N-CSR 1 d655694dncsr.htm COHEN & STEERS QUALITY INCOME REALTY FUND, INC. Cohen & Steers Quality Income Realty Fund, Inc.

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)

280 Park Avenue, New York, NY 10017

 

(Address of principal executive offices) (Zip code)

Dana A. DeVivo

Cohen & Steers Capital Management, Inc.

280 Park 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, 2021                                

 

 

 


Item 1. Reports to Stockholders.

 

 

 


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

To Our Shareholders:

We would like to share with you our report for the year ended December 31, 2021. The total returns for Cohen & Steers Quality Income Realty Fund, Inc. (the Fund) and its comparative benchmarks were:

 

     Six Months Ended
December 31, 2021
    

Year Ended
December 31, 2021

 

Cohen & Steers Quality Income Realty Fund at Net Asset Valuea

     18.08      47.77 %b 

Cohen & Steers Quality Income Realty Fund at Market Valuea

     19.40      56.40

FTSE Nareit All Equity REITs Indexc

     16.44      41.30

Blended Benchmark—80% FTSE Nareit All Equity REITs Index/ 20% ICE BofA REIT Preferred Securities Indexc

     12.93      32.37

S&P 500 Indexc

     11.67      28.71

The performance data quoted represent past performance. Past performance is no guarantee of future results. The investment return 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. Performance results reflect the effects of leverage, resulting from borrowings under a credit agreement. Current total returns of the Fund can be obtained by visiting our website at cohenandsteers.com. The Fund’s returns assume the reinvestment of all dividends and distributions at prices obtained under the Fund’s dividend reinvestment plan. Index performance does not reflect the deduction of any fees, taxes or expenses. An investor cannot invest directly in an index. Performance figures for periods shorter than one year are not annualized.

Managed Distribution Policy

The Fund, acting in accordance with an exemptive order received from the U.S. Securities and Exchange Commission (SEC) and with approval of its Board of Directors (the Board), adopted a managed distribution policy under which the Fund intends to include long-term capital gains, where applicable, as part of the regular monthly cash distributions to its shareholders (the Plan). The Plan gives the Fund greater flexibility to realize long-term capital gains and to distribute those gains on a regular monthly basis. In accordance with the Plan, the Fund currently distributes $0.08 per share on a monthly basis.

 

 

a 

As a closed-end investment company, the price of the Fund’s exchange-traded shares will be set by market forces and can deviate from the net asset value (NAV) per share of the Fund.

b 

The returns shown are based on NAVs reported on December 31, 2021 and may differ from the returns shown in the Consolidated Financial Highlights, which reflect adjustments made to the NAVs in accordance with accounting principles generally accepted in the United States of America (GAAP).

c 

The FTSE Nareit All Equity REITs Index contains all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. The ICE BofA REIT Preferred Securities Index tracks the performance of fixed-rate U.S. dollar-denominated preferred securities issued in the U.S. domestic market including all REITs. The S&P 500 Index is an unmanaged index of 500 large-capitalization stocks that is frequently used as a general measure of U.S. stock market performance.

 

1


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

The Fund may pay distributions in excess of the Fund’s investment company taxable income and net realized gains. This excess would be a return of capital distributed from the Fund’s assets. 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.

Shareholders should not draw any conclusions about the Fund’s investment performance from the amount of these distributions or from the terms of the Fund’s Plan. The Fund’s total return based on NAV is presented in the table above as well as in the Consolidated Financial Highlights table.

The Plan provides that the Board may amend or terminate the Plan at any time without prior notice to Fund shareholders; however, at this time, there are no reasonably foreseeable circumstances that might cause the termination. The termination of the Plan could have the effect of creating a trading discount (if the Fund’s stock is trading at or above NAV) or widening an existing trading discount.

Market Review

In the 12-month period ended December 31, 2021, U.S. real estate securities continued to rally from their lows in early 2020. Progress in vaccine distribution allowed certain regions to begin lifting restrictions on public gatherings, business activities and travel, notwithstanding some fits and starts as new virus variants emerged. Economic reopenings and additional fiscal relief led to increasing activity, generating stronger demand for real estate. Supply growth in many property sectors slowed amid labor shortages and rising construction costs, giving landlords greater pricing power to negotiate rents. Borrowing costs for many public real estate companies remained near historical lows. These positive conditions drove improving investor optimism, resulting in lower capitalization rates (higher property values) and higher earnings multiples.

Fund Performance

The Fund had a positive total return in the period and outperformed its blended benchmark on both a NAV and market price basis.

For REIT common shares, returns were positive across all property types. The regional mall and shopping center sectors were among the strongest performers, as easing virus concerns led to a sharp rise in foot traffic and retail sales from depressed levels. The Fund’s overweight in regional malls aided relative performance, although the benefit was countered by the effect of our underweight in shopping centers.

Self storage, which had been one of the more resilient sectors through the pandemic, continued to see strong demand amid continued moving activity, driving rates for new customers up 50—70% from 2020 levels. The Fund’s overweight in self storage companies contributed positively to performance.

Leasing trends for apartments in U.S. coastal markets have bounced back fast and Sunbelt markets remained exceptionally strong, fueled by strong housing demand. Our stock selection and underweight in apartments detracted from relative performance. The Fund had an underweight in Mid-America Apartment Communities and did not invest in Avalon Bay Communities, which both gained more than 60% in the period.

 

2


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

Infrastructure and industrial REITs, which were among the few sectors to advance in 2020, added to those gains in the period, although infrastructure modestly trailed the broader real estate market. The Fund’s underweight in infrastructure aided performance, although stock selection in industrials hindered relative performance.

Elsewhere of note, our underweight in offices, which underperformed amid an uncertain outlook for return to office trends, contributed to performance, while an overweight in health care, which lagged, detracted.

REIT preferreds had only a modest gain in the period compared with REIT common shares, restrained along with other higher-quality fixed income classes by a rise in bond yields as economies continued to reopen. The Fund’s underweight allocation to REIT preferreds aided performance compared with the blended benchmark, as did favorable security selection in the allocation. The Fund’s modest out-of-benchmark position in corporate bonds hindered performance, as these holdings trailed real estate stocks in the period.

Impact of Leverage on Fund Performance

The Fund employs leverage as part of a yield-enhancement strategy. Leverage, which can increase total return in rising markets (just as it can have the opposite effect in declining markets), contributed significantly to the Fund’s performance for the 12-month period ended December 31, 2021.

Impact of Derivatives on Fund Performance

The Fund used forward foreign currency exchange contracts for managing currency risk on certain Fund positions denominated in foreign currencies. The currency forwards did not have a material effect on the Fund’s total return for the 12-month period ended December 31, 2021.

The Fund also engaged in the buying and selling of single stock options with the intention of enhancing total returns and reducing overall volatility. These contracts did not have a material effect on the Fund’s total return for the 12-month period ended December 31, 2021.

In connection with its use of leverage, the Fund pays interest on a portion of its borrowings based on a floating rate under the terms of its credit agreement. To reduce the impact that an increase in interest rates could have on the performance of the Fund with respect to these borrowings, the Fund used interest rate swaps to exchange a portion of the floating rate for a fixed rate. The Fund’s use of swaps contributed to the Fund’s total return for the for the 12-month period ended December 31, 2021.

 

3


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

Sincerely,

 

LOGO

    

LOGO

WILLIAM F. SCAPELL

    

JASON YABLON

Portfolio Manager

    

Portfolio Manager

 

LOGO

MATHEW KIRSCHNER

Portfolio Manager

The views and opinions in the preceding commentary are subject to change without notice and are as of the date of the report. There is no guarantee that any market forecast set forth in the commentary will be realized. This material represents an assessment of the market environment at a specific point in time, should not be relied upon as investment advice and is not intended to predict or depict performance of any investment.

 

Visit Cohen & Steers online at cohenandsteers.com

For more information about the Cohen & Steers family of mutual funds, visit cohenandsteers.com. Here you will find fund net asset values, fund fact sheets and portfolio highlights, as well as educational resources and timely market updates.

Our website also provides comprehensive information about Cohen & Steers, including our most recent press releases, profiles of our senior investment professionals and their investment approach to each asset class. The Cohen & Steers family of mutual funds specializes in liquid real assets, including real estate securities, listed infrastructure and natural resource equities, as well as preferred securities and other income solutions.

 

4


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

Our Leverage Strategy

(Unaudited)

Our current leverage strategy utilizes borrowings up to the maximum permitted by the Investment Company Act of 1940 to provide additional capital for the Fund, with an objective of increasing net income available for shareholders. As of December 31, 2021, leverage represented 22% of the Fund’s managed assets.

Through a combination of variable and fixed rate financing, the Fund has locked in interest rates on a significant portion of this additional capital through 2027 (where we effectively reduce our variable rate obligation and lock in our fixed rate obligation over various terms). Locking in a significant portion of our leveraging costs is designed to protect the dividend-paying ability of the Fund. The use of leverage increases the volatility of the Fund’s NAV in both up and down markets. However, we believe that locking in portions of the Fund’s leveraging costs for the various terms partially protects the Fund’s expenses from an increase in short-term interest rates.

Leverage Factsa,b

 

Leverage (as a % of managed assets)

   22%

% Variable Rate Financing

   15%

Variable Rate

   0.9%

% Fixed Rate Financingc,d

   85%

Weighted Average Rate on Fixed Financing

   2.1%

Weighted Average Term on Fixed Financing

   4.6 years

The Fund seeks to enhance its dividend yield through leverage. The use of leverage is a speculative technique and there are special risks and costs associated with leverage. The NAV of the Fund’s shares may be reduced by the issuance and ongoing costs of leverage. So long as the Fund is able to invest in securities that produce an investment yield that is greater than the total cost of leverage, the leverage strategy will produce higher current net investment income for shareholders. On the other hand, to the extent that the total cost of leverage exceeds the incremental income gained from employing such leverage, shareholders would realize lower net investment income. In addition to the impact on net income, the use of leverage will have an effect of magnifying capital appreciation or depreciation for shareholders. Specifically, in an up market, leverage will typically generate greater capital appreciation than if the Fund were not employing leverage. Conversely, in down markets, the use of leverage will generally result in greater capital depreciation than if the Fund had been unlevered. To the extent that the Fund is required or elects to reduce its leverage, the Fund may incur breakage fees under the Fund’s credit arrangement and may need to liquidate investments, including under adverse economic conditions which may result in capital losses potentially reducing returns to shareholders. There can be no assurance that a leveraging strategy will be successful during any period in which it is employed.

 

 

 

a 

Data as of December 31, 2021. Information is subject to change.

b 

See Note 6 in Notes to Consolidated Financial Statements.

c 

Represents a combination of fixed rate borrowings and fixed payer interest rate swap contracts on variable rate borrowing.

d 

The Fund entered into a forward-starting interest rate swap contract with interest receipts and payments commencing on December 24, 2022 (effective date).

 

5


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

Performance Review (Unaudited)

Growth of a $10,000 Investment

 

LOGO

Average Annual Total Returns—For Periods Ended December 31, 2021

 

      1 Year      5 Years      10 Years      Since Inceptionc  

Fund at NAV

     47.77      14.72      14.97      11.18

Fund at Market Value

     56.40      16.85      16.23      10.99

The performance data quoted represent past performance. Past performance is no guarantee of future results. The investment 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. Performance results reflect the effect of leverage from utilization of borrowings under a credit agreement. Current total returns of the Fund can be obtained by visiting our website at cohenandsteers.com. The Fund’s returns assume the reinvestment of all dividends and distributions at prices obtained under the Fund’s dividend reinvestment plan. The performance graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares.

 

6


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

Performance Review (Unaudited)—(Continued)

 

a

The Linked Blended Benchmark is represented by the performance of the blended benchmark consisting of 80% FTSE Nareit Equity REITs Index and 20% ICE BofA REIT Preferred Securities Index through March 31, 2019; and the blended benchmark consisting of 80% FTSE Nareit All Equity REITs Index and 20% ICE BofA REIT Preferred Securities Index thereafter.

 

The Linked Benchmark is represented by the performance of the FTSE Nareit Equity REITs Index through March 31, 2019 and the FTSE Nareit All Equity REITs Index thereafter.

