UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act File Number: 811-10481
Cohen & Steers Quality Income Realty Fund, Inc.
(Exact name of registrant as specified in charter)
757 Third Avenue, New York, NY 10017
(Address of principal executive offices) (Zip code)
Robert H. Steers
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, New York 10017
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 832-3232
Date of fiscal year end: December 31
Date of reporting period: June 30, 2003
Item 1. Reports to Stockholders.
The registrant's semi-annual report to shareholders, for the period ended June
30, 2003, is hereby included.
Item 9. Controls and Procedures.
(b) There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Item 10. Exhibits.
(a)(2)(i) Certification, dated as of August 19, 2003, of Robert H. Steers,
principal executive officer of the registrant.
(a)(2)(ii) Certification, dated as of August 19, 2003, of Martin Cohen,
principal financial officer of the registrant.
(b) (1) Certification, dated as of August 19, 2003, of Robert H. Steers, chief
executive officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) (2) Certification, dated as of August 19, 2003, of Martin Cohen, chief
financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
By: /s/ Robert H. Steers, Chairman
Date: August 19, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert H. Steers, Chairman, Secretary and principal executive
officer
Date: August 19, 2003
By: /s/ Martin Cohen, President, Treasurer and principal financial
officer
Date: August 19, 2003
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
July 23, 2003
To Our Shareholders:
We are pleased to submit to you our report for the quarter and six months
ended June 30, 2003. The net asset value at that date was $15.28. In addition,
during the quarter, three $0.11 per share monthly dividends were declared and
paid.
MIDYEAR REVIEW
For the quarter, Cohen & Steers Quality Income Realty Fund had a total
return, based on income and change in net asset value, of 20.9%. This compares
to the NAREIT Equity REIT Index's(a) total return of 13.1%. For the six months
ended June 30, 2003, the fund's total return was 20.8%, compared to NAREIT's
13.9%.
At long last, nearly every sector of the U.S. financial markets provided
exceptional returns in the second quarter. REITs extended their winning streak
to over three years, and posted their best quarterly return since the fourth
quarter of 1996. In addition, the stock market arose from its three year slump
and posted its best performance (15.4% total return for the S&P 500 Index) since
the fourth quarter of 1998. Bonds extended what has now been, effectively, a
22-year bull market, with the 30-year Treasury bond registering a total return
of 5.4%.
There was an avalanche of geopolitical and economic news in the past three
months, most of it with positive implications. War in Iraq abated while steps
toward peace in the Middle East were promising. Congress passed tax cut
legislation, with a great deal of benefit going to investors by virtue of
lowered levies on dividends and capital gains. Interest rates reached their
lowest level in over 50 years, as the Fed's accommodative monetary policy
continued unabated. Consumer and business confidence clearly began to rise, and
more Americans now own homes than ever before.
While these positive developments have yet to ignite job creation, capital
spending and strong overall economic growth -- with the exception of
housing -- we believe that forecasts for accelerated growth in the second half
of 2003 and beyond have clearly gained credibility. We believe this renewed
optimism has helped the outlook for both real estate and REITs.
We are very pleased with our performance relative to our benchmarks. The
strongest contributors to our out-performance were our overweight in the
regional mall sector and our underweight in the apartment, hotel and self
storage sectors. Also contributing to our out-performance was our stock
selection in the health care, apartment and industrial sectors. Our investment
in REIT preferred stocks detracted from our performance, as the total return of
these securities, though positive, lagged that of the overall REIT market.
REITs are operating in an environment that they have never before
experienced. In nearly all of the previous cycles that we can remember, when
coming out of a recession real estate fundamentals have been dismal, property
owners were in distress, and equity and debt capital was unavailable at a
reasonable price as investors and lenders shunned the asset class. In this
cycle, however, there is virtually no distress on the part of any major property
owners. While there is no doubt that real estate fundamentals are
weak -- vacancy rates are high and many property-level cash flows have been flat
or declining -- fundamentals are more disparate across sectors than we have ever
seen coming out of a recession. Most notable is the retail sector where
occupancies and rents remain
-------------------
(a) The NAREIT Equity REIT Index is an unmanaged, market capitalization weighted
index of all publicly traded REITs that invest predominantly in the equity
ownership of real estate. The index is designed to reflect the performance
of all publicly traded equity REITs as a whole.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
very strong. Instead of capital fleeing the industry, it is now more plentiful
than ever and has never carried a lower cost. Investors that have been waiting
for an opportunity to acquire assets at bargain prices have been disappointed,
as prices have remained firm, or even risen, nearly across the board.
Consequently, the opportunity set for REITs is entirely different from past
history. Instead of an asset pricing opportunity, property owners now have a
liability pricing opportunity. Record low interest rates have allowed REITs to
refinance existing higher cost debt and boost earnings, just as homeowners and
homebuyers have been doing as they finance and refinance their mortgages. In
addition, REITs have been able to take advantage of the strong demand for
property by selling assets, enabling them to reposition and upgrade the quality
of their portfolios, while simultaneously strengthening their balance sheets.
For some investors, REITs themselves are the opportunity -- there were four
major acquisitions of public REITs in the first half of the year, and we suspect
that there will be even more merger and acquisition activity in the second half
of the year.
The strong REIT equity market offered renewed opportunities in the first
half of the year. Two initial public offerings were completed in late June, as
American Financial Realty and Maguire Properties together raised $1.4 billion in
common stock. This compares to just one IPO in 2002 (Heritage Properties), which
raised $450 million. Lower interest rates enabled REITs to tap the preferred
stock market as $1.7 billion was raised in the first half of 2003, compared to
$1.2 billion in the first half of 2002. Much of this capital was used to
refinance, at lower rates, preferred issues that reached their call dates. An
important source of demand for these securities has been mutual funds
specializing strictly in preferred stocks. REITs also issued $6.8 billion of
unsecured debt, mostly at historically low interest rates.
Despite such market conditions, equity issuance was modest in the first half
of the year, as was demand for REIT shares. Common equity issuance, at $1.4
billion, was at a historical low and well below last year's $2.1 billion pace at
mid-year. Capital flows into real estate mutual funds were $1.6 billion,
compared to $2.5 billion in the first half of 2002. Largely due to capital
appreciation, real estate mutual fund assets stood at a record $20 billion at
mid-year, up from $15 billion just six months ago. Some observers have suggested
that REITs were relatively disadvantaged by the recent tax bill's exclusion of
REITs from the lowered 15% dividend tax rate for investors, because REITs
already don't pay taxes at the corporate level. Nonetheless their substantial
dividend yield potential (still superior to nearly all alternatives on an
after-tax basis) and growth potential have enabled REITs to remain the
investment of choice for many real estate and income-oriented investors.
