenses............................. 92,031
Directors' fees and expenses (Note 2)................... 50,436
Transfer agent fees and expenses........................ 14,055
Miscellaneous........................................... 149,224
------------
Total Expenses..................................... 11,392,407
Reduction of Expenses (Note 2).............................. (3,533,952)
------------
Net Expenses....................................... 7,858,455
------------
Net Investment Income....................................... 39,246,096
------------
Net Realized and Unrealized Gain/(Loss) on Investments (Note
1):
Net realized gain on investments........................ 16,903,107
Net realized loss on interest rate swap transactions.... (8,363,437)
Net change in unrealized appreciation on investments.... 166,497,688
Net change in unrealized depreciation on interest rate
swap transactions.................................... 6,804,725
------------
Net realized and unrealized gain/(loss) on
investments..................................... 181,842,083
------------
Net Increase Resulting from Operations...................... 221,088,179
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (5,570,485)
------------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $215,517,694
------------
------------
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
15
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- ------------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income............................. $ 39,246,096 $ 40,209,268
Net realized gain/(loss) on investments and
interest rate swap transactions................. 8,539,670 8,538,886
Net change in unrealized appreciation on
investments and interest rate swap
transactions.................................... 173,302,413 212,314,764
-------------- ------------
Net increase in net assets resulting from
operations.................................. 221,088,179 261,062,918
-------------- ------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income............................. (3,775,000) (2,449,183)
Net realized gain on investments.................. (1,795,485) (1,294,045)
-------------- ------------
Total dividends and distributions to preferred
shareholders................................ (5,570,485) (3,743,228)
-------------- ------------
Net increase/(decrease) in net assets from
operations applicable to common shares.......... 215,517,694 257,319,690
-------------- ------------
Less Dividends and Distributions to Common
Shareholders from:
Net investment income............................. (27,723,135) (29,555,562)
Net realized gain on investments.................. (14,856,262) (15,615,873)
Tax return of capital............................. (13,567,631) (10,118,665)
-------------- ------------
Total dividends and distributions to common
shareholders................................ (56,147,028) (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............................. (1,335,519) (935,773)
-------------- ------------
Net increase/(decrease) in net assets from
capital stock transactions.................. (1,213,610) 2,102,241
-------------- ------------
Total increase in net assets applicable to
common shares............................... 158,157,056 204,131,831
Net Assets Applicable to Common Shares:
Beginning of year................................. 716,083,687 511,951,856
-------------- ------------
End of year(a).................................... $ 874,240,743 $716,083,687
-------------- ------------
-------------- ------------
-------------------
(a) Includes distributions in excess of net investment income of $71,770 at
December 31, 2004 and undistributed net investment income of $543,697 at
December 31, 2003.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
16
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS
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 YEAR ENDED DECEMBER 31, FEBRUARY 28, 2002(a)
------------------------------- THROUGH
PER SHARE OPERATING PERFORMANCE: 2004 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................................... 0.79 1.04(b) 0.78
Net realized and unrealized gain/(loss) on investments
and interest rate swap transactions................... 4.90 5.69 (0.90)
------ ------ ------
Total income from investment operations............. 5.69 6.73 (0.12)
------ ------ ------
Less dividends and distributions to preferred shareholders
from:
Net investment income................................... (0.09) (0.07) (0.09)
Net realized gain on investments........................ (0.05) (0.03) (0.01)
------ ------ ------
Total dividends and distributions to preferred
shareholders...................................... (0.14) (0.10) (0.10)
------ ------ ------
Total from investment operations applicable to
common shares..................................... 5.55 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........................... (0.03)(c) (0.02) (0.09)
Dilutive effect of common share offering................ -- -- (0.03)
------ ------ ------
Total offering and organization costs............... (0.03) (0.02) (0.15)
------ ------ ------
Less dividends and distributions to common shareholders
from:
Net investment income................................... (0.72) (0.76) (0.64)
Net realized gain on investments........................ (0.38) (0.41) (0.08)
Tax return of capital................................... (0.35) (0.26) (0.23)
------ ------ ------
Total dividends and distributions to common
shareholders...................................... (1.45) (1.43) (0.95)
------ ------ ------
Net increase/(decrease) in net asset value per common
share..................................................... 4.07 5.18 (1.32)
------ ------ ------
Net asset value, per common share, end of period........... $22.50 $18.43 $13.25
------ ------ ------
------ ------ ------
Market value, per common share, end of period.............. $20.62 $17.85 $13.05
------ ------ ------
------ ------ ------
Net asset value total return(d)............................ 32.15% 52.61% (2.73)%(e)
------ ------ ------
------ ------ ------
Market value return(d)..................................... 25.05% 50.07% (6.95)%(e)
------ ------ ------
------ ------ ------
-------------------
(a) Commencement of operations.