 

The FTSE Nareit Equity REITs Index contains all tax-qualified real estate investment trusts (REITs) except timber and infrastructure REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. The FTSE Nareit All Equity REITs Index contains all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. The ICE BofA REIT Preferred Securities Index tracks the performance of fixed-rate U.S. dollar denominated preferred securities issued in the U.S. domestic market including all REITs.

b 

The comparative indexes are not adjusted to reflect expenses or other fees that the U.S. Securities and Exchange Commission (SEC) requires to be reflected in the Fund’s performance. Index performance does not reflect the deduction of any fees, taxes or expenses. An investor cannot invest directly in an index. The Fund’s performance assumes dividends and distributions are reinvested at prices obtained under the Fund’s dividend reinvestment plan.

c 

Commencement of investment operations is February 28, 2002.

 

7


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

December 31, 2021

Top Ten Holdingsa

(Unaudited)

 

Security

   Value        % of
Managed
Assets
 

American Tower Corp.

   $ 269,226,652          8.6  

Duke Realty Corp.

     160,453,895          5.1  

Public Storage

     159,895,544          5.1  

Simon Property Group, Inc.

     140,445,339          4.5  

Welltower, Inc.

     121,414,039          3.9  

Prologis, Inc.

     116,686,107          3.7  

UDR, Inc.

     116,176,634          3.7  

Extra Space Storage, Inc.

     113,374,296          3.6  

Healthpeak Properties, Inc.

     102,119,470          3.3  

Equinix, Inc.

     101,755,398          3.3  

 

a 

Top ten holdings (excluding short-term investments and derivative instruments) are determined on the basis of the value of individual securities held. The Fund may also hold positions in other securities issued by the companies listed above. See the Consolidated Schedule of Investments for additional details on such other positions.

Sector Breakdownb

(Based on Managed Assets)

(Unaudited)

 

LOGO

 

 

b 

Excludes derivative instruments.

 

8


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2021

 

            Shares      Value  

COMMON STOCK

     104.4%        

COMMUNICATIONS—TOWERS

     16.6%        

American Tower Corp.a,b

 

     920,433      $ 269,226,652  

Crown Castle International Corp.

 

     461,825        96,401,351  

SBA Communications Corp.

 

     106,662        41,493,651  
        

 

 

 
           407,121,654  
        

 

 

 

REAL ESTATE

     87.8%        

DATA CENTERS

     7.1%        

Digital Realty Trust, Inc.a

 

     406,844        71,958,498  

Equinix, Inc.a,b

 

     120,301        101,755,398  
        

 

 

 
           173,713,896  
        

 

 

 

DIVERSIFIED—FOREIGN

     0.0%        

BGP Holdings PLC (EUR) (Australia)c,d

 

     3,927,678        0  
        

 

 

 

HEALTH CARE

     12.4%        

Healthcare Trust of America, Inc., Class A

 

     1,000,390        33,403,022  

Healthpeak Properties, Inc.a,b,e

 

     2,829,578        102,119,470  

Ventas, Inc.a,b

 

     940,746        48,090,936  

Welltower, Inc.a

 

     1,415,577        121,414,039  
        

 

 

 
           305,027,467  
        

 

 

 

HOTEL

     2.6%        

Host Hotels & Resorts, Inc.a,b,d

 

     3,670,660        63,832,777  
        

 

 

 

INDUSTRIALS

     13.7%        

Americold Realty Trusta

 

     1,348,690        44,223,545  

BG LLH, LLC (Lineage Logistics)f

 

     142,519        14,310,333  

Duke Realty Corp.a,b

 

     2,444,453        160,453,895  

Prologis, Inc.a

 

     693,075        116,686,107  
        

 

 

 
           335,673,880  
        

 

 

 

NET LEASE

     10.2%        

NETSTREIT Corp.

 

     713,226        16,332,876  

Realty Income Corp.a,b

 

     1,371,305        98,171,725  

Spirit Realty Capital, Inc.a,b

 

     859,157        41,402,776  

VICI Properties, Inc.a,b

 

     3,156,385        95,038,752  
        

 

 

 
           250,946,129  
        

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

9


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

            Shares      Value  

OFFICE

     1.7%        

Cousins Properties, Inc.a

 

     446,629      $ 17,990,216  

Highwoods Properties, Inc.

 

     510,337        22,755,927  
        

 

 

 
           40,746,143  
        

 

 

 

RESIDENTIAL

     15.8%        

APARTMENT

     9.8%        

Apartment Income REIT Corp.

 

     768,491        42,013,403  

Essex Property Trust, Inc.a

 

     237,564        83,677,167  

UDR, Inc.a,b

 

     1,936,600        116,176,634  
        

 

 

 
           241,867,204  
        

 

 

 

MANUFACTURED HOME

     2.8%        

Sun Communities, Inc.a,b

 

     329,580        69,201,913  
        

 

 

 

SINGLE FAMILY

     3.2%        

Invitation Homes, Inc.a,b

 

     1,695,055        76,853,794  
        

 

 

 

TOTAL RESIDENTIAL

 

        387,922,911  
        

 

 

 

SELF STORAGE

     11.1%        

Extra Space Storage, Inc.a

 

     500,041        113,374,296  

Public Storagea,b,e

 

     426,889        159,895,544  
        

 

 

 
           273,269,840  
        

 

 

 

SHOPPING CENTERS

     8.9%        

COMMUNITY CENTER

     3.1%        

Brixmor Property Group, Inc.

 

     1,000,490        25,422,451  

Kimco Realty Corp.

 

     2,067,728        50,969,495  
        

 

 

 
           76,391,946  
        

 

 

 

REGIONAL MALL

     5.8%        

Simon Property Group, Inc.a

 

     879,047        140,445,339  
        

 

 

 

TOTAL SHOPPING CENTERS

 

        216,837,285  
        

 

 

 

SPECIALTY

     1.6%        

Lamar Advertising Co., Class A

 

     325,973        39,540,525  
        

 

 

 

TIMBER

     2.7%        

Weyerhaeuser Co.a,b

 

     1,613,342        66,437,423  
        

 

 

 

TOTAL REAL ESTATE

 

        2,153,948,276  
        

 

 

 

TOTAL COMMON STOCK
(Identified cost—$1,499,660,922)

 

        2,561,069,930  
        

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

10


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

            Shares      Value  

PREFERRED SECURITIES—$25 PAR VALUE

     9.3%        

BANKS

     1.0%        

JPMorgan Chase & Co., 5.75%, Series DDg

 

     75,000      $ 2,016,000  

JPMorgan Chase & Co., 4.75%, Series GGg

 

     172,000        4,530,480  

JPMorgan Chase & Co., 4.625%, Series LLg

 

     189,812        4,955,991  

JPMorgan Chase & Co., 4.20%, Series MMg

 

     100,000        2,552,000  

Wells Fargo & Co., 4.70%, Series AAg

 

     88,000        2,270,400  

Wells Fargo & Co., 4.25%, Series DDg

 

     69,325        1,727,579  

Wells Fargo & Co., 4.75%, Series Zg

 

     208,044        5,380,018  
        

 

 

 
           23,432,468  
        

 

 

 

ELECTRIC

     0.1%        

CMS Energy Corp., 5.875%, due 3/1/79

 

     140,000        3,766,000  
        

 

 

 

INTEGRATED TELECOMMUNICATIONS SERVICES

     0.2%        

United States Cellular Corp., 5.50%, due 6/1/70

 

     168,545        4,419,250  
        

 

 

 

PIPELINES

     0.1%        

Energy Transfer LP, 7.60% to 5/15/24, Series Eg,h

 

     147,000        3,726,450  
        

 

 

 

REAL ESTATE

     7.9%        

DATA CENTERS

     1.0%        

Digital Realty Trust, Inc., 5.85%, Series Kg

 

     98,115        2,701,106  

Digital Realty Trust, Inc., 5.20%, Series Lg

 

     100,000        2,678,000  

DigitalBridge Group, Inc., 7.15%, Series Ig

 

     344,915        9,005,731  

DigitalBridge Group, Inc., 7.125%, Series Jg

 

     236,273        6,228,156  

KKR Real Estate Finance Trust, Inc., 6.50%, Series Ag

 

     150,000        3,855,000  
        

 

 

 
           24,467,993  
        

 

 

 

DIVERSIFIED

     1.4%        

Armada Hoffler Properties, Inc., 6.75%, Series Ag

 

     375,000        10,095,112  

EPR Properties, 9.00%, Series E (Convertible)a,g

 

     128,829        4,605,637  

EPR Properties, 5.75%, Series Gg

 

     177,002        4,471,071  

Lexington Realty Trust, 6.50%, Series C ($50 Par Value)a,g

 

     79,704        4,961,574  

Office Properties Income Trust, 6.375%, due 6/23/50

 

     25,000        683,250  

Urstadt Biddle Properties, Inc., 6.25%, Series Hg

 

     157,556        4,069,671  

Urstadt Biddle Properties, Inc., 5.875%, Series Kg

 

     159,900        4,088,643  
        

 

 

 
           32,974,958  
        

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

11


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

            Shares      Value  

HOTEL

     1.3%        

DiamondRock Hospitality Co., 8.25%g

 

     46,466      $ 1,296,866  

Pebblebrook Hotel Trust, 6.30%, Series Fg

 

     140,000        3,539,200  

Pebblebrook Hotel Trust, 6.375%, Series Gg

 

     188,800        4,957,888  

Pebblebrook Hotel Trust, 5.70%, Series Hg

 

     160,000        3,936,000  

RLJ Lodging Trust, 1.95%, Series Ag

 

     154,846        4,453,371  

Summit Hotel Properties, Inc., 6.25%, Series Eg

 

     226,000        5,729,100  

Summit Hotel Properties, Inc., 5.875%, Series Fg

 

     137,693        3,545,595  

Sunstone Hotel Investors, Inc., 6.125%, Series Hg

 

     114,000        2,916,120  
        

 

 

 
           30,374,140  
        

 

 

 

INDUSTRIALS

     0.7%     

Monmouth Real Estate Investment Corp., 6.125%, Series Cg

 

     473,000        11,938,520  

PS Business Parks, Inc., 5.20%, Series Yg

 

     185,000        4,826,650  

Rexford Industrial Realty, Inc., 5.625%, Series Cg

 

     30,000        785,400  
        

 

 

 
           17,550,570  
        

 

 

 

NET LEASE

     0.5%     

Agree Realty Corp., 4.25%, Series Ag

 

     117,655        2,790,777  

Spirit Realty Capital, Inc., 6.00%, Series Aa,g

 

     378,071        9,723,986  
        

 

 

 
           12,514,763  
        

 

 

 

OFFICE

     1.3%     

Arbor Realty Trust, Inc., 6.375%, Series Dg

 

     51,200        1,297,920  

Brookfield Property Partners LP, 5.75%, Series Ag

 

     154,000        3,628,240  

Brookfield Property Partners LP, 6.375%, Series A2g

 

     126,056        3,234,597  

Brookfield Property Preferred LP, 6.25%, due 7/26/81

 

     150,000        3,918,000  

City Office REIT, Inc., 6.625%, Series Ag

 

     61,000        1,576,850  

Hudson Pacific Properties, Inc., 4.75%, Series Cg

 

     201,200        5,249,308  

SL Green Realty Corp., 6.50%, Series Ia,g

 

     156,991        4,141,422  

TPG RE Finance Trust, Inc., 6.25%, Series Cg

 

     65,000        1,567,800  

Vornado Realty Trust, 5.25%, Series Ng

 

     150,000        3,973,500  

Vornado Realty Trust, 4.45%, Series Og

 

     134,570        3,323,879  
        

 

 

 
           31,911,516  
        

 

 

 

RESIDENTIAL

     0.6%        

APARTMENT

     0.1%     

Centerspace, 6.625%, Series Cg

 

     98,959        2,580,851  
        

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

12


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

            Shares      Value  

MANUFACTURED HOME

     0.3%     

Green Brick Partners, Inc., 5.75%, Series Ag

 

     91,675      $ 2,396,384  

UMH Properties, Inc., 6.75%, Series Cg

 

     152,845        3,980,084  

UMH Properties, Inc., 6.375%, Series Dg

 

     65,000        1,688,700  
        

 

 

 
           8,065,168  
        

 