Finally, the matter of corporate governance has become one of the most
important issues in the financial world. As the nation's leading REIT investor
and a very long-term holder of these securities, we view corporate governance as
one of our most important responsibilities. While REITs in general tend to score
rather well in comparison to other industries, many concerns remain. In the
proxy-voting period of 2003, Cohen & Steers voted in opposition to management
proposals or directors on 22 separate occasions. Most of these related to poison
pills, board classification and independence, and compensation. Our emphasis on
corporate governance issues is not new; in 2002 we voted in opposition to
management 17 times, and in 2001, 21 times.
INVESTMENT OUTLOOK
In our opinion, the single most important investment variable today relates
to the current interest rate climate and the prospect of a low-return
environment for the foreseeable future. We have experienced a secular re-
pricing of the cost of money, as the inflation risk premium has effectively been
extinguished from the bond
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
market. As short-term interest rates approach zero, investors, savers, retirees,
pension funds, foundations and endowments, and a host of financial managers are
at a loss to find appropriate means to fulfill both long-term and short-term
obligations. For example, a recent survey by Morgan Stanley Research found that
nearly 90% of the 292 S&P 500 component companies they surveyed have annual
return expectations of 8% or more for their pension fund assets. These
obligations simply cannot be satisfied through U.S. Treasury or investment grade
corporate debt securities whose coupons are far below this minimum return
expectation. The experience of the equity markets over the past several years
has served to rein in exposure to the volatility and low current income of
stocks in general. Ironically, despite this aversion to the risk of equity
markets, there has been a marked shift towards alternative and riskier
investments, including high yield bonds, commodities, foreign securities, hedge
funds and other vehicles, a trend that, frankly, we have difficulty figuring
out.
In today's market environment, many investors are finding REITs to be a very
appealing asset class. Offering the potential for high income, tangible
underlying asset value, low correlation to other assets and long-term growth,
REITs are becoming increasingly more appreciated by investors. Further, we
believe that the prudent use of leverage -- which is plentiful today at a modern
record low cost -- by real estate owners and investors has helped real estate
prices have remained firm despite weak fundamentals. Moreover, in our view, it
explains why REITs are trading closer to some analysts' net asset value
estimates than might otherwise be expected.
The entire notion of net asset value is subject to considerable debate. It
is our opinion that many analysts are underestimating REIT NAVs because they are
ignoring three important variables. First, the capitalization rate used to value
current rental streams and the discount rate used to value future rental streams
are at a low point in history, suggesting that higher valuations are warranted.
Second is the replacement cost of REIT assets. From Class A downtown office
buildings to dominant regional malls, the cost to replace these
assets -- assuming that one could at all -- far exceeds most current value
estimates of such properties. And third, since we believe we are just beginning
new economic and real estate growth cycles, investors should consider the
potential for real assets to appreciate as economic conditions improve. With
little or no speculative building taking place, except in the apartment sector,
it is unlikely that there will be a glut of new space coming on to the market
just as demand is increasing. This should necessarily precipitate an increase in
occupancy rates, rents and asset values.
In our view, the key to continued positive returns from REITs is the future
course of the U.S. economy. As mentioned, signs of a recovery are beginning to
emerge. In light of the massive fiscal and monetary stimulus currently in place,
we are confident that in the coming quarters the economy will demonstrate
increasing strength.
With respect to strategy, we are encouraged that our office sector holdings
are beginning to produce positive results. In our opinion, we are early in this
cycle and are making few changes except with respect to some individual
holdings. We believe that regional malls, the stars of the REIT industry over
the past three years, are likely to show the strongest earnings growth and
therefore remain a slight overweight position. We continue to maintain a
well-below market position in the shopping center sector, based on our belief
that this sector is currently trading at the greatest premium to net asset value
in our universe. Additionally, we remain underweight in the apartment sector,
due to low demand created by ongoing incentives for, and the unparalleled
attractiveness of, single-family home ownership.
In light of the continued bull market for bonds, which only seemed to
accelerate during the second quarter, some comments regarding our thoughts on
REIT preferred stocks are in order. The good news for REITs is that strength in
the bond market and demand generated by significant capital entering the market
have presented very
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
attractively priced opportunities. Many companies have taken advantage by
issuing new preferreds, with proceeds being used to redeem higher-priced
existing preferreds and for other corporate purposes. However, these factors
have made REIT preferred stocks less attractive. As a result, we marginally
reduced our allocation to REIT preferreds during the quarter. Subsequent to
quarter-end, we have observed a reversal in the strength of the bond market, and
will look to take advantage if REIT preferred pricing adjusts accordingly.
When any sector performs as well as -- and for as long as -- REITs have, an
abundance of skeptics invariably appear, both among industry analysts as well as
outside observers. We remain firm in our belief that we are at the beginning of
a new cycle and that real estate owners are entering the new cycle in a very
strong position. Further, we are not inclined to be market timers because we
have not seen any timing strategies that have been consistently successful. We
are confident that REITs will continue to play an important role in investors'
portfolio needs.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
GREG E. BROOKS
GREG E. BROOKS
Portfolio Manager
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Cohen & Steers is online at COHENANDSTEERS.COM
We have enhanced both the look and features of our Web site to give you more
information about our company, our funds and the REIT market in general. Check
out our interactive Asset Allocation Tool, which allows you to hypothetically
add REITs to any portfolio to see how they impact expected total returns and
risk. Or try the Fund Performance Calculator and see how our funds have
performed versus the S&P 500 Index or Nasdaq Composite. As always, you can also
get daily net asset values, fund fact sheets, portfolio highlights, recent news
articles and our overall insights on the REIT market.