(b) Calculation based on average shares outstanding.
(c) Includes preferred offering cost adjustments of less than $0.005 per share.
(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.
--------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS -- (CONTINUED)
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, FEBRUARY 28, 2002(a)
------------------------------- THROUGH
RATIOS/SUPPLEMENTAL DATA: 2004 2003 DECEMBER 31, 2002
------------------------- -------------- -------------- -------------------
Net assets applicable to common shares, end of period (in
millions)................................................. $ 874.2 $ 716.1 $ 512.0
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets applicable to
common shares (before expense reduction)(e)............... 1.51% 1.57% 1.52%(b)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets applicable to
common shares (net of expense reduction)(e)............... 1.04% 1.09% 1.05%(b)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average daily net assets
applicable to common shares (before expense
reduction)(e)............................................. 4.74% 6.39% 6.82%(b)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average daily net assets
applicable to common shares (net of expense
reduction)(e)............................................. 5.20% 6.88% 7.29%(b)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed assets (before
expense reduction)(d,e)................................... 1.03% 1.04% 1.04%(b)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed assets (net of
expense reduction)(d,e)................................... 0.71% 0.72% 0.72%(b)
-------- -------- --------
-------- -------- --------
Portfolio turnover rate.................................... 3.33% 20.51% 12.37%(c)
-------- -------- --------
-------- -------- --------
PREFERRED SHARES:
-----------------
Liquidation value, end of period (in 000's)................ $434,000 $340,000 $280,000
-------- -------- --------
-------- -------- --------
Total shares outstanding (in 000's)........................ 17 14 11
-------- -------- --------
-------- -------- --------
Asset coverage per share................................... $ 75,359 $ 77,653 $ 70,710
-------- -------- --------
-------- -------- --------
Liquidation preference per share........................... $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
Average market value per share(k).......................... $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
-------------------
(a) Commencement of operations.
(b) Annualized
(c) Not annualized.
(d) Average daily managed assets represent the net assets applicable to common
shares plus the liquidation preference of preferred shares.
(e) Ratios do not reflect the effects of dividend payments to preferred
shareholders.
(f) Based on weekly prices.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
18
--------------------------------------------------------------------------------
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 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 (GAAP). The preparation of the financial statements in
accordance with GAAP 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 or, if no asked price is available, at the bid price. 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. 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, or if no asked price is available, at
the bid price. 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.
Any securities for which market quotations are not readily available shall
be valued in accordance with the procedures approved by the board of directors.
--------------------------------------------------------------------------------
19
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 structure of the preferred shares. In these interest rate
swaps, 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. 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
accrual of 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) and realized gain/(loss) 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 GAAP.
--------------------------------------------------------------------------------
20
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Series M7, 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 M7, 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 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,
2004, the fund incurred investment management fees of $9,387,060.
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, 2004, the investment manager waived management fees of $3,533,952.
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
--------------------------------------------------------------------------------
21
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
daily managed asset value. For the year ended December 31, 2004, the fund
incurred 220,870 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, 2004, fees and related expenses accrued for
nonaffiliated directors totaled $50,436.
Other: During the period, the fund may have purchased securities in which an
affiliate of the investment manager served as placement agent for the issuer.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments for the
year ended December 31, 2004, totaled $67,982,902 and $36,914,045, respectively.