 

 

SINGLE FAMILY

     0.2%     

American Homes 4 Rent, 6.25%, Series Hg

 

     178,714        4,834,214  
        

 

 

 

TOTAL RESIDENTIAL

 

     15,480,233  
  

 

 

 

SELF STORAGE

     0.5%     

National Storage Affiliates Trust, 6.00%, Series Ag

 

     192,080        4,999,842  

Public Storage, 4.625%, Series Lg

 

     29,610        792,956  

Public Storage, 4.00%, Series Pg

 

     266,328        6,682,170  
        

 

 

 
           12,474,968  
        

 

 

 

SHOPPING CENTERS—COMMUNITY CENTER

     0.6%     

Kimco Realty Corp., 5.25%, Series Mg

 

     181,358        4,728,003  

Saul Centers, Inc., 6.125%, Series Dg

 

     101,300        2,633,800  

Saul Centers, Inc., 6.00%, Series Eg

 

     111,000        3,049,170  

SITE Centers Corp., 6.375%, Series Ag

 

     200,000        5,146,000  
        

 

 

 
           15,556,973  
        

 

 

 

TOTAL REAL ESTATE

 

        193,306,114  
  

 

 

 

TOTAL PREFERRED SECURITIES—$25 PAR VALUE
(Identified cost—$211,131,564)

 

        228,650,282  
        

 

 

 
            Principal
Amount
        

PREFERRED SECURITIES—CAPITAL SECURITIES

     9.8%        

BANKS

     3.4%        

Bank of America Corp., 6.10% to 3/17/25, Series AAa,g,h

 

   $ 4,000,000        4,337,780  

Bank of America Corp., 6.25% to 9/5/24, Series Xa,g,h

 

     6,000,000        6,461,250  

Bank of New York Mellon Corp./The, 3.75% to 12/20/26, Series Ia,g,h

 

     5,000,000        5,030,350  

Citigroup, Inc., 3.875% to 2/18/26g,h

 

     2,500,000        2,506,250  

Citigroup, Inc., 4.00% to 12/10/25, Series Wa,g,h

 

     6,000,000        6,060,000  

Citigroup, Inc., 4.15% to 11/15/26, Series Yg,h

 

     2,100,000        2,139,375  

Citigroup, Inc., 5.95% to 1/30/23g,h

 

     2,140,000        2,209,550  

Citigroup, Inc., 5.95% to 5/15/25, Series Pg,h

 

     2,000,000        2,145,000  

 

See accompanying notes to the consolidated financial statements.

 

13


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

            Principal
Amount
     Value  

Citigroup, Inc., 6.25% to 8/15/26, Series Tg,h

 

   $ 2,140,000      $ 2,418,842  

Goldman Sachs Group, Inc./The, 4.125% to 11/10/26, Series Vg,h

 

     4,100,000        4,170,469  

JPMorgan Chase & Co., 3.599% (3 Month US LIBOR + 3.47%), Series I (FRN)a,g,i

 

     2,108,000        2,118,555  

JPMorgan Chase & Co., 3.451% (3 Month US LIBOR + 3.32%), Series V (FRN)g,i

 

     738,000        740,758  

JPMorgan Chase & Co., 3.65% to 6/1/26, Series KKg,h

 

     2,920,000        2,920,000  

JPMorgan Chase & Co., 6.10% to 10/1/24, Series Xg,h

 

     4,660,000        4,919,212  

JPMorgan Chase & Co., 6.125% to 4/30/24, Series Ug,h

 

     3,850,000        4,109,875  

JPMorgan Chase & Co., 6.75% to 2/1/24, Series Sg,h

 

     6,500,000        7,049,250  

PNC Financial Services Group, Inc./The, 3.40% to 9/15/26, Series Tg,h

 

     5,000,000        4,933,700  

SVB Financial Group, 4.00% to 5/15/26, Series Cg,h

 

     5,130,000        5,162,062  

SVB Financial Group, 4.25% to 11/15/26, Series Dg,h

 

     4,130,000        4,195,564  

Wells Fargo & Co., 3.90% to 3/15/26, Series BBg,h

 

     7,600,000        7,813,750  

Wells Fargo & Co., 5.875% to 6/15/25, Series Ug,h

 

     2,000,000        2,190,000  
        

 

 

 
           83,631,592  
        

 

 

 

BANKS—FOREIGN

     2.8%        

Banco Bilbao Vizcaya Argentaria SA, 6.50% to 3/5/25, Series 9 (Spain)a,g,h,j

 

     4,000,000        4,255,000  

Banco Santander SA, 4.75% to 11/12/26 (Spain)g,h,j

 

     2,600,000        2,604,654  

Barclays PLC, 8.00% to 6/15/24 (United Kingdom)g,h,j

 

     3,000,000        3,323,340  

BNP Paribas SA, 6.625% to 3/25/24, 144A (France)a,g,h,j,k

 

     4,150,000        4,482,207  

Credit Agricole SA, 6.875% to 9/23/24, 144A (France)g,h,j,k

 

     3,000,000        3,279,000  

Credit Agricole SA, 8.125% to 12/23/25, 144A (France)g,h,j,k

 

     5,000,000        5,938,750  

Credit Suisse Group AG, 5.25% to 2/11/27, 144A (Switzerland)g,h,j,k

 

     2,500,000        2,587,500  

Credit Suisse Group AG, 7.125% to 7/29/22 (Switzerland)g,h,j,l

 

     3,000,000        3,076,470  

Credit Suisse Group AG, 7.50% to 7/17/23, 144A (Switzerland)a,g,h,j,k

 

     2,000,000        2,118,500  

Credit Suisse Group AG, 7.50% to 12/11/23, 144A (Switzerland)g,h,j,k

 

     2,891,000        3,130,196  

Deutsche Bank AG, 4.789% to 4/30/25 (Germany)g,h,j,l

 

     1,800,000        1,791,126  

DNB Bank ASA, 6.50% to 3/26/22 (Norway)g,h,j,l

 

     1,400,000        1,419,600  

 

See accompanying notes to the consolidated financial statements.

 

14


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

            Principal
Amount
     Value  

HSBC Holdings PLC, 6.00% to 5/22/27 (United Kingdom)g,h,j

 

   $ 4,100,000      $ 4,422,875  

ING Groep N.V., 5.75% to 11/16/26 (Netherlands)g,h,j

 

     2,400,000        2,585,004  

ING Groep N.V., 6.50% to 4/16/25 (Netherlands)a,g,h,j

 

     4,000,000        4,361,320  

Lloyds Banking Group PLC, 7.50% to 6/27/24 (United Kingdom)g,h,j

 

     3,400,000        3,762,746  

Macquarie Bank Ltd./London, 6.125% to 3/8/27, 144A (Australia)g,h,j,k

 

     2,800,000        2,990,162  

Natwest Group PLC, 8.00% to 8/10/25 (United Kingdom)g,h,j

 

     3,000,000        3,486,990  

Societe Generale SA, 7.875% to 12/18/23, 144A (France)g,h,j,k

 

     3,600,000        3,946,500  

Stichting AK Rabobank Certificaten, 6.50% (Netherlands)g,l

 

     1,478,350        2,322,679  

UBS Group AG, 7.00% to 1/31/24, 144A (Switzerland)g,h,j,k

 

     1,600,000        1,726,312  
        

 

 

 
           67,610,931  
        

 

 

 

ELECTRIC

     0.0%        

Southern Co./The, 3.75% to 6/15/26, due 9/15/51, Series 21-Ah

 

     700,000        701,750  
        

 

 

 

ELECTRIC—FOREIGN

     0.1%        

Electricite de France SA, 6.00% to 1/29/26, Series EMTN (France)g,h,l

 

     2,500,000        3,687,571  
        

 

 

 

FINANCIAL—INVESTMENT BANKER/BROKER

     0.5%        

American Express Co., 3.55% to 9/15/26g,h

 

     2,700,000        2,709,113  

Charles Schwab Corp./The, 4.00% to 6/1/26, Series Ig,h

 

     6,750,000        6,893,437  

Ladder Capital Finance Holdings LLLP/Ladder Capital Finance Corp., 4.75%, due 6/15/29, 144Ak

 

     3,500,000        3,593,467  
        

 

 

 
     13,196,017  
  

 

 

 

INDUSTRIALS

     0.2%        

General Electric Co., 3.533% (3 Month US LIBOR + 3.33%), Series D (FRN)a,b,g,i

 

     4,000,000        3,980,000  
        

 

 

 

INSURANCE

     0.3%        

LIFE/HEALTH INSURANCE

     0.1%     

MetLife Capital Trust IV, 7.875%, due 12/15/37, 144A (TruPS)a,k

 

     2,000,000        2,735,000  
        

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

15


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

            Principal
Amount
     Value  

PROPERTY CASUALTY—FOREIGN

     0.2%     

QBE Insurance Group Ltd., 6.75% to 12/2/24, due 12/2/44 (Australia)h,l

 

   $ 4,052,000      $ 4,494,580  
        

 

 

 

TOTAL INSURANCE

 

        7,229,580  
  

 

 

 

INTEGRATED TELECOMMUNICATIONS SERVICES

     0.2%        

AT&T Inc., 2.875% to 3/2/25, Series Bg,h

 

     5,000,000        5,710,606  
        

 

 

 

INTEGRATED TELECOMMUNICATIONS SERVICES—FOREIGN

     0.4%        

Vodafone Group PLC, 4.125% to 3/4/31, due 6/4/81
(United Kingdom)h

 

     5,710,000        5,661,922  

Vodafone Group PLC, 7.00% to 1/4/29, due 4/4/79
(United Kingdom)a,h

 

     2,750,000        3,328,967  
        

 

 

 
           8,990,889  
        

 

 

 

NET LEASE

     0.1%        

VICI Properties LP/VICI Note Co., Inc., 3.75%, due 2/15/27, 144Ak

 

     2,000,000        2,068,040  
        

 

 

 

PIPELINES

     0.2%     

Energy Transfer LP, 6.50% to 11/15/26, Series Hg,h

 

     1,480,000        1,509,600  

Energy Transfer LP, 7.125% to 5/15/30, Series Gg,h

 

     3,125,000        3,179,688  
        

 

 

 
           4,689,288  
        

 

 

 

PIPELINES—FOREIGN

     0.1%     

Enbridge, Inc., 6.00% to 1/15/27, due 1/15/77, Series 16-A (Canada)a,h

 

     1,750,000        1,882,345  
        

 

 

 

REAL ESTATE

     1.1%     

DIVERSIFIED

     0.3%     

American Finance Trust, Inc./American Finance Operating Partner LP, 4.50%, due 9/30/28, 144Ak

 

     4,000,000        4,035,500  

CTR Partnership LP/CareTrust Capital Corp.,
3.875%, due 6/30/28, 144Ak

 

     3,000,000        3,064,305  
        

 

 

 
           7,099,805  
        

 

 

 

FINANCE

     0.2%     

Invitation Homes Operating Partnership LP, 2.30%,
due 11/15/28

 

     650,000        643,456  

Newmark Group, Inc., 6.125%, due 11/15/23

 

     2,000,000        2,142,000  

Tanger Properties LP, 2.75%, due 9/1/31

 

     1,625,000        1,579,655  
        

 

 

 
           4,365,111  
        

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

16


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

            Principal
Amount
     Value  

HEALTH CARE

     0.0%     

Sabra Health Care LP, 3.20%, due 12/1/31

 

   $ 1,000,000      $ 978,330  
        

 

 

 

HOTEL

     0.1%     

RLJ Lodging Trust LP, 3.75%, due 7/1/26, 144Ak

 

     800,000        805,244  

RLJ Lodging Trust LP, 4.00%, due 9/15/29, 144Ak

 

     1,500,000        1,486,192  
        

 

 

 
           2,291,436  
        

 

 

 

INDUSTRIALS

     0.1%     

Park Intermediate Holdings LLC/PK Domestic Property LLC/PK Finance Co-Issuer, 4.875%, due 5/15/29, 144Ak

     1,350,000        1,382,427  
        

 

 

 

OFFICE

     0.1%     

Kilroy Realty LP, 2.65%, due 11/15/33

 

     625,000        608,305  

Office Properties Income Trust, 2.40%, due 2/1/27

 