So visit us today at COHENANDSTEERS.COM
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 2003 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD(a)
---------- ------------- --------
EQUITIES 149.26%
COMMON STOCK 112.93%
DIVERSIFIED 14.42%
Colonial Properties Trust........................ 557,300 $ 19,611,387 7.56%
Crescent Real Estate Equities Co. ............... 1,396,200 23,190,882 9.03
iStar Financial.................................. 239,400 8,738,100 7.26
Vornado Realty Trust............................. 780,543 34,031,675 6.24
-------------
85,572,044
-------------
HEALTH CARE 16.62%
Health Care Property Investors................... 575,200 24,359,720 7.84
Health Care REIT................................. 969,625 29,573,563 7.67
Nationwide Health Properties..................... 1,205,300 19,200,429 9.29
Ventas........................................... 1,686,200 25,545,930 7.06
-------------
98,679,642
-------------
INDUSTRIAL 3.99%
First Industrial Realty Trust.................... 465,600 14,712,960 8.67
Keystone Property Trust.......................... 484,900 8,975,499 7.02
-------------
23,688,459
-------------
OFFICE 36.18%
Arden Realty..................................... 826,800 21,455,460 7.78
Brandywine Realty Trust.......................... 1,140,900 28,088,958 7.15
CarrAmerica Realty Corp.......................... 942,600 26,213,706 7.19
Equity Office Properties Trust................... 1,602,200 43,275,422 7.40
Highwoods Properties............................. 980,100 21,856,230 7.62
Mack-Cali Realty Corp............................ 1,021,800 37,173,084 6.93
Maguire Properties............................... 349,800 6,733,650 8.31
Prentiss Properties Trust........................ 1,000,200 29,995,998 7.47
-------------
214,792,508
-------------
OFFICE/INDUSTRIAL 8.92%
Kilroy Realty Corp. ............................. 142,600 3,921,500 7.20
Liberty Property Trust........................... 1,009,200 34,918,320 6.94
Reckson Associates Realty Corp. -- Class B....... 663,800 14,138,940 12.16
-------------
52,978,760
-------------
-------------------
(a) Dividend yield is computed by dividing the security's current annual
dividend rate by the last sale price on the principal exchange, or market,
on which such security trades.
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2003 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
---------- ------------- --------
RESIDENTIAL -- APARTMENT 13.27%
Archstone-Smith Trust............................ 754,100 $ 18,098,400 7.13%
AvalonBay Communities............................ 373,200 15,913,248 6.57
Camden Property Trust............................ 315,600 11,030,220 7.27
Gables Residential Trust......................... 586,900 17,741,987 7.97
Home Properties of New York...................... 361,600 12,742,784 6.92
Mid-America Apartment Communities................ 1,500 40,515 8.66
Post Properties.................................. 120,100 3,182,650 6.79
-------------
78,749,804
-------------
SELF STORAGE 0.08%
Sovran Self Storage.............................. 15,000 472,500 7.62
-------------
SHOPPING CENTER 19.45%
COMMUNITY CENTER 7.11%
Federal Realty Investment Trust.................. 219,300 7,017,600 6.06
Heritage Property Investment Trust............... 253,500 6,864,780 7.75
Kramont Realty Trust............................. 1,293,300 21,339,450 7.88
Urstadt Biddle Properties -- Class A............. 544,000 6,995,840 6.53
-------------
42,217,670
-------------
REGIONAL MALL 12.34%
Glimcher Realty Trust............................ 507,200 11,361,280 8.57
Macerich Co. .................................... 949,657 33,361,450 6.49
Mills Corp. ..................................... 849,200 28,490,660 6.74
-------------
73,213,390
-------------
TOTAL SHOPPING CENTER............................ 115,431,060
-------------
TOTAL COMMON STOCK (Identified
cost -- $635,842,573)..................... 670,364,777
-------------
PREFERRED STOCK 36.33%
DIVERSIFIED 7.25%
Colonial Properties Trust, 8.125%, Series D...... 64,900 1,699,731 7.75
Crescent Real Estate Equities Co., 6.75%, Series
A (Convertible)(a)............................ 1,827,100 39,830,780 7.75
Newcastle Investment Corp., 9.75%, Series B...... 56,000 1,523,200 8.97
-------------
43,053,711
-------------
HEALTH CARE 0.04%
Health Care Property Investors, 8.70%, Series
B............................................. 10,000 253,200 8.61
-------------
-------------------
(a) 410,000 shares segregated as collateral for the interest rate swap
transactions (Note 6).
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2003 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
---------- ------------- --------
HOTEL 7.42%
FelCor Lodging Trust, 9.00%, Series B............ 652,500 $ 14,407,200 10.19%
Innkeepers USA Trust, 8.625%, Series A........... 80,300 2,027,575 8.55
LaSalle Hotel Properties, 10.25%, Series A(b).... 1,000,000 27,600,000 9.28
-------------
44,034,775
-------------
INDUSTRIAL 0.35%
Keystone Property Trust, 9.125%, Series D........ 75,000 2,081,250 8.22
-------------
OFFICE 2.96%
CarrAmerica Realty Corp., 8.55%, Series C........ 46,600 1,182,242 8.44
HRPT Properties Trust, 8.75%, Series B........... 120,000 3,306,000 7.95
Highwoods Properties, 8.625%, Series A........... 13,195 13,087,791 8.70
-------------
17,576,033
-------------
OFFICE/INDUSTRIAL 0.10%
PS Business Parks, 9.25%, Series A............... 10,800 280,152 8.91
PS Business Parks, 8.75%, Series F............... 4,100 110,905 8.10
ProLogis, 8.54%, Series C........................ 4,000 219,000 7.80
-------------
610,057
-------------
RESIDENTIAL -- APARTMENT 5.43%
Apartment Investment & Management Co., 8.75%,
Series D...................................... 8,600 216,634 8.69
Apartment Investment & Management Co., 10.00%,
Series R...................................... 950,000 25,887,500 9.17
Home Properties of New York, 9.00%, Series F..... 196,000 5,546,800 7.95
Mid-America Apartment Communities, 8.875%,
Series B...................................... 21,800 550,450 8.79
-------------
32,201,384
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SHOPPING CENTER 12.78%
COMMUNITY CENTER 6.63%
Commercial Net Lease Realty, 9.00%, Series A..... 25,000 688,000 8.23
Developers Diversified Realty Corp., 8.60%,
Series F...................................... 1,039,400 27,918,284 8.00
Federal Realty Investment Trust, 8.50%,
Series B...................................... 310,300 8,440,160 7.83
Urstadt Biddle Properties, 8.50%, Series C,
144A(c)....................................... 24,000 2,339,640 8.72
-------------
39,386,084
-------------
OUTLET CENTER 0.13%
Chelsea Property Group, 8.375%, Series A......... 14,000 756,000 7.76
-------------
-------------------
(b) 157,000 shares segregated as collateral for the interest rate swap
transactions (Note 6).