NOTE 4. INCOME TAXES
The fund had a return of capital of $13,567,631 ($0.35 per share) for the
year ended December 31, 2004.
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.
The dividends and distributions to shareholders are characterized for tax
purposes as follows:
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
2004 2003
----------- -----------
Preferred Shareholders:
Ordinary income.............................. $ 3,900,110(a) $ 2,449,183
Long-term capital gain....................... 1,670,375 1,294,045
----------- -----------
Total dividends and distributions to
preferred shareholders............... $ 5,570,485 $ 3,743,228
----------- -----------
----------- -----------
Common Shareholders:
Ordinary income.............................. $28,758,320 $29,555,562
Long-term capital gain....................... 13,821,077 15,615,873
Tax return of capital........................ 13,567,631 10,118,665
----------- -----------
Total dividends and distributions to
common shareholders.................. $56,147,028 $55,290,100
----------- -----------
----------- -----------
-------------------
(a) Under federal income tax rules, the tax character of $424,464 will be
determined based upon 2005 earnings and profits.
--------------------------------------------------------------------------------
22
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2004, the cost of investments and net unrealized
appreciation for federal income tax purposes were as follows:
Aggregate cost.................................... $955,077,753
------------
------------
Gross unrealized appreciation..................... $355,872,336
Gross unrealized depreciation..................... (478,766)
------------
Net unrealized appreciation on investments........ 355,393,570
Net unrealized depreciation on interest rate swap
transactions.................................... (7,395,541)
------------
Net unrealized appreciation....................... $347,998,029
------------
------------
Differences between book and tax basis unrealized appreciation are primarily
due to wash sales on portfolio securities and differing treatment of swap
income/expense.
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to differing treatment 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, 2004, the fund decreased
undistributed net investment income by $8,363,427, increased accumulated net
realized gain on investments by $8,112,067 and decreased paid-in capital by
$251,360, relating primarily to differing treatment of interest rate swap
income/expense.
For the year ended December 31, 2004, the Fund did not have any
undistributed ordinary income or capital gains.
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. At December 31, 2004, Cohen & Steers Capital
Management, Inc. owned approximately 9,000 shares.
During the year ended December 31, 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 year ended
December 31, 2004.
The fund's articles of incorporation authorize the issuance of fund
preferred shares, par value $0.001 per share, in one or more classes or series,
with rights as determined by the board of directors, by action of the board of
directors without the approval of the common shareholders.
During the year ended December 31, 2003, the fund issued 219,752 shares of
common stock for the reinvestment of dividends.
On November 19, 2004, the fund issued 3,760 auction market preferred shares,
Series M7 (par value $0.001). Proceeds paid to the fund amounted to $92,664,481
after deduction of underwriting commissions and offering expenses of $1,335,519.
This issue has received a 'AAA/Aaa' rating from Standard & Poor's and Moody's.
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.
--------------------------------------------------------------------------------
23
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Preferred shares are senior to the fund's common shares and will rank on a
parity with shares of any other series of preferred shares, and with shares of
any other series of preferred stock of the fund, as to the payment of dividends
and the distribution of assets upon liquidation. If the fund does not timely
cure a failure to (1) maintain a discounted value of its portfolio equal to the
preferred shares basic maintenance amount, (2) maintain the 1940 Act preferred
shares asset coverage, or (3) file a required certificate related to asset
coverage on time, the preferred shares will be subject to a mandatory redemption
at the redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon to the date fixed for redemption. To the extent
permitted under the 1940 Act and Maryland Law, the fund at its option may
without consent of the holders of preferred shares, redeem preferred shares
having a dividend period of one year or less, In whole, or in part, on the
business day after the last day of such dividend period upon not less than 15
calendar days and not more than 40 calendar days prior to notice. The optional
redemption price is $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon to the date fixed for redemption.