     1,350,000        1,307,646  

Vornado Realty LP, 2.15%, due 6/1/26

 

     1,050,000        1,050,282  
        

 

 

 
           2,966,233  
        

 

 

 

RETAIL—FOREIGN

     0.3%     

Scentre Group Trust 2, 5.125% to 6/24/30, due 9/24/80, 144A (Australia)h,k

 

     7,600,000        8,151,000  
        

 

 

 

TOTAL REAL ESTATE

 

        27,234,342  
  

 

 

 

UTILITIES

     0.4%     

ELECTRIC

     0.1%     

Sempra Energy, 4.125% to 1/1/27, due 4/1/52h

 

     3,000,000        3,039,816  
        

 

 

 

ELECTRIC—FOREIGN

     0.3%     

Enel SpA, 8.75% to 9/24/23, due 9/24/73, 144A (Italy)a,h,k

 

     5,250,000        5,857,740  
        

 

 

 

TOTAL UTILITIES

 

        8,897,556  
  

 

 

 

TOTAL PREFERRED SECURITIES—CAPITAL SECURITIES
(Identified cost—$235,131,063)

 

        239,510,507  
        

 

 

 

CORPORATE BONDS

     0.8%     

COMMUNICATIONS—TOWERS

     0.1%     

SBA Communications Corp., 3.875%, due 2/15/27

 

     2,525,000        2,604,095  
        

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

17


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

            Principal
Amount
     Value  

REAL ESTATE

     0.7%     

HEALTH CARE

     0.1%     

Diversified Healthcare Trust, 9.75%, due 6/15/25

 

   $ 2,000,000      $ 2,166,430  
        

 

 

 

INDUSTRIALS

     0.3%     

Retail Properties of America, Inc., 4.75%, due 9/15/30

 

     7,000,000        7,754,560  
        

 

 

 

NET LEASE

     0.2%     

Global Net Lease, Inc./Global Net Lease Operating Partnership LP, 3.75%, due 12/15/27, 144Ak

 

     1,500,000        1,466,139  

VICI Properties LP/VICI Note Co., Inc., 4.125%, due 8/15/30, 144Ak

 

     1,366,000        1,446,908  

VICI Properties LP/VICI Note Co., Inc., 4.25%, due 12/1/26, 144Ak

 

     2,525,000        2,633,032  
        

 

 

 
           5,546,079  
        

 

 

 

SHOPPING CENTERS—REGIONAL MALL

     0.1%     

Brookfield Property REIT, Inc./BPR Cumulus LLC/BPR Nimbus LLC/GGSI Sellco LLC, 5.75%, due 5/15/26, 144Aa,k

 

     1,800,000        1,865,025  
        

 

 

 

TOTAL REAL ESTATE

 

        17,332,094  
  

 

 

 

TOTAL CORPORATE BONDS
(Identified cost—$18,703,280)

 

        19,936,189  
        

 

 

 
            Shares         

SHORT-TERM INVESTMENTS

     1.9%        

MONEY MARKET FUNDS

        

State Street Institutional Treasury Money Market Fund, Premier Class, 0.01%m

 

     45,184,216        45,184,216  
        

 

 

 

TOTAL SHORT-TERM INVESTMENTS
(Identified cost—$45,184,216)

 

        45,184,216  
        

 

 

 

TOTAL INVESTMENTS IN SECURITIES
(Identified cost—$2,009,811,045)

     126.2%           3,094,351,124  

WRITTEN OPTION CONTRACTS
(Premiums received—$367,962)

     (0.0)             (432,582

LIABILITIES IN EXCESS OF OTHER ASSETS

     (26.2)             (641,531,428
  

 

 

       

 

 

 

NET ASSETS (Equivalent to $18.27 per share based on 134,255,902 shares of common stock outstanding)

     100.0%         $ 2,452,387,114  
  

 

 

       

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

18


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

Exchange-Traded Option Contracts

Written Options

 

 

             
Description   Exercise
Price
  Expiration
Date
    Number of
Contracts
    Notional
Amountn
    Premiums
Received
    Value  

Call—Healthcare Trust of America, Inc.

  $ 35.00     1/21/22       (5     $(16,695     $(468     $(300

Call—Weyerhaeuser Co.

  40.00     1/21/22       (1,773     (7,301,214     (107,407     (299,637

Call—Cyrusone, Inc.

  95.00     3/18/22       (298     (2,673,656     (30,984     (1,490

Call—Equinix, Inc.

  900.00     3/18/22       (81     (6,851,304     (114,338     (117,855

Put—Welltower, Inc.

  77.50     1/21/22       (665     (5,703,705     (114,765     (13,300
    (2,822     $(22,546,574     $(367,962     $(432,582

 

 

Centrally Cleared Interest Rate Swap Contracts

 

                 

Notional

Amount

    Fixed
Rate
Payable
    Fixed
Payment
Frequency
  Floating Rate
Receivable
(resets monthly)
    Floating
Payment
Frequency
    Maturity Date   Value     Upfront
Receipts
(Payments)
    Unrealized
Appreciation
(Depreciation)
 
  $200,000,000       0.669   Monthly     0.102%o       Monthly     9/15/25   $ 3,393,633     $     $ 3,393,633  
  69,000,000       1.280   Monthly     0.102%o       Monthly     2/3/26     (357,125     (10,238     (367,363
  115,000,000       0.761   Monthly     0.109%o       Monthly     9/15/26     2,373,219             2,373,219  
  190,000,000       1.237%p     Monthly     1 Month LIBOR p      Monthly     9/15/27     1,852,975             1,852,975  
  $ 7,262,702     $ (10,238   $ 7,252,464  

 

 

 

Forward Foreign Currency Exchange Contracts

 

         
Counterparty    Contracts to
Deliver
     In Exchange
For
       Settlement
Date
       Unrealized
Appreciation
(Depreciation)
 

Brown Brothers Harriman

   EUR      7,119,972      USD      8,047,847          1/4/22        $ (58,239

Brown Brothers Harriman

   USD      8,097,616      EUR      7,119,972          1/4/22          8,470  

Brown Brothers Harriman

   CAD      1,367,884      USD      1,068,309          1/5/22          (13,064

Brown Brothers Harriman

   GBP      2,778,138      USD      3,684,089          1/5/22          (76,260

Brown Brothers Harriman

   USD      1,067,536      CAD      1,367,884          1/5/22          13,837  

Brown Brothers Harriman

   USD      3,762,460      GBP      2,778,138          1/5/22          (2,111

Brown Brothers Harriman

   EUR      7,155,654      USD      8,142,347          2/2/22          (9,092

Brown Brothers Harriman

   GBP      2,788,169      USD      3,775,557          2/2/22          1,865  
                      $ (134,594

 

 

 

See accompanying notes to the consolidated financial statements.

 

19


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

Glossary of Portfolio Abbreviations

 

 

CAD

  Canadian Dollar

EMTN

  Euro Medium Term Note

EUR

  Euro Currency

FRN

  Floating Rate Note

GBP

  Great British Pound

LIBOR

  London Interbank Offered Rate

REIT

  Real Estate Investment Trust

TruPS

  Trust Preferred Securities

USD

  United States Dollar

 

 

See accompanying notes to the consolidated financial statements.

 

20


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

December 31, 2021

 

 

Note: Percentages indicated are based on the net assets of the Fund.

a 

All or a portion of the security is pledged as collateral in connection with the Fund’s revolving credit agreement. $1,530,332,338 in aggregate has been pledged as collateral.

b 

A portion of the security has been rehypothecated in connection with the Fund’s revolving credit agreement. $617,570,251 in aggregate has been rehypothecated.

c 

Security value is determined based on significant unobservable inputs (Level 3).

d 

Non-income producing security.

e 

All or a portion of the security is pledged in connection with exchange-traded written option contracts. $36,377,519 in aggregate has been pledged as collateral.

f 

Restricted security. Aggregate holdings equal 0.6% of the net assets of the Fund. This security was acquired on August 3, 2020, at a cost of $8,757,813. Security value is determined based on significant unobservable inputs (Level 3).

g 

Perpetual security. Perpetual securities have no stated maturity date, but they may be called/redeemed by the issuer.

h 

Security converts to floating rate after the indicated fixed-rate coupon period.

i 

Variable rate. Rate shown is in effect at December 31, 2021.

j 

Contingent Capital security (CoCo). CoCos are debt or preferred securities with loss absorption characteristics built into the terms of the security for the benefit of the issuer. Aggregate holdings amounted to $65,288,252 which represents 2.7% of the net assets of the Fund (2.1% of the managed assets of the Fund).

k 

Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may only be resold to qualified institutional buyers. Aggregate holdings amounted to $70,789,146 which represents 2.9% of the net assets of the Fund, of which 0.0% are illiquid.

l 

Securities exempt from registration under Regulation S of the Securities Act of 1933. These securities are subject to resale restrictions. Aggregate holdings amounted to $16,792,026 which represents 0.7% of the net assets of the Fund, of which 0.0% are illiquid.

m 

Rate quoted represents the annualized seven-day yield.

n 

Represents the number of contracts multiplied by notional contract size multiplied by the underlying price.

o 

Based on 1 Month LIBOR. Represents rates in effect at December 31, 2021.

p 

Represents a forward-starting interest rate swap contract with interest receipts and payments commencing on December 24, 2022 (effective date).

 

See accompanying notes to the consolidated financial statements.

 

21


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

December 31, 2021

 

ASSETS:

 

Investments in securities, at valuea (Identified cost—$2,009,811,045)

   $ 3,094,351,124  

Cash

     12,394,633  

Cash collateral pledged for interest rate swap contracts

     11,580,393  

Foreign currency, at value (Identified cost—$100,856)

     101,567  

Receivable for dividends and interest

     8,896,097  

Unrealized appreciation on forward foreign currency exchange contracts

     24,172  

Other assets

     2,544,050  
  

 

 

 

Total Assets

     3,129,892,036  
  

 

 

 

LIABILITIES:

 

Written option contracts, at value (Premiums received—$367,962)

     432,582  

Unrealized depreciation on forward foreign currency exchange contracts

     158,766  

Payable for:

  

Credit agreement

     672,500,000  

Investment management fees

     2,164,641  

Interest expense

     1,075,986  

Variation margin on interest rate swap contracts

     318,213  

Dividends and distributions declared

     229,500  

Administration fees

     152,798  

Directors’ fees

     1,884  

Other liabilities

     470,552  
  

 

 

 

Total Liabilities

     677,504,922  
  

 

 

 

NET ASSETS

   $ 2,452,387,114  
  

 

 

 

NET ASSETS consist of:

 

Paid-in capital

   $ 1,280,236,413  

Total distributable earnings/(accumulated loss)

     1,172,150,701  
  

 

 

 
   $ 2,452,387,114  
  

 

 

 

NET ASSET VALUE PER SHARE:

 

($2,452,387,114 ÷ 134,255,902 shares outstanding)

   $ 18.27  
  

 

 

 

MARKET PRICE PER SHARE

   $ 18.22  
  

 

 

 

MARKET PRICE PREMIUM (DISCOUNT) TO NET ASSET VALUE PER SHARE

     (0.27 )% 
  

 

 

 

 

 

a 

Includes $1,530,332,338 pledged, of which $617,570,251 has been rehypothecated in connection with the Fund’s credit agreement, as described in Note 6.

 

See accompanying notes to the consolidated financial statements.