(c) As of June 30, 2003, this security is subject to Rule 144A and is pending
registration with the Securities and Exchange Commission. The fund prices
this security at fair value using procedures approved by the fund's board of
directors.
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2003 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
---------- ------------- --------
REGIONAL MALL 6.02%
CBL & Associates Properties, 8.75%, Series B(a).. 430,000 $ 23,585,500 7.99%
Mills Corp., 9.00%, Series B..................... 55,300 1,520,750 8.18
Mills Corp., 9.00%, Series C..................... 159,600 4,389,000 8.18
Mills Corp., 8.75%, Series E..................... 84,000 2,221,800 8.28
Simon Property Group, 8.75%, Series F............ 30,000 820,200 8.05
Taubman Centers, 8.30%, Series A................. 127,600 3,209,140 8.27
-------------
35,746,390
-------------
TOTAL SHOPPING CENTER............................ 75,888,474
-------------
TOTAL PREFERRED STOCK (Identified
cost -- $198,556,553)..................... 215,698,884
-------------
TOTAL EQUITIES (Identified
cost -- $834,399,126)..................... 886,063,661
-------------
PRINCIPAL
AMOUNT
----------
COMMERCIAL PAPER 0.17%
State Street Boston Corp., 1.10%, due 7/1/03
(Identified cost -- $988,000).................... $ 988,000 988,000
-------------
SHORT TERM -- U.S. GOVERNMENT 0.17%
United States Treasury Bill, 0.75%, due 7/3/03
(Identified cost -- $999,959).................... 1,000,000 999,958
-------------
TOTAL INVESTMENTS (Identified
cost -- $836,387,085).......................... 149.60% 888,051,619
LIABILITIES IN EXCESS OF OTHER ASSETS............ (2.43)% (14,432,053)
LIQUIDATION VALUE OF TAXABLE AUCTION MARKET
PREFERRED SHARES:
SERIES T, SERIES W, SERIES TH, AND SERIES F
(Equivalent to $25,000 per share based on
2,800 shares outstanding for each class)...... (47.17)% (280,000,000)
-------------
NET ASSETS -- COMMON STOCK (Equivalent to
$15.28 per share based on 38,856,074
shares of capital stock outstanding)........... 100.00% $ 593,619,566
-------------
-------------
-------------------
(a) 158,000 shares segregated as collateral for the interest rate swap
transactions (Note 6).
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2003 (UNAUDITED)
ASSETS:
Investments in securities, at value (Identified
cost -- $836,387,085) (Note 1)........................ $888,051,619
Cash.................................................... 711
Dividends receivable.................................... 5,132,411
Receivable for investment securities sold............... 2,697,591
Other assets............................................ 60,490
------------
Total Assets....................................... 895,942,822
------------
LIABILITIES:
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6).......................... 21,505,922
Payable to investment manager........................... 376,029
Payable for investment securities purchased............. 198,728
Payable for dividends declared on preferred shares...... 116,144
Other liabilities....................................... 126,433
------------
Total Liabilities.................................. 22,323,256
------------
LIQUIDATION VALUE OF PREFERRED SHARES:
Taxable auction market preferred shares, Series T
($25,000 liquidation value, $0.001 par value,
2,800 shares issued and outstanding) (Notes 1
and 5)................................................ 70,000,000
Taxable auction market preferred shares, Series W
($25,000 liquidation value, $0.001 par value,
2,800 shares issued and outstanding) (Notes 1
and 5)................................................ 70,000,000
Taxable auction market preferred shares, Series TH
($25,000 liquidation value, $0.001 par value,
2,800 shares issued and outstanding) (Notes 1
and 5)................................................ 70,000,000
Taxable auction market preferred shares, Series F
($25,000 liquidation value, $0.001 par value,
2,800 shares issued and outstanding) (Notes 1
and 5)................................................ 70,000,000
------------
280,000,000
------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES................ $593,619,566
------------
------------
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)................. $552,251,499
Undistributed net investment income..................... 3,743,166
Accumulated net realized gain on investments............ 7,466,289
Net unrealized appreciation/(depreciation) on
investments and interest rate swap
transactions.......................................... 30,158,612
------------
$593,619,566
------------
------------
NET ASSET VALUE PER COMMON SHARE:
($593,619,566 [div] 38,856,074 shares outstanding)...... $ 15.28
------------
------------
MARKET PRICE PER COMMON SHARE............................... $ 15.57
------------
------------
MARKET PRICE PREMIUM TO NET ASSET VALUE PER COMMON SHARE.... 1.90%
------------
------------
See accompanying notes to financial statements.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
Investment Income (Note 1):
Dividend income......................................... $ 33,489,741
Interest income......................................... 68,167
------------
Total Income....................................... 33,557,908
------------
Expenses:
Investment management fees (Note 2)..................... 3,382,600
Auction agent fees...................................... 364,689
Administration fees (Note 2)............................ 161,152
Reports to shareholders................................. 154,981
Professional fees....................................... 53,196
Custodian fees and expenses............................. 39,316
Directors' fees and expenses (Note 2)................... 20,143
Transfer agent fees and expenses........................ 11,371
Miscellaneous........................................... 52,770
------------
Total Expenses..................................... 4,240,218
Reduction of Expenses (Note 2).......................... (1,273,450)
------------
Net Expenses....................................... 2,966,768
------------
Net Investment Income....................................... 30,591,140
------------
Net Realized and Unrealized Gain/(Loss) on Investments (Note
1):
Net realized gain on investments........................ 2,226,191
Net realized loss on interest rate swap transactions.... (3,906,936)
Net change in unrealized appreciation/(depreciation) on
investments.......................................... 79,159,442
Net change in unrealized depreciation on interest rate
swap transactions.................................... (2,592,168)
------------
Net realized and unrealized gain/(loss) on
investments..................................... 74,886,529
------------
Net Increase Resulting from Operations...................... 105,477,669
------------
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (1,865,612)
------------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $103,612,057
------------
------------
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
10
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES (UNAUDITED)
FOR THE PERIOD
FOR THE SIX FEBRUARY 28, 2002(a)
MONTHS ENDED THROUGH
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income....................... $ 30,591,140 $ 47,448,931 (b)
Net realized loss on investments and
interest rate swap transactions........... (1,680,745) (6,922,341)(b)
Net change in unrealized
appreciation/(depreciation) on investments
and interest rate swap transactions....... 76,567,274 (46,408,662)(b)
------------ ------------
Net increase/(decrease) resulting from