The fund's common shares and preferred shares have equal voting rights of
one vote per share and vote together as a single class. In addition, the
affirmative vote of the holders a majority, as defined in the 1940 Act, of the
outstanding preferred shares shall be required to (1) approve any plan of
reorganization that would adversely affect the taxable auction market preferred
shares and (2) 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, Banc of America, 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, 2004 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% 2.331% April 5, 2005 $ (309,867)
Merrill Lynch Derivative
Products....................... $46,000,000 5.2100% 2.331% April 5, 2007 (1,836,759)
Merrill Lynch Derivative
Products....................... $46,000,000 5.5800% 2.331% April 5, 2009 (3,224,136)
UBS AG........................... $24,000,000 4.4500% 2.402% April 15, 2005 (149,773)
UBS AG........................... $24,000,000 5.1200% 2.402% April 15, 2007 (902,070)
UBS AG........................... $24,000,000 5.4950% 2.402% April 15, 2009 (1,586,166)
Banc of America.................. $14,000,000 3.2125% 2.290% October 2, 2008 240,657
Royal Bank of Canada............. $14,000,000 3.6800% 2.413% October 22, 2008 19,876
-----------
$(7,748,238)
-----------
-----------
-------------------
(a) Based on LIBOR (London Interbank Offered Rate). Represents rates in effect
at December 31, 2004.
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24
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the periods presented, 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 the standards of the
Public Company Accounting Oversight Board (United States). Those standards
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, 2004 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 21, 2005
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25
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
AVERAGE ANNUAL TOTAL RETURNS(a)
(PERIODS ENDED DECEMBER 31, 2004) (UNAUDITED)
SINCE INCEPTION
ONE YEAR (2/28/02)
-------- ---------------
32.15% 26.93%
The performance data quoted represent 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.
TAX INFORMATION -- 2004 (UNAUDITED)
Pursuant to the Jobs and Growth Relief Reconciliation Act of 2003, the fund
designates qualified dividend income of $143,295. Additionally, the fund
designates long term capital gains distribution of $11,539,478 at the rate of
15% and $3,951,976 at the rate of 25% or the maximum allowable.
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.
OTHER INFORMATION
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 (SEC)
Web site at http://www.sec.gov. In addition, the fund's proxy voting record for
the most recent 12-month period ended June 30 is available (i) without charge,
upon request, by calling 1-800-330-7348 or (ii) on the SEC's Web site at
http://www.sec.gov.
The fund files its complete schedule of portfolio holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q. The Fund's
Forms N-Q are available (i) without charge, upon request by calling
1-800-330-7348, or (ii) on the SEC's website at http://www.sec.gov. In addition,
the Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330.
As required, the fund has submitted to the New York Stock Exchange ('NYSE')
the annual certification of the fund's chief executive officer that he is not
aware of any violation of the NYSE's Corporate Governance listing standards. The
fund also has included the certifications of the Fund's chief executive officer
and chief financial
-------------------
(a) Based on net asset value.
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26
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
OTHER INFORMATION -- (CONTINUED)
officer required by Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to
the fund's Form N-CSR for the year ended December 31, 2004 filed with the SEC.
As noted in the shareholder letter, the fund has adopted a level rate
distribution policy. If, for any monthly distribution, the fund's net investment
company taxable income is less than the amount of the distribution, the
difference generally will be a tax-free return of capital distributed from the
fund's assets. Such a return of capital distribution would decrease the fund's
total assets and, therefore, have the likely effect of increasing the fund's
expense ratio. In addition, in order to make such distributions, the fund may
have to sell a portion of its investment portfolio at a time when independent
investment judgment might not dictate such action.
Please note that the distributions paid by the fund to shareholders are
subject to recharacterization for tax purposes. The final tax treatment of these
distributions is reported to shareholders on their 1099-DIV forms, which are
mailed to shareholders after the close of each fiscal year. As noted in the
shareholder letter, the fund has adopted a level rate distribution policy. Under
this policy, the fund will pay distributions in excess of the fund's net
investment company taxable income and this excess will be a tax-free return of
capital distributed from the fund's assets. The fund's shareholders of record
will be notified of the approximate amount of capital returned to shareholders
for each distribution. Distributions of capital decrease the fund's total assets
and, therefore, could have the effect of increasing the fund's expense ratio. In
addition, in order to make these distributions, the fund may have to sell
portfolio securities at a less than opportune time.