 

22


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2021

 

Investment Income:

 

Dividend income (net of $6,635 of foreign withholding tax)

   $ 53,199,251  

Interest income

     8,030,416  

Rehypothecation income

     556,524  
  

 

 

 

Total Investment Income

     61,786,191  
  

 

 

 

Expenses:

 

Investment management fees

     23,481,540  

Interest expense

     13,146,101  

Administration fees

     1,856,493  

Shareholder reporting expenses

     826,125  

Professional fees

     156,316  

Custodian fees and expenses

     151,009  

Directors’ fees and expenses

     73,391  

Transfer agent fees and expenses

     28,399  

Miscellaneous

     207,039  
  

 

 

 

Total Expenses

     39,926,413  
  

 

 

 

Net Investment Income (Loss)

     21,859,778  
  

 

 

 

Net Realized and Unrealized Gain (Loss):

 

Net realized gain (loss) on:

 

Investments in securities

     180,112,287  

Written option contracts

     3,960,715  

Interest rate swap contracts

     (5,679,243

Forward foreign currency exchange contracts

     601,551  

Foreign currency transactions

     6,966  
  

 

 

 

Net realized gain (loss)

     179,002,276  
  

 

 

 

Net change in unrealized appreciation (depreciation) on:

 

Investments in securities

     598,630,752  

Written option contracts

     (778,621

Interest rate swap contracts

     15,007,929  

Forward foreign currency exchange contracts

     (31,373

Foreign currency translations

     (1,995
  

 

 

 

Net change in unrealized appreciation (depreciation)

     612,826,692  
  

 

 

 

Net Realized and Unrealized Gain (Loss)

     791,828,968  
  

 

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

   $ 813,688,746  
  

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

23


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

 

     For the
Year Ended
December 31, 2021a
       For the
Year Ended
December 31, 2020
 

Change in Net Assets:

 

From Operations:

 

Net investment income (loss)

   $ 21,859,778        $ 31,198,017  

Net realized gain (loss)

     179,002,276          22,861,687  

Net change in unrealized appreciation (depreciation)

     612,826,692          (131,788,166
  

 

 

      

 

 

 

Net increase (decrease) in net assets resulting from operations

     813,688,746          (77,728,462
  

 

 

      

 

 

 

Distributions to Shareholders

     (128,873,500        (124,878,334
  

 

 

      

 

 

 

Capital Stock Transactions:

 

Proceeds from the rights offering resulting in the issuance of 0 and 24,970,742 shares, respectively (Note 8)

              351,368,592  

Increase (decrease) in net assets from other Fund share transactions

     229,508           
  

 

 

      

 

 

 

Net increase (decrease) in net assets resulting from capital stock transactions

     229,508          351,368,592  
  

 

 

      

 

 

 

Total increase (decrease) in net assets

     685,044,754          148,761,796  

Net Assets:

       

Beginning of year

     1,767,342,360          1,618,580,564  
  

 

 

      

 

 

 

End of year

   $ 2,452,387,114        $ 1,767,342,360  
  

 

 

      

 

 

 

 

 

a 

Consolidated (see Note 1).

 

See accompanying notes to the consolidated financial statements.

 

24


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2021

 

Increase (Decrease) in Cash:

  

Cash Flows from Operating Activities:

  

Net increase (decrease) in net assets resulting from operations

   $ 813,688,746  

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities:

  

Purchases of long-term investments

     (1,023,397,664

Proceeds from sales and maturities of long-term investments

     1,137,790,754  

Net purchases, sales and maturities of short-term investments

     (40,575,577

Net amortization of premium on investments in securities

     1,747,886  

Net decrease in dividends and interest receivable and other assets

     224,081  

Net increase in interest expense payable, accrued expenses and other liabilities

     431,328  

Net increase in payable for variation margin on interest rate swap contracts

     247,969  

Net decrease in premiums received from written option contracts

     (1,067,282

Net change in unrealized depreciation on written option contracts

     778,621  

Net change in unrealized appreciation on investments in securities

     (598,630,752

Net change in unrealized depreciation on forward foreign currency exchange contracts

     31,373  

Net realized gain on investments in securities

     (180,112,287
  

 

 

 

Cash provided by operating activities

     111,157,196  
  

 

 

 

Cash Flows from Financing Activities:

 

Drawdown on revolving credit agreement

     37,500,000  

Dividends and distributions paid

     (128,927,065
  

 

 

 

Cash used for financing activities

     (91,427,065
  

 

 

 

Increase (decrease) in cash and restricted cash

     19,730,131  

Cash and restricted cash at beginning of year (including foreign currency)

     4,346,462  
  

 

 

 

Cash and restricted cash at end of year (including foreign currency)

   $ 24,076,593  
  

 

 

 

Supplemental Disclosure of Cash Flow Information and Non-Cash Activities:

For the year ended December 31, 2021, interest paid was $13,343,766.

For the year ended December 31, 2021, reinvestment of dividends was $229,508.

For the year ended December 31, 2021, as a result of corporate actions, the Fund received shares of new securities valued at $ 5,210,000.

 

See accompanying notes to the consolidated financial statements.

 

25


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED STATEMENT OF CASH FLOWS—(Continued)

For the Year Ended December 31, 2021

The following table provides a reconciliation of cash and restricted cash reported within the Consolidated Statement of Assets and Liabilities that sums to the total of such amounts shown on the Consolidated Statement of Cash Flows.

 

Cash

   $ 12,394,633  

Restricted cash

     11,580,393  

Foreign currency

     101,567  
  

 

 

 

Total cash and restricted cash shown on the Consolidated Statement of Cash Flows

   $ 24,076,593  
  

 

 

 

Restricted cash consists of cash that has been pledged to cover the Fund’s collateral or margin obligations under derivative contracts. It is reported on the Consolidated Statement of Assets and Liabilities as cash collateral pledged for interest rate swap contracts.

 

See accompanying notes to the consolidated financial statements.

 

26


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED FINANCIAL HIGHLIGHTS

The following table includes selected data for a share outstanding throughout each year and other performance information derived from the consolidated financial statements. It should be read in conjunction with the consolidated financial statements and notes thereto.

 

                                                                     
    For the Year Ended December 31,  

Per Share Operating Data:

  2021a     2020     2019     2018     2017  

Net asset value, beginning of year

    $13.17       $14.81       $11.73       $13.59       $13.42  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from investment operations:

         

Net investment income (loss)b

    0.16       0.24       0.27       0.31       0.33  

Net realized and unrealized gain (loss)

    5.90       (0.64     3.82       (1.21 )c      0.80  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total from investment operations

    6.06       (0.40     4.09       (0.90     1.13  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less dividends and distributions to shareholders from:

         

Net investment income

    (0.20     (0.23     (0.28     (0.32     (0.32

Net realized gain

    (0.76     (0.73     (0.73     (0.64     (0.64
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total dividends and distributions to shareholders

    (0.96     (0.96     (1.01     (0.96     (0.96
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dilutive effect of rights offer (Note 8)

          (0.28                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net asset value

    5.10       (1.64     3.08       (1.86     0.17  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value, end of year

    $18.27       $13.17       $14.81       $11.73       $13.59  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Market value, end of year

    $18.22       $12.40       $14.88       $10.36       $12.65  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                         

Total net asset value returnd

    47.66     –3.12     35.80     –6.32 %c      9.18
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total market value returnd

    56.40     –9.22     54.49     –11.11     11.69
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

 

See accompanying notes to the consolidated financial statements.

 

27


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

CONSOLIDATED FINANCIAL HIGHLIGHTS—(Continued)

 

                                                                     
    For the Year Ended December 31,  

Ratios/Supplemental Data:

  2021a     2020     2019     2018     2017  

Net assets, end of year (in millions)

    $2,452.4       $1,767.3       $1,618.6       $1,280.6       $1,483.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios to average daily net assets:

         

Expenses

    1.91     2.22     2.15     2.17 %c      1.88
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses (excluding interest expense)

    1.28     1.30     1.26     1.32     1.25
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

    1.05     1.92     1.94     2.47     2.40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of expenses to average daily managed assetse

    1.45     1.67     1.66     1.63     1.43
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio turnover rate

    38     54     51     26     25
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit Agreement

         

Asset coverage ratio for credit agreement

    465     378     452     378     423
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Asset coverage per $1,000 for credit agreement

    $4,647       $3,783       $4,519       $3,784       $4,226  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of loan outstanding (in millions)

    $672.5       $635.0       $460.0       $460.0       $460.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

a 

Consolidated (see Note 1).

b 

Calculation based on average shares outstanding.

c 

During the reporting period the Fund settled legal claims against one issuer of securities previously held by the Fund. As a result, the net realized and unrealized gain (loss) on investments per share includes proceeds received from the settlements. Without these proceeds the net realized and unrealized gain (loss) on investments per share would have been $(1.22). Additionally, the expense ratio includes extraordinary expenses related to the direct action. Without these expenses, the ratio of expenses to average daily net assets would have been 2.16%. Excluding the proceeds from and expenses relating to the settlements, the total return on a NAV basis would have been -6.37%.

d 

Total net asset value return measures the change in net asset value per share over the period indicated. Total market value return is computed based upon the Fund’s market price per share and excludes the effects of brokerage commissions. Dividends and distributions are assumed, for purposes of these calculations, to be reinvested at prices obtained under the Fund’s dividend reinvestment plan.

e 

Average daily managed assets represent net assets plus the outstanding balance of the credit agreement.

 

See accompanying notes to the consolidated financial statements.

 

28


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and 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 (the 1940 Act) as a diversified, closed-end management investment company. The Fund’s primary investment objective is high current income through investment in real estate securities. The Fund’s secondary objective is capital appreciation.

Cohen & Steers RQI Trust (the REIT Subsidiary), a wholly-owned subsidiary of the Fund organized under the laws of the state of Maryland as a statutory trust on July 9, 2021 and commenced operations on November 30, 2021. The REIT Subsidiary acts as an investment vehicle for the Fund in order to effect certain investments on behalf of the Fund, consistent with the Fund’s investment objectives and policies. The Fund expects that it will achieve a significant portion of its exposure to private real estate investments through investment in the REIT Subsidiary. Unlike the Fund, the REIT Subsidiary may invest without limitation in private real estate. Investments in the REIT Subsidiary are limited to 25% of the Fund’s total assets. The financial statements have been consolidated and include the accounts of the Fund and the REIT Subsidiary. All significant inter-company balances and transactions have been eliminated in consolidation. As of December 31, 2021, the REIT Subsidiary did not hold any investments.

The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its consolidated financial statements. The Fund is an investment company and, accordingly, follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 946—Investment Companies. The accounting policies of the Fund are in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of the consolidated 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 consolidated 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 (NYSE) are valued, except as indicated below, at the last sale price reflected at the close of the NYSE 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 ask prices on such day or, if no ask price is available, at the bid price. Centrally cleared interest rate swaps are valued at the price determined by the relevant exchange or clearinghouse. Forward foreign currency exchange contracts are valued daily at the prevailing forward exchange rate. Exchange traded options are valued at their last sale price as of the close of options trading on applicable exchanges on the valuation date. In the absence of a last sale price on such day, options are valued at the average of the quoted bid and ask prices as of the close of business. Over-the-counter (OTC) options are valued based upon prices provided by a third-party pricing service or counterparty.

Securities not listed on the NYSE but listed on other domestic or foreign securities exchanges (including NASDAQ) are valued in a similar manner. Securities traded on more than one securities exchange are valued at the last sale price reflected at the close of the exchange representing the principal market for such securities on the business day as of which such value is being determined.

 

29


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

If after the close of a foreign market, but prior to the close of business on the day the securities are being valued, market conditions change significantly, certain non-U.S. equity holdings may be fair valued pursuant to procedures established by the Board of Directors.

Readily marketable securities traded in the OTC market, including listed securities whose primary market is believed by Cohen & Steers Capital Management, Inc. (the investment manager) to be OTC, are valued on the basis of prices provided by a third-party pricing service or third-party broker-dealers when such prices are believed by the investment manager, pursuant to delegation by the Board of Directors, to reflect the fair value of such securities.

Fixed-income securities are valued on the basis of prices provided by a third-party pricing service or third-party broker-dealers when such prices are believed by the investment manager, pursuant to delegation by the Board of Directors, to reflect the fair value of such securities. The pricing services or broker-dealers use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services or broker-dealers may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services or broker-dealers also utilize proprietary valuation models which may consider market transactions in comparable securities and the various relationships between securities in determining fair value and/or characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features which are then used to calculate the fair values.

Short-term debt securities with a maturity date of 60 days or less are valued at amortized cost, which approximates fair value. Investments in open-end mutual funds are valued at net asset value (NAV).

The policies and procedures approved by the Fund’s Board of Directors delegate authority to make fair value determinations to the investment manager, subject to the oversight of the Board of Directors. The investment manager has established a valuation committee (Valuation Committee) to administer, implement and oversee the fair valuation process according to the policies and procedures approved annually by the Board of Directors. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.