operations........................... 105,477,669 (5,882,072)
------------ ------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income....................... (1,865,612) (3,509,955)
Net realized gain on investments............ -- (434,405)
------------ ------------
Total dividends and distributions to
preferred shareholders............... (1,865,612) (3,944,360)
------------ ------------
Net increase/(decrease) in net assets
from operations applicable to common
shares............................... 103,612,057 (9,826,432)
------------ ------------
Less Dividends and Distributions to Common
Shareholders from:
Net investment income....................... (24,982,362) (24,413,662)
Net realized gain on investments............ -- (3,021,534)
Tax return of capital....................... -- (8,942,086)
------------ ------------
Total dividends and distributions to
common shareholders.................. (24,982,362) (36,377,282)
------------ ------------
Capital Stock Transactions (Note 5):
Increase in net assets from common share
transactions.............................. -- 557,997,269
Increase in net assets from shares issued to
common shareholders for reinvestment of
dividends................................. 3,038,015 3,417,272
Decrease in net assets from underwriting
commissions and offering expenses from
issuance of preferred shares.............. -- (3,360,947)
------------ ------------
Net increase in net assets from capital
stock transactions................... 3,038,015 558,053,594
------------ ------------
Total increase in net assets applicable
to common shares..................... 81,667,710 511,849,880
Net Assets Applicable to Common Shares:
Beginning of period......................... 511,951,856 101,976
------------ ------------
End of period............................... $593,619,566 $511,951,856
------------ ------------
------------ ------------
-------------------
(a) Commencement of operations.
(b) See Note 1.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
11
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
The following table includes selected data for a 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 SIX FEBRUARY 28, 2002(a)
MONTHS ENDED THROUGH
PER SHARE OPERATING PERFORMANCE: JUNE 30, 2003 DECEMBER 31, 2002
-------------------------------- ------------- -----------------
Net asset value per common share, beginning of period....... $ 13.25 $ 14.57
-------- --------
Income from investment operations:
Net investment income................................... 0.80 1.13 (b)
Net realized and unrealized gain/(loss) on
investments........................................... 1.93 (1.25)(b)
-------- --------
Total income from investment operations............. 2.73 (0.12)
-------- --------
Less: Dividends and distributions to preferred shareholders
from:
Net investment income................................... (0.05) (0.09)
Net realized gain on investments........................ -- (0.01)
-------- --------
Total dividends and distributions to preferred
shareholders...................................... (0.05) (0.10)
-------- --------
Total from investment operations applicable to
common shares..................................... 2.68 (0.22)
-------- --------
Less: Offering and organization costs charged to paid-in
capital -- common shares.................................. -- (0.03)
Offering and organization costs charged to paid-in
capital -- preferred shares............................. -- (0.09)
Dilutive effect of common share offering................ -- (0.03)
-------- --------
Total offering and organization costs............... -- (0.15)
-------- --------
Less Dividends and distributions to common shareholders
from:
Net investment income................................... (0.65) (0.64)
Net realized gain on investments........................ -- (0.08)
Tax return of capital................................... -- (0.23)
-------- --------
Total dividends and distributions to common
shareholders...................................... (0.65) (0.95)
-------- --------
Net increase/(decrease) in net asset value per common
share..................................................... 2.03 (1.32)
-------- --------
Net asset value, per common share, end of period............ $ 15.28 $ 13.25
-------- --------
-------- --------
Market value, per common share, end of period............... $ 15.57 $ 13.05
-------- --------
-------- --------
-------------------------------------------------------------------------------------------
Net asset value total return(c)............................. 20.83%(d) - 2.73%(d)
-------- --------
-------- --------
Market value return(c)...................................... 25.01%(d) - 6.95%(d)
-------- --------
-------- --------
-------------------------------------------------------------------------------------------
-------------------
(a) Commencement of operations.
(b) See Note 1.
(c) Total market value return is computed based upon the New York Stock Exchange
market price of the fund's shares and excludes the effects of brokerage
commission. Dividends and distributions, if any, are assumed for purposes of
this calculation, to be reinvested at prices obtained under the fund's
dividend reinvestment plan. Total net asset value return measures the
changes in value over the period indicated, taking into account dividends as
reinvested.
(d) Not annualized.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
12
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED) -- (CONTINUED)
FOR THE PERIOD
FOR THE SIX FEBRUARY 28, 2002(a)
MONTHS ENDED THROUGH
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
RATIOS/SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period (in
millions)................................................. $ 593.6 $ 512.0
-------- --------
-------- --------
Ratio of expenses to average daily net assets applicable to
common shares
(before expense reduction)................................ 1.64%(d) 1.52%(c)(d)
-------- --------
-------- --------
Ratio of expenses to average daily net assets applicable to
common shares
(net of expense reduction)................................ 1.15%(d) 1.05%(c)(d)
-------- --------
-------- --------
Ratio of net investment income to average daily net assets
applicable to common shares (before expense reduction).... 11.32%(d) 10.02%(c)(d)
-------- --------
-------- --------
Ratio of net investment income to average daily net assets
applicable to common shares (net of expense reduction).... 11.81%(d) 10.49%(c)(d)
-------- --------
-------- --------
Ratio of expenses to average daily managed assets (before
expense reduction)(b)..................................... 1.07%(d) 1.04%(c)(d)
-------- --------
-------- --------
Ratio of expenses to average daily managed assets (net of
expense reduction)(b)..................................... 0.75%(d) 0.72%(c)(d)
-------- --------
-------- --------
Portfolio turnover rate..................................... 14.16%(e) 12.37%(e)
-------- --------
-------- --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)................. $280,000 $280,000
-------- --------
-------- --------
Total shares outstanding (in 000's)......................... 11 11
-------- --------
-------- --------
Asset coverage per share.................................... $ 78,002 $ 70,710
-------- --------
-------- --------
Liquidation preference per share............................ $ 25,000 $ 25,000
-------- --------
-------- --------
Average market value per share(f)........................... $ 25,000 $ 25,000
-------- --------
-------- --------
-------------------
(a) Commencement of operations.