Joseph M. Harvey was appointed as a portfolio manager of the fund in August
2004. He joined Cohen & Steers Capital Management, the fund's advisor, in 1992
and currently serves as its president. Mr. Harvey also serves as president of
the advisor's parent company, Cohen & Steers, Inc. Prior to August 2003, he was
a senior vice president and director of investment research for the advisor.
James S. Corl was appointed as a portfolio manager in December 2004. He
joined the advisor in 1997 and currently serves as an executive vice president.
Mr. Corl is also an executive vice president of the advisor's parent company,
Cohen & Steers, Inc. Prior to that, Mr. Corl was a senior vice president of the
advisor.
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.
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27
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
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 advisor who
have a legitimate business need for the information.
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28
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
MANAGEMENT OF THE FUND
The business and affairs of the fund are managed under the direction of the
board of directors. The board of directors approves all significant agreements
between the fund and persons or companies furnishing services to it, including
the fund's agreements with its advisor, administrator, custodian and transfer
agent. The management of the fund's day-to-day operations is delegated to its
officers, the advisor and the fund's administrator, subject always to the
investment objective and policies of the fund and to the general supervision of
the board of directors.
The directors and officers of the fund and their principal occupations
during the past five years are set forth below. The statement of additional
information (SAI) includes additional information about fund directors and is
available, without charge, upon request by calling 1-800-330-7348.
PRINCIPAL OCCUPATION NUMBER OF FUNDS
DURING PAST 5 YEARS WITHIN FUND COMPLEX LENGTH
POSITION(S) HELD TERM OF (INCLUDING OTHER OVERSEEN BY DIRECTOR OF TIME
NAME, ADDRESS AND AGE(a) WITH FUND OFFICE DIRECTORSHIPS HELD) (INCLUDING THE FUND) SERVED
------------------------ --------- ------ ------------------- -------------------- ------
Interested Directors(1)
Robert H. Steers ..... Director, chairman 2006 Co-chairman and 14 Since
Age: 51 of the board, co-chief executive inception
and secretary officer of the advisor
since 2003 and prior to
that, chairman of the
advisor. President of
Cohen & Steers
Securities, LLC, the
fund's distributor.
Martin Cohen ......... Director, 2007 Co-chairman and 14 Since
Age: 55 president and co-chief executive inception
treasurer officer of the advisor
since 2003 and prior to
that, president of the
advisor. Vice president
of Cohen & Steers
Securities, LLC, the
fund's distributor.
Disinterested Directors
Bonnie Cohen(2) ...... Director 2005 Consultant. Prior 14 Since
Age: 61 thereto, Undersecretary inception
of State, United States
Department of State.
Director of Wellsford
Real Properties, Inc.
George Grossman ...... Director 2006 Attorney-at-law. 14 Since
Age: 50 inception
(table continued on next page)
-------------------
(a) The address for all directors is 757 Third Avenue, New York, NY 10017.
(1) 'Interested person,' as defined in the 1940 Act, of the fund because of
affiliation with Cohen & Steers Capital Management, Inc., the fund's
advisor.
(2) Martin Cohen and Bonnie Cohen are unrelated.
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29
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
(table continued from preceding page)
PRINCIPAL OCCUPATION NUMBER OF FUNDS
DURING PAST 5 YEARS WITHIN FUND COMPLEX LENGTH
POSITION(S) HELD TERM OF (INCLUDING OTHER OVERSEEN BY DIRECTOR OF TIME
NAME, ADDRESS AND AGE(a) WITH FUND OFFICE DIRECTORSHIPS HELD) (INCLUDING THE FUND) SERVED
------------------------ --------- ------ ------------------- -------------------- ------
Richard E. Kroon ........ Director 2005 Board member of Finlay 14 2004 to
Age: 62 Enterprises, Inc. present
(operator of department
store fine jewelry
leased departments),
and several private
companies; member of
Investment
Subcommittee, Monmouth
University; retired
Chairman and Managing
Partner of Sprout Group
venture capital funds,
then an affiliate of
Donaldson, Lufkin and
Jenrette Securities
Corporation; and former
chairman of the
National Venture
Capital Association.