Securities for which market prices are unavailable, or securities for which the investment manager determines that the bid and/or ask price or a counterparty valuation does not reflect market value, will be valued at fair value, as determined in good faith by the Valuation Committee, pursuant to procedures approved by the Fund’s Board of Directors. Circumstances in which market prices may be unavailable include, but are not limited to, when trading in a security is suspended, the exchange on which the security is traded is subject to an unscheduled close or disruption or material events occur after the close of the exchange on which the security is principally traded. In these circumstances, the Fund determines fair value in a manner that fairly reflects the market value of the security on the valuation date based on consideration of any information or factors it deems appropriate. These may include, but are not limited to, recent transactions in comparable securities, information relating to the specific security and developments in the markets.

 

30


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For equity securities, including restricted securities, where observable inputs are limited, assumptions about market activity and risk are used and these securities would be categorized as Level 2 or 3 in the hierarchy, depending on the relative significance of the valuation inputs. Securities, including private placements or other restricted securities, for which observable inputs are not available are valued using alternate valuation approaches, including the market approach, the income approach and cost approach, and are categorized as Level 3 in the hierarchy. The market approach considers factors including the price of recent investments in the same or a similar security or financial metrics of comparable securities. The income approach considers factors including expected future cash flows, security specific risks and corresponding discount rates. The cost approach considers factors including the value of the security’s underlying assets and liabilities.

The Fund’s use of fair value pricing may cause the NAV of Fund shares to differ from the NAV that would be calculated using market quotations. Fair value pricing involves subjective judgments and it is possible that the fair value determined for a security may be materially different than the value that could be realized upon the sale of that security.

Fair value is defined as the price that the Fund would expect to receive upon the sale of an investment or expect to pay to transfer a liability in an orderly transaction with an independent buyer in the principal market or, in the absence of a principal market, the most advantageous market for the investment or liability. The hierarchy of inputs that are used in determining the fair value of the Fund’s investments is summarized below.

 

   

Level 1—quoted prices in active markets for identical investments

 

   

Level 2—other significant observable inputs (including quoted prices for similar investments, interest rates, credit risk, etc.)

 

   

Level 3—significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

The inputs or methodology used for valuing investments may or may not be an indication of the risk associated with those investments. Changes in valuation techniques may result in transfers into or out of an assigned level within the disclosure hierarchy.

 

31


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following is a summary of the inputs used as of December 31, 2021 in valuing the Fund’s investments carried at value:

 

    Total     Quoted Prices
in Active
Markets for
Identical
Investments
(Level 1)
    Other
Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Common Stock:

       

Real Estate—Diversified—Foreign

  $ 0     $     $     $ 0 a 

Real Estate—Industrials

    335,673,880       321,363,547             14,310,333 b 

Other Industries

    2,225,396,050       2,225,396,050              

Preferred Securities—$25 Par Value

    228,650,282       228,650,282              

Preferred Securities—Capital Securities

    239,510,507             239,510,507        

Corporate Bonds

    19,936,189             19,936,189        

Short-Term Investments

    45,184,216             45,184,216        
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments in Securitiesc

  $ 3,094,351,124     $ 2,775,409,879     $ 304,630,912     $ 14,310,333  
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest Rate Swap Contracts

  $ 7,619,827     $     $ 7,619,827     $  

Forward Foreign Currency Exchange Contracts

    24,172             24,172        
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Derivative Assetsc

  $ 7,643,999     $     $ 7,643,999     $  
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest Rate Swap Contracts

  $ (367,363   $     $ (367,363   $  

Written Option Contracts

    (432,582     (299,937     (132,645  

Forward Foreign Currency Exchange Contracts

    (158,766           (158,766      
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Derivative Liabilitiesc

  $ (958,711   $ (299,937 )     $ (658,774   $  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

a 

BGP Holdings PLC was acquired via a spinoff and has been fair valued at $0 by the Valuation Committee, pursuant to the Fund’s fair value procedures and classified as a Level 3 security.

b 

Restricted security, where observable inputs are limited, has been fair valued by the Valuation Committee, pursuant to the Fund’s fair value procedures and classified as Level 3 security.

c 

Portfolio holdings are disclosed individually on the Consolidated Schedule of Investments.

 

32


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following is a reconciliation of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

     Common Stock—
Real Estate—
Industrials
    Written
Option
Contracts
 

Balance as of December 31, 2020

   $ 8,568,644     $ (23,200

Purchases

     162,795 a       

Realized gain (loss)

           468,789  

Change in unrealized appreciation (depreciation)

     5,578,894       (445,589
  

 

 

   

 

 

 

Balance as of December 31, 2021

   $ 14,310,333     $  
  

 

 

   

 

 

 

 

a 

Represents additional shares acquired through dividend reinvestment.

The change in unrealized appreciation (depreciation) attributable to securities owned on December 31, 2021 which were valued using significant unobservable inputs (Level 3) amounted to $5,578,894.

The following table summarizes the quantitative inputs and assumptions used for investments categorized in Level 3 of the fair value hierarchy.

 

    Fair Value at
December 31,
2021
  Valuation
Technique
 

Unobservable Inputs

  Amount   Valuation Impact
from an Increase
in Inputa

Common Stock— Real Estate—Industrials

  $14,310,333   Market
Comparable
Companies
 

Enterprise Value/

EBITDAb Multiple Liquidity Discount

  28.8x

15%

  Increase  

Decrease

 

a 

Represents the directional change in the fair value of the Level 3 investments that could have resulted from an increase in the corresponding input as of year end. A decrease to the unobservable input would have had the opposite effect. Significant changes in these inputs may result in a materially higher or lower fair value measurement.

b 

Earnings Before Interest, Taxes, Depreciation and Amortization.

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, which includes the amortization of premiums and accretion of discounts, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date, except for certain dividends on foreign securities, which are recorded as soon as the Fund is informed after the ex-dividend date. Distributions from real estate investment trusts (REITs) are recorded as ordinary income, net realized capital gains or return of capital based on information reported by the REITs and management’s estimates of such amounts based on historical information. These estimates are adjusted when the actual source of distributions is disclosed by the REITs and actual amounts may differ from the estimated amounts.

 

33


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollars based upon prevailing exchange rates on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.

Net realized foreign currency transaction gains or losses arise from sales of foreign currencies, (excluding gains and losses on forward foreign currency exchange contracts, which are presented separately, if any) currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency translation gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates. Pursuant to U.S. federal income tax regulations, certain foreign currency gains/losses included in realized and unrealized gains/losses are included in or are a reduction of ordinary income for federal income tax purposes.

Forward Foreign Currency Exchange Contracts: The Fund enters into forward foreign currency exchange contracts to hedge the currency exposure associated with certain of its non-U.S. dollar denominated securities. A forward foreign currency exchange contract is a commitment between two parties to purchase or sell foreign currency at a set price on a future date. The market value of a forward foreign currency exchange contract fluctuates with changes in foreign currency exchange rates. These contracts are marked to market daily and the change in value is recorded by the Fund as unrealized appreciation and/or depreciation on forward foreign currency exchange contracts. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are included in net realized gain or loss on forward foreign currency exchange contracts.

Forward foreign currency exchange contracts involve elements of market risk in excess of the amounts reflected on the Consolidated Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the contract. Risks may also arise upon entering these contracts from the potential inability of the counterparties to meet the terms of their contracts. In connection with these contracts, securities may be identified as collateral in accordance with the terms of the respective contracts.

Option Contracts: The Fund may purchase and write exchange-listed and OTC put or call options on securities, stock indices and other financial instruments for hedging purposes, to enhance portfolio returns and/or reduce overall volatility.

When the Fund writes (sells) an option, an amount equal to the premium received by the Fund is recorded on the Consolidated Statement of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. When an option expires, the Fund realizes a gain on the option to the extent of the premium received. Premiums

 

34


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

received from writing options which are exercised or closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. If a put option on a security is exercised, the premium reduces the cost basis of the security purchased by the Fund. If a call option is exercised, the premium is added to the proceeds of the security sold to determine the realized gain or loss. The Fund, as writer of an option, bears the market risk of an unfavorable change in the price of the underlying investment. Other risks include the possibility of an illiquid options market or the inability of the counterparties to fulfill their obligations under the contracts.

Put and call options purchased are accounted for in the same manner as portfolio securities. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying investment transaction to determine the realized gain or loss when the underlying transaction is executed. The risk associated with purchasing an option is that the Fund pays a premium whether or not the option is exercised. Additionally, the Fund bears the risk of loss of the premium and change in market value should the counterparty not perform under the contract.

Centrally Cleared Interest Rate Swap Contracts: The Fund uses interest rate swaps in connection with borrowing under its credit agreement. The interest rate swaps are intended to reduce interest rate risk by countering the effect that an increase in short-term interest rates could have on the performance of the Fund’s shares as a result of the floating rate structure of interest owed pursuant to the credit agreement. When entering into 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’s agreement to pay the Fund a variable rate payment that was intended to approximate the Fund’s variable rate payment obligation on the credit agreement, the accruals for which would begin at a specific date in the future (the effective date). 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 Fund. Swaps are marked-to-market daily and changes in the value are recorded as unrealized appreciation (depreciation).

Immediately following execution of the swap agreement, the swap agreement is novated to a central counterparty (the CCP) and the Fund’s counterparty on the swap agreement becomes the CCP. The Fund is required to interface with the CCP through a broker. Upon entering into a centrally cleared swap, the Fund is required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on the size and risk profile of the particular swap. Securities deposited as initial margin are designated on the Consolidated Schedule of Investments and cash deposited is recorded on the Consolidated Statement of Assets and Liabilities as cash collateral pledged for interest rate swap contracts. The daily change in valuation of centrally cleared swaps is recorded as a receivable or payable for variation margin on interest rate swap contracts in the Consolidated Statement of Assets and Liabilities. Any upfront payments paid or received upon entering into a swap agreement would be recorded as assets or liabilities, respectively, in the Consolidated Statement of Assets and Liabilities, and amortized or accreted over the life of the swap and recorded as realized gain (loss) in the Consolidated Statement of Operations. Payments received from or paid to the counterparty during the term of the swap agreement, or at termination, are recorded as realized gain (loss) in the Consolidated Statement of Operations.

 

35


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Swap agreements involve, to varying degrees, elements of market and counterparty risk, and exposure to loss in excess of the related amounts reflected on the Consolidated Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements and that there may be unfavorable changes in interest rates.

Dividends and Distributions to Shareholders: 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. Dividends from net investment income, if any, are typically declared quarterly and paid monthly. Net realized capital gains, unless offset by any available capital loss carryforward, are typically distributed to shareholders at least annually. Dividends and distributions to shareholders are recorded on the ex-dividend date and are automatically reinvested in full and fractional shares of the Fund in accordance with the Fund’s Reinvestment Plan, unless the shareholder has elected to have them paid in cash.

The Fund has a managed distribution policy in accordance with exemptive relief issued by the U.S. Securities and Exchange Commission (SEC). The Plan gives the Fund greater flexibility to realize long-term capital gains throughout the year and to distribute those gains on a more regular basis to shareholders. Therefore, regular monthly distributions throughout the year may include a portion of estimated realized long-term capital gains, along with net investment income, short-term capital gains and return of capital, which is not taxable. In accordance with the Plan, the Fund is required to adhere to certain conditions in order to distribute long-term capital gains during the year. For the year ended December 31, 2021, the Fund paid distributions from net investment income and net realized gain.

Distributions Subsequent to December 31, 2021: The following distributions have been declared by the Fund’s Board of Directors and are payable subsequent to the period end of this report.

 

Ex-Date    Record Date    Payable Date    Amount
1/11/22    1/12/22    1/31/22    $0.080
2/15/22    2/16/22    2/28/22    $0.080
3/15/22    3/16/22    3/31/22    $0.080

Income Taxes: It is the policy of the Fund to continue to qualify as a regulated investment company (RIC), 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 RICs, and by distributing substantially all of its taxable earnings to its shareholders. Also, in order to avoid the payment of any federal excise taxes, the Fund will distribute substantially all of its net investment income and net realized gains on a calendar year basis. Accordingly, no provision for federal income or excise tax is necessary. Dividend and interest income from holdings in non-U.S. securities is recorded net of non-U.S. taxes paid. Management has analyzed the Fund’s tax positions taken on federal and applicable state income tax returns as well as its tax positions in non-U.S. jurisdictions in which it trades for all open tax years and has concluded that as of December 31, 2021, no additional provisions for income tax are required in the Fund’s consolidated financial statements. The Fund’s tax positions for the tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service, state departments of revenue and by foreign tax authorities.