(b) Average daily managed assets represent the net assets applicable to common
shares plus the liquidation preference of preferred shares.
(c) See Note 1.
(d) Annualized.
(e) Not annualized.
(f) Based on weekly prices.
See accompanying notes to financial statements.
--------------------------------------------------------------------------------
13
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Quality Income Realty Fund, Inc. (the fund) was incorporated
under the laws of the State of Maryland on August 22, 2001 and is registered
under the Investment Company Act of 1940, as amended, as a non-diversified,
closed-end management investment company. The fund had no operations until
February 15, 2002 when it sold 7,000 shares of common stock for $100,275 to
Cohen & Steers Capital Management, Inc. (the investment manager). In addition,
on February 27, 2002, the investment manager made a capital contribution of
$1,701 to the fund. Investment operations commenced on February 28, 2002.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the board of directors shall determine in good faith
to reflect its fair market value.
Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. (Nasdaq) national
market system are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
manager to be over-the-counter, but excluding securities admitted to trading on
the Nasdaq national list, are valued at the official closing prices as reported
by Nasdaq, the National Quotations Bureau or such other comparable sources as
the board of directors deems appropriate to reflect their fair market value.
However, certain fixed-income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed by the board of
directors to reflect the fair market value of such securities. Where securities
are traded on more than one exchange and also over-the-counter, the securities
will generally be valued using the quotations the board of directors believes
reflect most closely the value of such securities.
Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost which approximates value.
--------------------------------------------------------------------------------
14
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Interest Rate Swaps: The fund uses interest rate swaps in connection with
the leverage created by the sale of taxable auction market preferred shares. The
interest rate swaps are intended to reduce or eliminate the risk that an
increase in short-term interest rates could have on the performance of the
fund's common shares as a result of the floating rate nature of leverage. In an
interest rate swap, the fund agrees to pay the other party to the interest rate
swap (which is known as the counterparty) a fixed rate payment in exchange for
the counterparty agreeing to pay the fund a variable rate payment that is
intended to approximate the fund's variable rate payment obligation on the
taxable auction market preferred shares. The payment obligation is based on the
notional amount of the swap. Depending on the state of interest rates in
general, the use of interest rate swaps could enhance or harm the overall
performance of the common shares. The market value of interest rate swaps is
based on pricing models that consider the time value of money, volatility, the
current market and contractual prices of the underlying financial instrument.
Revision of Financial Information: As required, effective January 1, 2003,
the fund has adopted the requirements of EITF Issue 02-3, Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities, which requires that
periodic payments under interest rate swap transactions be reported as a
component of realized and unrealized gains/losses on the fund's statement of
operations. The fund has reclassified amounts previously reported as interest
expense on interest rate swap transactions, thereby revising certain amounts in
the Statement of Changes in Net Assets and the Financial Highlights. For the
period ended December 31, 2002, net investment income was increased by
$5,029,510 ($0.13 per share), and net realized loss on investments and interest
rate swap transactions and net change in unrealized depreciation on investments
and interest rate swap transactions were increased by $4,563,379 and $466,131,
respectively (a total of $0.13 per share).
Additionally, the ratios of net investment income to average daily net
assets applicable to common shares (before expense reduction and net of expense
reduction) increased 1.11% for the period ended December 31, 2002, the ratios of
expenses to average daily net assets applicable to common shares (before expense
reduction and net of expense reduction) decreased 1.11% for the period ended
December 31, 2002, and the ratios of expenses to average daily managed assets
(before expense reduction and net of expense reduction) decreased 0.75% for the
period ended December 31, 2002. The reclassifications had no effect on net
assets or the net increase in net assets from operations applicable to common
shares.
Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost for accounting and tax purposes.
Interest income is recorded on the accrual basis. Dividend income is recorded on
the ex-dividend date. Discounts and premiums of securities purchased are
amortized using the scientific method over their respective lives.
Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid to common shareholders monthly. Dividends to
shareholders are recorded on the ex-dividend date. A portion of the fund's
dividend may consist of amounts in excess of net investment income derived from
nontaxable components
--------------------------------------------------------------------------------
15
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
of the dividends from the fund's portfolio investments. Net realized capital
gains, unless offset by any available capital loss carryforward, are distributed
to shareholders annually.
Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. federal income tax regulations which may
differ form generally accepted accounting principals.
Series T, Series TH, and Series F preferred shares pay dividends based on a
variable interest rate set at auctions, normally held every seven days.
Dividends for Series T, Series TH, and Series F preferred shares are accrued for
the subsequent seven day period on the auction date. In most instances,
dividends are payable every seven days, on the first business day following the
end of the dividend period.
Series W preferred shares pay dividends based on a variable interest rate
set at auctions, normally held every 28 days. Dividends for Series W preferred
shares are accrued for the subsequent 28 day period on the auction date. In most
instances, dividends are payable every 28 days, on the first business day
following the end of the dividend period.
Federal Income Taxes: It is the policy of the fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for federal income or excise tax is necessary.
NOTE 2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
investment manager) serves as the investment manager to the fund, pursuant to an
investment management agreement (the management agreement). The investment
manager furnishes a continuous investment program for the fund's portfolio,
makes the day-to-day investment decisions for the fund and generally manages the
fund's investments in accordance with the stated polices of the fund, subject to
the general supervision of the board of directors of the fund. The investment
manager also performs certain administrative services for the fund.
For the services under the management agreement, the fund pays the
investment manager a monthly management fee, computed daily and payable monthly
at an annual rate of 0.85% of the fund's average daily managed asset value.
Managed asset value is the net asset value of the common shares plus the
liquidation preference of the preferred shares. For the six months ended June
30, 2003, the fund incurred investment management fees of $3,382,600.
The investment manager has contractually agreed to waive investment
management fees in the amount of 0.32% of average daily managed asset value for
the first five fiscal years of the fund's operations, 0.26% of average daily
managed asset value in year six, 0.20% of average daily managed asset value in
year seven, 0.14% of average daily managed asset value in year eight, 0.08% of
average daily managed asset value in year nine and 0.02% of average daily
managed asset value in year 10. As long as this expense cap continues, it may
lower the fund's
--------------------------------------------------------------------------------
16
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
expenses and increase its total return. For the six months ended June 30, 2003,
the investment manager waived management fees of $1,273,450.