Richard J. Norman ....... Director 2007 Private investor. 14 Since
Age: 61 President of the Board inception
of Directors of
Maryland Public
Television and board
member of The Salvation
Army. Prior thereto,
investment
representative of
Morgan Stanley Dean
Witter.
Frank K. Ross ........... Director 2007 Board member of NCRIC 14 2004 to
Age: 61 Group, Inc. (insurance) present
and Pepco Holdings,
Inc. (electric
utility). Formerly,
Midatlantic Area
Managing Partner for
Audit and Risk Advisory
Services at KPMG LLP
and Managing Partner of
its Washington, DC
office.
Willard H. Smith, Jr. ... Director 2005 Board member of Essex 14 Since
Age: 68 Property Trust, Inc., inception
Highwoods Properties,
Inc., Realty Income
Corporation and Crest
Net Lease, Inc.
Managing director at
Merrill Lynch & Co.,
Equity Capital Markets
Division from 1983 to
1995.
C. Edward Ward, Jr. ..... Director 2005 Member of the board of 14 2004 to
Age: 58 trustees of Manhattan present
College, Riverdale, New
York. Formerly head of
closed-end fund
listings for the New
York Stock Exchange.
-------------------
(a) The address for each officer is 757 Third Avenue, New York, NY 10017.
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30
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
The officers of the fund (other than Messrs. Cohen and Steers, whose
biographies are provided above), their addresses, their ages, and their
principal occupations for at least the past five years are set forth below.
POSITION(S) HELD
NAME, ADDRESS AND AGE(a) WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
------------------------ --------- ----------------------------------------
Joseph M. Harvey ........ Vice president President of the advisor since 2003 and, prior to
Age: 40 that, senior vice president and director of
investment research of the advisor.
Adam M. Derechin ........ Vice president and Chief operating officer of the advisor since 2003
Age: 40 assistant and prior to that, senior vice president of the
treasurer advisor.
Lawrence B. Stoller ..... Assistant Senior vice president and general counsel of the
Age: 41 secretary advisor, since 1999; Chief legal officer of Cohen
& Steers Securities, LLC. Prior to that, associate
general Counsel, Neuberger Berman Management, Inc.
(money manager); and assistant general counsel,
The Dreyfus Corporation (money manager).
John E. McLean .......... Chief compliance Vice president and associate general counsel of
Age: 34 officer Cohen & Steers Capital Management since September
2003. Prior to that, vice president, Law &
Regulation, J. & W. Seligman & Co. Incorporated
(money manager); and associate, Battle Fowler LLP
(law firm).
-------------------
(a) The address for each officer is 757 Third Avenue, New York, NY 10017.
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31
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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
REALTY INCOME FUND REALTY SHARES
DESIGNED FOR INVESTORS SEEKING A HIGH DESIGNED FOR INVESTORS SEEKING MAXIMUM
DIVIDEND YIELD AND CAPITAL APPRECIATION, TOTAL RETURN THROUGH BOTH CURRENT INCOME
INVESTING PRIMARILY IN REITS AND CAPITAL APPRECIATION, INVESTING
A, B, C AND I SHARES AVAILABLE PRIMARILY IN REITS
SYMBOLS: CSEIX, CSBIX, CSCIX, CSDIX SYMBOL: CSRSX
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 REALTY FOCUS FUND
DESIGNED FOR INVESTORS SEEKING MAXIMUM DESIGNED FOR INVESTORS SEEKING MAXIMUM
TOTAL RETURN THROUGH BOTH CURRENT INCOME CAPITAL APPRECIATION, INVESTING IN A
AND CAPITAL APPRECIATION, INVESTING LIMITED NUMBER OF REITS AND OTHER REAL
PRIMARILY IN UTILITIES ESTATE COMPANIES
A, B, C AND I SHARES AVAILABLE CONCENTRATED, HIGHLY FOCUSED PORTFOLIO
SYMBOLS: CSUAX, CSUBX, CSUCX, CSUIX A, B, C AND I SHARES AVAILABLE
SYMBOLS: CSFAX, CSFBX, CSFCX, 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. THE PROSPECTUS CONTAINS THIS AND OTHER
INFORMATION ABOUT THE FUND. PLEASE READ THE PROSPECTUS CAREFULLY
BEFORE INVESTING.