 

36


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The REIT Subsidiary intends to elect to be taxed as a REIT under Subchapter M of the Code. The REIT Subsidiary’s qualification and taxation as a REIT depends upon the REIT Subsidiary’s ability to meet on a continuing basis, through actual operating results, certain qualification tests set forth in the Code. Those qualification tests involve the percentage of income that it earns from specified sources, the percentage of its assets that falls within specified categories, the diversity of the ownership of its shares, and the percentage of its taxable income that the REIT Subsidiary distributes. As a REIT, the REIT Subsidiary generally will be allowed to deduct dividends paid to its shareholders and, as a result, the REIT Subsidiary will not be subject to U.S. federal income tax on that portion of its ordinary income and net capital gain that the REIT Subsidiary annually distributes to its shareholders, as long as the REIT Subsidiary meets the minimum distribution requirements under the Code. The REIT Subsidiary intends to make distributions on a regular basis as necessary to avoid material U.S. federal income tax and to comply with the REIT distribution requirements.

For the current open tax year and for all major jurisdictions, management of the REIT Subsidiary has analyzed and concluded that there are no uncertain tax positions that would require recognition in the Fund’s consolidated financial statements. The REIT Subsidiary’s tax positions for the tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service, state departments of revenue and by foreign tax authorities.

Note 2. Investment Management Fees, Administration Fees and Other Transactions with Affiliates

Investment Management Fees: Cohen & Steers Capital Management, Inc. serves as the Fund’s investment manager pursuant to an investment management agreement (the investment management agreement). Under the terms of the investment management agreement, the investment manager provides the Fund with day-to-day investment decisions and generally manages the Fund’s investments in accordance with the stated policies of the Fund, subject to the supervision of the Board of Directors.

For the services provided to the Fund, the investment manager receives a fee, accrued daily and paid monthly, at the annual rate of 0.85% of the average daily managed assets of the Fund. Managed assets are equal to the net assets plus the amount of any borrowings used for leverage outstanding.

Administration Fees: The Fund has entered into an administration agreement with the investment manager under which the investment manager performs certain administrative functions for the Fund and receives a fee, accrued daily and paid monthly, at the annual rate of 0.06% of the average daily managed assets of the Fund. For the year ended December 31, 2021, the Fund incurred $1,657,520 in fees under this administration agreement. Additionally, the Fund pays State Street Bank and Trust Company as co-administrator under a fund accounting and administration agreement.

Directors’ and Officers’ Fees: Certain directors and officers of the Fund are also directors, officers and/or employees of the investment manager. The Fund does not pay compensation to directors and officers affiliated with the investment manager except for the Chief Compliance Officer, who received compensation from the investment manager, which was reimbursed by the Fund, in the amount of $13,280 for the year ended December 31, 2021.

 

37


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Note 3. Purchases and Sales of Securities

Purchases and sales of securities, excluding short-term investments, for the year ended December 31, 2021, totaled $1,020,197,440 and $1,089,924,738, respectively.

Note 4. Derivative Investments

The following tables present the value of derivatives held at December 31, 2021 and the effect of derivatives held during the year ended December 31, 2021, along with the respective location in the consolidated financial statements.

Consolidated Statement of Assets and Liabilities

 

    

Assets

    

Liabilities

 

Derivatives

  

Location

   Fair Value     

Location

   Fair Value  

Equity Risk:

           

Written Option Contracts— Exchange-Tradeda

      $      Written option
contracts, at value
   $ 432,582  

Foreign Exchange Risk:

           

Forward Foreign Currency Exchange Contractsb

   Unrealized appreciation      24,172      Unrealized depreciation      158,766  

Interest Rate Risk:

           

 

Interest Rate Swap Contractsa

             Payable for variation margin on interest rate swap contracts      7,252,464 c 

 

a 

Not subject to a master netting agreement or another similar arrangement.

b 

Forward foreign currency exchange contracts executed with Brown Brothers Harriman are not subject to a master netting agreement or another similar arrangement.

c 

Amount represents the cumulative net appreciation on interest rate swap contracts as reported on the Consolidated Schedule of Investments. The Consolidated Statement of Assets and Liabilities only reflects the current day variation margin payable to the broker.

 

38


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Consolidated Statement of Operations

 

Derivatives

  

Location

   Realized
Gain (Loss)
    Change in
Unrealized
Appreciation
(Depreciation)
 

Equity Risk:

       

Written Option Contracts

   Net Realized and Unrealized Gain (Loss)    $ 3,960,715     $ (778,621

Interest Rate Risk:

       

Interest Rate Swap Contracts

   Net Realized and Unrealized Gain (Loss)      (5,679,243     15,007,929  

Foreign Exchange Risk:

       

Forward Foreign Currency Exchange Contracts

   Net Realized and Unrealized Gain (Loss)      601,551       (31,373

The following summarizes the volume of the Fund’s option contracts, interest rate swap contracts and forward foreign currency exchange contracts activity for the year ended December 31, 2021:

 

     Written Option
Contractsa
       Interest Rate
Swap
Contracts
       Forward Foreign
Currency
Exchange
Contracts
 

Average Notional Amount

   $ 32,745,077        $ 514,000,000        $ 6,783,649  

 

a 

Notional amount is calculated using the number of contracts multiplied by notional contract size multiplied by the underlying price.

Note 5. Income Tax Information

The tax character of dividends and distributions paid was as follows:

 

     For the Year Ended
December 31,
 
     2021        2020  

Ordinary income

   $ 37,222,271        $ 41,071,341  

Long-term capital gain

     91,651,229          83,806,993  
  

 

 

      

 

 

 

Total dividends and distributions

   $ 128,873,500        $ 124,878,334  
  

 

 

      

 

 

 

 

39


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

As of December 31, 2021, the tax basis components of accumulated earnings, the federal tax cost and net unrealized appreciation (depreciation) in value of investments held were as follows:

 

Cost of investments in securities for federal income tax purposes

   $ 2,034,079,122  
  

 

 

 

Gross unrealized appreciation on investments

   $ 1,074,621,337  

Gross unrealized depreciation on investments

     (7,157,116
  

 

 

 

Net unrealized appreciation (depreciation) on investments

   $ 1,067,464,221  
  

 

 

 

Undistributed ordinary income

   $ 55,994,454  
  

 

 

 

Undistributed long-term capital gains

   $ 44,353,918  
  

 

 

 

As of December 31, 2021, the Fund had temporary book/tax differences primarily attributable to wash sales on portfolio securities, straddle deferrals, certain REIT dividends, certain fixed income securities and losses from option transactions and permanent book/tax differences primarily attributable to certain fixed income securities. To reflect reclassifications arising from the permanent differences, paid-in capital was charged $611,318 and total distributable earnings/(accumulated loss) was credited $611,318. Net assets were not affected by this reclassification.

Note 6. Borrowings

The Fund has entered into an amended and restated credit agreement (the credit agreement) with BNP Paribas Prime Brokerage International, Ltd. (BNPP) in which the Fund pays a monthly financing charge based on a combination of LIBOR-based variable and fixed rates. The commitment amount of the credit agreement is $710,000,000. The Fund may pay a fee of 0.45% per annum on any unused portion of the credit agreement. BNPP may not change certain terms of the credit agreement except upon 360 days’ notice. Also, if the Fund violates certain conditions, the credit agreement may be terminated. The Fund is required to pledge portfolio securities and/or cash as collateral in an amount up to two times the loan balance outstanding (or more depending on the terms of the credit agreement) and has granted a security interest in the securities pledged to, and in favor of, BNPP as security for the loan balance outstanding. If the Fund fails to meet certain requirements, or maintain other financial covenants required under the credit agreement, the Fund may be required to repay immediately, in part or in full, the loan balance outstanding under the credit agreement, necessitating the sale of portfolio securities at potentially inopportune times. Under the terms of the credit agreement, the Fund may, upon prior written notice to BNPP, prepay all or a portion of the fixed rate portions of the credit facility. In the event of such prepayment, the Fund will receive or pay any gain or loss associated with BNPP’s interest rate hedge with respect to the applicable fixed rate portions of the credit facility, which could be material in certain circumstances (breakage fee). The credit agreement also permits, subject to certain conditions, BNPP to rehypothecate portfolio securities pledged by the Fund up to the amount of the loan balance outstanding and the Fund receives a portion of the fees earned by BNPP in connection with the rehypothecation of portfolio securities. The Fund continues to receive dividends and interest on rehypothecated securities. The Fund also has the right under the credit agreement to recall the rehypothecated securities from BNPP on demand. If BNPP fails to deliver the recalled security in a

 

40


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

timely manner, the Fund will be compensated by BNPP for any fees or losses related to the failed delivery or, in the event a recalled security will not be returned by BNPP, the Fund, upon notice to BNPP, may reduce the loan balance outstanding by the amount of the recalled security failed to be returned.

As of December 31, 2021 the Fund had outstanding borrowings of $672,500,000 at a weighted average rate of 1.4%. The fair value of these borrowings at December 31, 2021 was approximately $675,400,000, including estimated breakage fees of approximately $2,900,000 in the event of a prepayment of all of the fixed rate financing. The borrowings are classified as Level 2 within the fair value hierarchy. During the year ended December 31, 2021, the Fund borrowed an average daily balance of $671,164,383 at a weighted average borrowing cost of 1.9%.

Note 7. Capital Stock

The Fund is authorized to issue 300 million shares of common stock at a par value of $0.001 per share.

During the year ended December 31, 2021, the Fund issued 12,673 shares of common stock at $229,508 for the reinvestment of dividends. During the year ended December 31, 2020, the Fund did not issue shares of common stock at for the reinvestment of dividends.

On December 8, 2020, the Board of Directors approved the continuation of the delegation of its authority to management to effect repurchases, pursuant to management’s discretion and subject to market conditions and investment considerations, of up to 10% of the Fund’s common shares outstanding (Share Repurchase Program) as of January 1, 2021 through December 31, 2021.

During the years ended December 31, 2021 and December 31, 2020, the Fund did not effect any repurchases.

On December 7, 2021, the Board of Directors approved the continuation of the Share Repurchase Program of up to 10% of the Fund’s common shares outstanding as of January 1, 2022 through December 31, 2022.

Note 8. Rights Offering

On January 7, 2020, the Fund announced that its Board of Directors had approved the terms of the issuance of transferrable rights (Rights) to the holders of the Fund’s common stock (par value $0.001 per share), as of the record date, January 17, 2020 (the Record Date). As of the close of business on the Record Date, the Fund issued Rights to its common shareholders of record (Record Date Shareholders), entitling the holders of those Rights to subscribe (the Offer) for up to an aggregate of 36,424,162 shares of the Fund’s common stock (the Common Shares). Record Date Shareholders received one Right for each outstanding Common Share owned on the Record Date. The Rights entitled their holders to purchase one new Common Share for every three Rights held (1-for-3). The Common Shares offered for subscription in the Offer are listed and trade on the New York Stock Exchange (NYSE) under the symbol “RQI.” The investment manager paid all fees and expenses (approximately $12 million) in connection with the Offer.

 

41


COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Offer expired at 5:00 p.m., Eastern Time, on February 13, 2020 (the Expiration Date). The subscription price pursuant to the Offer was $14.12 per Common Share, which was equal to 90.25% of the Fund’s net asset value per Common Share at the close of trading on the NYSE on the Expiration Date. The Fund received from the Offer gross proceeds of $351,368,592, for the issuance of 24,970,742 Common Shares. The Fund received the entire proceeds of the Offer since the investment manager agreed to pay the dealer manager fee and all other expenses related to the Offer.

Note 9. Other

In the normal course of business, the Fund enters into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is dependent on claims that may be made against the Fund in the future and, therefore, cannot be estimated; however, based on experience, the risk of material loss from such claims is considered remote.

Note 10. Subsequent Events

Management has evaluated events and transactions occurring after December 31, 2021 through the date that the consolidated financial statements were issued, and has determined that no additional disclosure in the consolidated financial statements is required.