Administration Fees: Pursuant to an administration agreement, the investment
manager also performs certain administrative and accounting functions for the
fund and receives a fee of 0.02% of the fund's average daily managed asset
value. For the six months ended June 30, 2003, the fund incurred $79,590 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 six months ended June 30, 2003, fees and related expenses accrued for
nonaffiliated directors totaled $20,143.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments for the
six months ended June 30, 2003, totaled $118,520,943 and $113,017,848,
respectively.
NOTE 4. INCOME TAXES
At June 30, 2003 the cost of investments and net unrealized appreciation for
federal income tax purposes were as follows:
Aggregate cost.................................... $836,387,085
------------
------------
Gross unrealized appreciation..................... $ 69,804,083
Gross unrealized depreciation..................... (18,139,549)
------------
Net unrealized appreciation on investments........ 51,664,534
Net unrealized depreciation on interest rate swap
transactions.................................... (21,505,922)
------------
Net unrealized depreciation....................... $ 30,158,612
------------
------------
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to return of capital and capital gain
distributions received by the fund on portfolio securities. To the extent such
differences are permanent in nature, such amounts are reclassified within the
capital accounts. Short-term capital gains are reflected in the financial
statements as realized gains on investments but are typically reclassified as
ordinary income for tax purposes.
NOTE 5. CAPITAL STOCK
During the six months ended June 30, 2003, the fund issued 219,752 shares of
common stock for the reinvestment of dividends.
--------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
On February 28, 2002, the fund completed the initial public offering of
34,000,000 shares of common stock. Proceeds paid to the fund amounted to
$494,292,000 after deduction of underwriting commissions and offering expenses
of $15,708,000.
On March 8, 2002, the fund completed a subsequent offering of 2,000,000
shares of common stock. Proceeds paid to the fund amounted to $29,076,000 after
deduction of underwriting commissions and offering expenses of $924,000.
On March 21, 2002, the fund's underwriters exercised an option to purchase
an additional 1,700,000 shares. Proceeds paid to the fund amounted to
$24,714,600 after deduction of underwriting commissions and offering expenses of
$785,400.
On April 8, 2002, the fund's underwriters exercised an option to purchase an
additional 681,983 shares. Proceeds paid to the fund amounted to $9,914,669
after deduction of underwriting commissions and offering expenses of $315,076.
During the period February 28, 2002 (commencement of operations) through
December 31, 2002, the fund issued 247,339 shares of common stock for the
reinvestment of dividends.
On April 4, 2002, the fund issued 2,800 taxable auction market preferred
shares, Series T (par value $0.001), 2,800 taxable auction market preferred
shares, Series W (par value $0.001), 2,800 taxable auction market preferred
shares, Series TH (par value $0.001), and 2,800 taxable auction market preferred
shares, Series F (par value $0.001) (together referred to as preferred shares).
Proceeds paid to the fund amounted to $276,639,053 after deduction of
underwriting commissions and offering expenses of $3,360,947. This issue has
received a 'AAA/Aaa' rating from Standard & Poor's and Moody's.
Preferred shares are senior to the fund's common shares and will rank on a
parity with shares of any other series of preferred shares, and with shares of
any other series of preferred stock of the fund, as to the payment of dividends
and the distribution of assets upon liquidation. If the fund does not timely
cure a failure to (1) maintain a discounted value of its portfolio equal to the
preferred shares basic maintenance amount, (2) maintain the 1940 Act preferred
shares asset coverage, or (3) file a required certificate related to asset
coverage on time, the preferred shares will be subject to a mandatory redemption
at the redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon to the date fixed for redemption. To the extent
permitted under the 1940 Act and Maryland law, the fund at its option may
without consent of the holders of preferred shares, redeem preferred shares
having a dividend period of one year or less, in whole, or in part, on the
business day after the last day of such dividend period upon not less than 15
calendar days and not more than 40 calendar days prior to notice. The optional
redemption price is $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon to the date fixed for redemption.
The fund's common shares and preferred shares have equal voting rights of
one vote per share and vote together as a single class. In addition, the
affirmative vote of the holders a majority, as defined in the 1940 Act, of the
outstanding preferred shares shall be required to (1) approve any plan of
reorganization that would adversely
--------------------------------------------------------------------------------
18
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
affect the taxable auction market preferred shares and (2) 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 and UBS Warburg. Under the agreements the fund receives a
floating rate of interest and pays a respective fixed rate of interest on the
nominal value of the swaps. Details of the swaps at June 30, 2003 are as
follows:
NOTIONAL FLOATING RATE(a) UNREALIZED
COUNTERPARTY AMOUNT FIXED RATE (RESET MONTHLY) TERMINATION DATE DEPRECIATION
------------ ------ ---------- --------------- ---------------- ------------
Merrill Lynch Derivative
Products $46,000,000 4.560% 1.319% April 5, 2005 $ (2,631,642)
Merrill Lynch Derivative
Products $46,000,000 5.210% 1.319% April 5, 2007 (5,058,734)
Merrill Lynch Derivative
Products $46,000,000 5.580% 1.319% April 5, 2009 (6,637,327)
UBS Warburg $24,000,000 4.450% 1.180% April 15, 2005 (1,318,560)
UBS Warburg $24,000,000 5.120% 1.180% April 15, 2007 (2,540,320)
UBS Warburg $24,000,000 5.495% 1.180% April 15, 2009 (3,319,339)
------------
$(21,505,922)
------------
------------
-------------------
(a) Based on LIBOR (London Interbank Offered Rate).
--------------------------------------------------------------------------------
19
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
AVERAGE ANNUAL TOTAL RETURNS (a)
(PERIODS ENDED JUNE 30, 2003) (UNAUDITED)
SINCE INCEPTION
ONE YEAR (8/30/02)
-------- ---------
8.91% 15.05%
-----------------------------------------------------------------
REINVESTMENT PLAN
We urge shareholders who want to take advantage of this plan
and whose shares are held in 'street name' to consult your
broker as soon as possible to determine if you must change
registration into your own name to participate.