COHEN & STEERS SECURITIES, LLC, DISTRIBUTOR
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32
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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
Bonnie Cohen FUND SUBADMINISTRATOR AND CUSTODIAN
Director State Street Bank and Trust Company
225 Franklin Street
George Grossman Boston, MA 02110
Director
TRANSFER AGENT -- COMMON SHARES
Richard E. Kroon Equiserve Trust Company
Director 250 Royall Street
Canton, MA 02021
Richard J. Norman (800) 426-5523
Director
TRANSFER AGENT -- PREFERRED SHARES
Frank K. Ross The Bank of New York
Director 100 Church Street
New York, NY 10007
Willard H. Smith Jr.
Director LEGAL COUNSEL
Simpson Thacher & Bartlett LLP
C. Edward Ward, Jr. 425 Lexington Avenue
Director New York, NY 10017
Adam Derechin New York Stock Exchange Symbol: RQI
Vice president and assistant treasurer
Web site: cohenandsteers.com
Joseph M. Harvey
Vice president This report is for shareholder
information. This is not a prospectus
Lawrence B. Stoller intended for use in the purchase or sale
Assistant secretary of fund shares. Past performance is of
course no guarantee of future results
and your investment may be worth more
or less at the time you sell.
--------------------------------------------------------------------------------
33
COHEN & STEERS
QUALITY INCOME REALTY FUND
-------------
ANNUAL REPORT
DECEMBER 31, 2004
COHEN & STEERS
QUALITY INCOME REALTY FUND
747 THIRD AVENUE
NEW YORK, NY 10017
Item 2. Code of Ethics.
The registrant has adopted a Code of Ethics that applies to its Principal
Executive Officer and Principal Financial Officer. The registrant undertakes to
provide to any person without charge, upon request, a copy of the Code of
Ethics. Such request can be made by calling 800-330-7348 or writing to the
Secretary of the registrant, 757 Third Avenue, New York, NY 10017.
Item 3. Audit Committee Financial Expert.
The registrant's Board has determined that Frank K. Ross, a member of the
registrant's Audit Committee, is an "audit committee financial expert" and
"independent," as such terms are defined in this Item.
Item 4. Principal Accountant Fees and Services.
(a) - (d) Aggregate fees billed to the registrant for the last two fiscal years
for professional services rendered by the registrant's principal accountant were
as follows:
2004 2003
------- -------
Audit Fees $80,000 $74,151
Audit-Related Fees 15,000 40,000
Tax Fees 12,600 9,300
All Other Fees -- --
Audit-related fees were billed in connection with the preparation and issuance
of certification reports to rating agencies relating to the registrant's
preferred shares. Tax fees were billed in connection with the preparation of tax
returns, calculation and designation of dividends and other miscellaneous tax
services.
Aggregate fees billed by the registrant's principal accountant for the last two
fiscal years for non-audit services provided to the registrant's investment
adviser (not including a sub-adviser whose role is primarily portfolio
management and is subcontracted or overseen by another investment adviser) and
any entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registered investment
company, where the engagement relates directly to the operations and financial
reporting of the registrant, were as follows:
2004 2003
------- -------
Audit-Related Fees -- --
Tax Fees -- --
All Other Fees $62,500 $49,500
These other fees were billed in connection with internal control reviews and
AIMR performance reviews.
(e)(1) The Audit Committee is required to pre-approve audit and non-audit
services performed for the registrant by the principal accountant. The Audit
Committee also is required to pre-approve non-audit services performed by the
registrant's principal accountant for the registrant's investment adviser and
any sub-adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser)
and any entity controlling, controlled by or under common control with the
registrant's investment adviser that provides ongoing services to the
registrant, if the engagement for services relates directly to the operations
and financial reporting of the registrant.
The audit committee may delegate pre-approval authority to one or more of its
members who are independent members of the board of directors of the registrant.
The member or members to whom such authority is delegated shall report any
pre-approval decisions to the Audit Committee at its next scheduled meeting. The
Audit Committee may not delegate its responsibility to pre-approve services to
be performed by the registrant's principal accountant for the investment
adviser.
(e) (2) No services included in (b) - (d) above were approved by the Audit
Committee pursuant to paragraphs (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) For the fiscal years ended December 31, 2004 and December 31, 2003, the
aggregate fees billed by the registrant's principal accountant for non-audit
services rendered to the registrant and for non-audit services rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the registrant's investment adviser that provides ongoing services
to the registrant were $95,600 and $98,800, respectively.
(h) The registrant's audit committee considered whether the provision of
non-audit services that were rendered to the registrant's investment adviser
(not including any sub-adviser whose role is primarily portfolio management and
is subcontracted with or overseen by another investment adviser) and any
entity controlling, controlled by or under common control with the registrant's
investment adviser that provides ongoing services to the registrant that were
not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X
was compatible with maintaining the principal accountant's independence.
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 Frank
K. Ross (chairman), Bonnie
Cohen, George Grossman, Richard E. Kroon, Richard J. Norman, Willard H. Smith
Jr. and C. Edward Ward.
Item 6. Schedule of Investments.
Included in Item 1 above.
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 the Director of Research. The Director of Research's
designee shall be responsible for ensuring that the Investment Committee is
aware of all upcoming proxy voting opportunities. The Designee shall ensure that
proxy votes are properly recorded and that the requisite information regarding
each proxy voting opportunity is maintained. The General Counsel of C&S shall
have overall responsibility for ensuring that C&S complies with all proxy voting
requirements and procedures.
VI. Recordkeeping
The Designee 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
The General Counsel of C&S shall be responsible for maintaining and updating
these Policies 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.
The General Counsel of C&S shall have responsibility for supervising and
monitoring conflicts of interest in the proxy voting process according to the
following process:
1. Identifying Conflicts - The General Counsel of C&S is responsible for
monitoring the relationships of Capital Advisors for purposes of C&S's Inside
Information Policies and Procedures. The General Counsel of C&S(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, the General Counsel of C&S(or his designee) shall promptly inquire of the
Designee 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, the General Counsel of C&S shall inform the Investment
Committee that no proxy vote is to be submitted for that company until the
General Counsel completes the conflicts analysis.
For purposes of monitoring personal or familial relationships, the General
Counsel of C&S (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 the
General Counsel of C&S 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 - The General Counsel of C&S (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 the General
Counsel of C&S 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 the Designee, 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, the General Counsel of C&S(or his designee)
shall be responsible for ensuring that the Designee votes proxies in this
manner. The General Counsel of C&S 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. The General
Counsel of C&S 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.
IV. Annual Review; Reporting
The chief compliance officer (CCO) of C&S (or his designee) shall conduct an
annual review to assess compliance with these policies and procedures. This
review will include sampling a
limited number of proxy votes during the prior year to determine if they were
consistent with these policies and procedures. The results of this review will
be reported to the General Counsel of C&S and the CCO of the Funds.
Any violations of these policies and procedures shall be reported to the General
Counsel or CCO of C&S. If the violation relates to any Cohen & Steers Fund, the
General Counsel or CCO of C&S shall report such violation to the CCO of the
Funds.
Item 8. Portfolio Managers of Closed-End Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. 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 second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
Item 12. Exhibits.
(a)(1) Not applicable.
(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: March 8, 2005
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 and Title: President, Treasurer
principal executive officer and principal financial officer
Date: March 8, 2005
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................. 'SS'
The division sign shall be expressed as.................................. [div]