-----------------------------------------------------------------
-----------------------------------------------------------------
Notice is hereby given in accordance with Section 23(c) of
the Investment Company Act of 1940 that the fund may
purchase, from time to time, shares of its common stock in
the open market.
-----------------------------------------------------------------
-------------------
(a) Based on net asset value.
--------------------------------------------------------------------------------
20
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
PROXY RESULTS
Cohen & Steers Quality Income Realty Fund, Inc. shareholders voted on the
following proposals at the annual meeting held on April 24, 2003. The
description of each proposal and number of shares voted are as follows:
Common Shares
-----------------------------------------------------------------------------------------
SHARES VOTED SHARES VOTED
FOR AUTHORITY WITHHELD
-----------------------------------------------------------------------------------------
1. To elect Directors
Gregory C. Clark................................... 37,661,811 418,769
Bonnie Cohen....................................... 37,646,479 434,101
George Grossman.................................... 37,662,805 417,775
Richard J. Norman.................................. 37,662,236 418,343
Robert H. Steers................................... 37,625,497 455,083
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
SHARES VOTED SHARES VOTED SHARES VOTED
FOR AGAINST ABSTAIN
-----------------------------------------------------------------------------------------
2. To ratify PricewaterhouseCoopers LLP as the
fund's independent accountants.............. 37,465,589 261,593 353,398
-----------------------------------------------------------------------------------------
Preferred Shares
-----------------------------------------------------------------------------------------
SHARES VOTED SHARES VOTED
FOR AUTHORITY WITHHELD
-----------------------------------------------------------------------------------------
1. To elect Directors
Martin Cohen....................................... 7,272 4
Willard H. Smith Jr................................ 7,272 4
-----------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
21
--------------------------------------------------------------------------------
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
------------------------------------------------------------------
PRIVACY POLICY
The fund is committed to maintaining the privacy of its
shareholders and to safeguarding their personal information.
The following is provided to help you understand what
personal information the fund collects, how we protect that
information, and why in certain cases we may share this
information with others.
The fund does not receive any personal information relating
to shareholders who purchase shares through an intermediary
that acts as the record owner of the shares. In the case of
shareholders who are record owners of the fund, to conduct
and process your business in an accurate and efficient
manner, we must collect and maintain certain personal
information about you. This is the information we collect on
applications or other forms, and from the transactions you
make with us.
The fund does not disclose any personal information about
its shareholders or former shareholders to anyone, except as
required or permitted by law or as is necessary to service
shareholder accounts. We will share information with
organizations, such as the fund's transfer agent, that
assist the fund in carrying out its daily business
operations. These organizations will use this information
only for purposes of providing the services required or as
otherwise as may be required by law. These organizations are
not permitted to share or use this information for any other
purpose. In addition, the fund restricts access to personal
information about its shareholders to employees of the
adviser who have a legitimate business need for the
information.
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
MEET THE COHEN & STEERS FAMILY OF OPEN-END FUNDS:
FOR HIGH CURRENT INCOME: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
EQUITY INCOME FUND REALTY SHARES
IDEAL FOR INVESTORS SEEKING A HIGH DIVIDEND IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
YIELD AND CAPITAL APPRECIATION, INVESTING RETURN THROUGH BOTH CURRENT INCOME AND
PRIMARILY IN REITS CAPITAL APPRECIATION, INVESTING PRIMARILY IN
A, B, C AND I SHARES AVAILABLE REITS
SYMBOLS: CSEIX, CSBIX, CSCIX, CSDIX SYMBOL: CSRSX
FOR CAPITAL APPRECIATION: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
SPECIAL EQUITY FUND INSTITUTIONAL REALTY SHARES
IDEAL FOR INVESTORS SEEKING MAXIMUM CAPITAL IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
APPRECIATION, INVESTING IN A LIMITED NUMBER RETURN THROUGH BOTH CURRENT INCOME AND
OF REITS AND OTHER REAL ESTATE COMPANIES CAPITAL APPRECIATION, INVESTING PRIMARILY IN
CONCENTRATED, HIGHLY FOCUSED PORTFOLIO REITS
SYMBOL: CSSPX OFFERS LOW TOTAL EXPENSE RATIO
HIGHER MINIMUM PURCHASE REQUIRED
SYMBOL: CSRIX
FOR MORE INFORMATION ABOUT ANY COHEN & STEERS FUND
OR TO OBTAIN A PROSPECTUS PLEASE CONTACT US AT:
1-800-330-REIT, OR VISIT OUR WEB SITE AT COHENANDSTEERS.COM
THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT EACH FUND INCLUDING ALL CHARGES AND EXPENSES,
AND SHOULD BE READ CAREFULLY BEFORE YOU INVEST.
COHEN & STEERS SECURITIES, LLC, DISTRIBUTOR
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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
OFFICERS AND DIRECTORS KEY INFORMATION
Robert H. Steers INVESTMENT MANAGER
Director and chairman Cohen & Steers Capital Management, Inc.
757 Third Avenue
Martin Cohen New York, NY 10017
Director and president (212) 832-3232
Gregory C. Clark FUND SUBADMINISTRATOR AND CUSTODIAN
Director State Street Bank and Trust Company
225 Franklin Street
Bonnie Cohen Boston, MA 02110
Director
George Grossman TRANSFER AGENT -- COMMON SHARES
Director Equiserve Trust Company
150 Royall Street
Richard J. Norman Canton, MA 02021
Director (800) 426-5523
Willard H. Smith Jr. TRANSFER AGENT -- PREFERRED SHARES
Director The Bank of New York
100 Church Street
Greg E. Brooks New York, NY 10007
Vice president
Adam Derechin LEGAL COUNSEL
Vice president and assistant Simpson Thacher & Bartlett
treasurer 425 Lexington Avenue
New York, NY 10017
Lawrence B. Stoller
Assistant secretary
New York Stock Exchange Symbol: RQI
Web site: cohenandsteers.com
This report is for shareholder
information. This is not a prospectus
intended for use in the purchase or sale
of fund shares. Past performance is of
course no guarantee of future results
and your investment may be worth more or
less at the time you sell.
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COHEN & STEERS
QUALITY INCOME REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
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QUALITY INCOME REALTY FUND
SEMIANNUAL REPORT
JUNE 30, 2003
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................ 'SS'
The division sign shall be expressed as.................................[div]