On January 27, 2022, the Fund’s wholly-owned REIT Subsidiary completed a private placement of 125 shares of 12.0% Cumulative Preferred Stock (the Preferred Stock) for aggregate gross proceeds of $125,000. The Preferred Stock has a liquidation preference of $1,000 per share plus an amount equal to accrued but unpaid dividends (the Liquidation Preference). The Preferred Stock dividends are cumulative at a rate of 12.0% per annum and are redeemable under certain conditions by the REIT Subsidiary or subject to mandatory redemption upon default of certain coverage requirements at a redemption price equal to the Liquidation Preference.

 

42


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.

Opinion on the Financial Statements

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Cohen & Steers Quality Income Realty Fund, Inc. (the “Fund”) as of December 31, 2021, the related statements of operations and cash flows for the year ended December 31, 2021, the statement of changes in net assets for each of the two years in the period ended December 31, 2021, including the related notes, and the financial highlights for each of the five years in the period ended December 31, 2021 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2021, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period ended December 31, 2021 and the financial highlights for each of the five years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2021 by correspondence with the custodian, transfer agent and issuers of privately offered securities. We believe that our audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

New York, New York

February 25, 2022

We have served as the auditor of one or more investment companies in the Cohen & Steers family of mutual funds since 1991.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

(The following pages are unaudited)

TAX INFORMATION—2021

For the calendar year ended December 31, 2021, for individual taxpayers, the Fund designates $9,247,034 as qualified dividend income eligible for reduced tax rates, long-term capital gain distributions of $78,874,687 taxable at the maximum 20% rate, long-term capital gain distributions of $12,776,542 taxable at 25% maximum rate, short term capital gain distributions of $10,739,458 and $19,553,167 as qualified business income eligible for the 20% deduction. In addition, for corporate taxpayers, 10.75% of the ordinary dividends paid qualified for the dividends received deduction (DRD).

REINVESTMENT PLAN

The Fund has a dividend reinvestment plan commonly referred to as an “opt-out” plan (the Reinvestment Plan). Each common shareholder who participates in the Reinvestment Plan will have all distributions of dividends and capital gains (Dividends) automatically reinvested in additional common shares by Computershare as agent (the Plan Agent). Shareholders who elect not to participate in the Reinvestment Plan will receive all Dividends in cash paid by check mailed directly to the shareholder of record (or if the shares are held in street or other nominee name, then to the nominee) by the Plan Agent, as dividend disbursing agent. Shareholders whose common shares are held in the name of a broker or nominee should contact the broker or nominee to determine whether and how they may participate in the Reinvestment Plan.

The Plan Agent serves as agent for the shareholders in administering the Reinvestment Plan. After the Fund declares a Dividend, the Plan Agent will, as agent for the shareholders, either: (i) receive the cash payment and use it to buy common shares in the open market, on the NYSE or elsewhere, for the participants’ accounts or (ii) distribute newly issued common shares of the Fund on behalf of the participants.

The Plan Agent will receive cash from the Fund with which to buy common shares in the open market if, on the Dividend payment date, the NAV per share exceeds the market price per share plus estimated brokerage commissions on that date. The Plan Agent will receive the Dividend in newly issued common shares of the Fund if, on the Dividend payment date, the market price per share plus estimated brokerage commissions equals or exceeds the NAV per share of the Fund on that date. The number of shares to be issued will be computed at a per share rate equal to the greater of (i) the NAV or (ii) 95% of the closing market price per share on the payment date.

If the market price per share is less than the NAV on a Dividend payment date, the Plan Agent will have until the last business day before the next ex-dividend date for the common stock, but in no event more than 30 days after the Dividend payment date (as the case may be, the Purchase Period), to invest the Dividend amount in shares acquired in open market purchases. If at the close of business on any day during the Purchase Period on which NAV is calculated the NAV equals or is less than the market price per share plus estimated brokerage commissions, the Plan Agent will cease making open market purchases and the uninvested portion of such Dividends shall be filled through the issuance of new shares of common stock from the Fund at the price set forth in the immediately preceding paragraph.

Participants in the Reinvestment Plan may withdraw from the Reinvestment Plan upon notice to the Plan Agent. Such withdrawal will be effective immediately if received not less than ten days prior to a Dividend record date; otherwise, it will be effective for all subsequent Dividends. If any participant elects to have the Plan Agent sell all or part of his or her shares and remit the proceeds, the Plan Agent is authorized to deduct a $15.00 fee plus $0.10 per share brokerage commissions.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

The Plan Agent’s fees for the handling of reinvestment of Dividends will be paid by the Fund. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent’s open market purchases in connection with the reinvestment of Dividends. The automatic reinvestment of Dividends will not relieve participants of any income tax that may be payable or required to be withheld on such Dividends.

The Fund reserves the right to amend or terminate the Reinvestment Plan. All correspondence concerning the Reinvestment Plan should be directed to the Plan Agent at 800-432-8224.

OTHER INFORMATION

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 866-227-0757, (ii) on our website at cohenandsteers.com or (iii) on the U.S. Securities and Exchange Commission’s (SEC) website 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 by August 31 of each year (i) without charge, upon request, by calling 866-227-0757 or (ii) on the SEC’s website at http://www.sec.gov.

Disclosures of the Fund’s complete holdings are required to be made monthly on Form N-PORT, with every third month made available to the public by the SEC 60 days after the end of the Fund’s fiscal quarter. The Fund’s Form N-PORT is available (i) without charge, upon request, by calling 866-227-0757 or (ii) on the SEC’s website at http://www.sec.gov.

Please note that distributions paid by the Fund to shareholders are subject to recharacterization for tax purposes and are taxable up to the amount of the Fund’s investment company taxable income and net realized gains. Distributions in excess of the Fund’s investment company taxable income and net realized gains are a return of capital distributed from the Fund’s assets. To the extent this occurs, the Fund’s shareholders of record will be notified of the estimated amount of capital returned to shareholders for each such distribution and this information will also be available at cohenandsteers.com. The final tax treatment of all distributions is reported to shareholders on their 1099-DIV forms, which are mailed after the close of each calendar year. 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.

Notice is hereby given in accordance with Rule 23c-1 under the 1940 Act that the Fund may purchase, from time to time, shares of its common stock in the open market.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

The following information in this annual shareholder report is a summary of certain changes since the Fund’s most recent annual shareholder report. This information may not reflect all of the changes that have occurred since you purchased the Fund.

Changes to the Portfolio Management Team

Effective May 1, 2021, Thomas Bohjalian no longer serves as a portfolio manager of the Fund. Jon Cheigh, Jason Yablon and Mathew Kirschner continue to serve as portfolio managers of the Fund.

Changes to the Board of Directors and Officers

On March 8, 2021, the Board of Directors voted to set the number of directors on the Fund’s Board of Directors to ten. In addition, the Board of Directors elected Ms. Ramona Rogers-Windsor as a Director of the Fund.

Effective December 7, 2021, Director and Chairman Robert H. Steers resigned from the Fund’s Board of Directors. The Board of Directors has appointed Director Joseph M. Harvey to succeed Mr. Steers as Chairman. In addition, effective March 1, 2022, Mr. Harvey, Cohen & Steers, Inc.’s (CNS) current President and a member of CNS’ board of directors, will succeed Mr. Steers as Chief Executive Officer of CNS and Cohen & Steers Capital Management, Inc., the Fund’s investment manager (the investment manager). At that time, Mr. Steers will assume the role of Executive Chairman of CNS and continue on as a member of CNS’ board of directors.

On December 7, 2021, the Board of Directors elected Adam M. Derechin, President and Chief Executive Officer of the Fund, as a Director of the Fund. Concurrent with his election, Mr. Derechin resigned as President and Chief Executive Officer of the Fund. Mr. Derechin currently serves as the Chief Operating Officer of CNS and the investment manager since 2004 and 2003, respectively. Effective December 7, 2021, James Giallanza, previously Chief Financial Officer of the Fund, succeeded Mr. Derechin as President and Chief Executive Officer of the Fund and Albert Laskaj, Treasurer of the Fund, succeeded Mr. Giallanza as Chief Financial Officer of the Fund.

In addition, also on December 7, 2021, the Board of Directors voted to set the number of directors on the Fund’s Board of Directors to nine, effective January 1, 2022. Director C. Edward Ward, Jr. retired from the Board of Directors on December 31, 2021 pursuant to the Fund’s mandatory retirement policy.

Change to Non-Fundamental Investment Policy

Prior to the close of business on March 31, 2022, the Fund’s non-fundamental policy (the Former Policy) was to invest, under normal market conditions, at least 80% of the Fund’s total assets in income producing equity securities issued by high quality real estate investment trusts (REITs). High quality REITs are companies that, in the opinion of the Fund’s investment manager, offer prospects for above average revenue and earnings growth. Effective as of the close of business on March 31, 2022, the Former Policy will be replaced in its entirety with the following new non-fundamental investment policy:

Under normal market conditions, at least 80% of the Fund’s total assets are invested in income-producing common stocks and other securities issued by real estate companies, such as real estate investment trusts (REITs). Real estate securities include common stocks, preferred stocks, and other equity and debt securities issued by real estate companies, including REITs and similar REIT-like entities.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

Investment Policy Clarification

The Fund’s investments in securities of real estate companies may also include private real estate investments. Private real estate investments include debt or equity investments in private real estate operating companies that own or manage real estate, privately offered REITs, mortgages secured by commercial or residential real estate, securities issued by real estate companies prior to an IPO, private investments in public equity (PIPEs) and joint ventures which invest in residential and commercial real estate. The Fund expects to invest directly or indirectly in certain real estate and real estate-related investments through one or more private, wholly owned REIT subsidiaries (each, a REIT Subsidiary). The Fund’s private real estate investments may consist of real estate joint ventures where the Fund (generally through a REIT Subsidiary) partners with a real estate operator. These investments may include retail, office, hotel, healthcare, multifamily residential, industrial and other properties. The investment manager believes that a REIT Subsidiary will allow it to access more attractive investment opportunities than would otherwise be the case. See “Current Investment Objectives, Principal Investment Policies and Principal Risks of the Fund” below for additional information regarding the Fund’s investments in private real estate and the related risks, including Geopolitical Risk, Potential Conflicts of Interest Risk, Private Real Estate Risk, Real Estate Market Risk, Real Estate Joint Venture Risk, Recourse Financings Risk, REIT Risk, REIT Subsidiary Risk, Regulatory Risk, Restricted and Illiquid Securities Risk, Small- and Medium-Sized Companies Risk and Valuation Risk.

CURRENT INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT POLICIES AND PRINCIPAL RISKS OF THE FUND

The information contained herein is provided for informational purposes only and does not constitute a solicitation of an offer to buy or sell Fund shares.

Investment Objectives

Cohen & Steers Quality Income Realty Fund, Inc. (the Fund) is a diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act). The Fund’s primary investment objective is high current income through investment in real estate securities. Capital appreciation is a secondary investment objective. The Fund’s investment objectives are considered fundamental and may not be changed without shareholder approval.

Investment Strategies

In making investment decisions with respect to securities purchased by the Fund, the investment manager relies on a fundamental analysis of each company. Securities are evaluated for their potential to provide an attractive level of distributions. Their potential for capital appreciation is also evaluated. The investment manager reviews each company’s potential for success in light of general economic and industry trends, as well as the company’s quality of management, financial condition, business plan, industry and sector market position, distribution coverage ratio and environmental, social or governance (ESG) factors. The investment manager utilizes a value-oriented approach, and evaluates each company’s valuation on the basis of relative price to distributable cash flow multiples, distributable cash flow growth rate and distribution yield, among other metrics.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

Prior to the close of business on March 31, 2022, the Fund’s non-fundamental policy (the Former Policy) is to invest, under normal market conditions, at least 80% of the Fund’s total assets in income producing equity securities issued by high quality real estate investment trusts (REITs). High quality REITs are companies that, in the opinion of the Fund’s investment manager, offer prospects for above average revenue and earnings growth.

Effective as of the close of business on March 31, 2022, the Former Policy will be replaced in its entirety with the following new non-fundamental investment policy: under normal market conditions, at least 80% of the Fund’s total assets are invested in income-producing common stocks and other securities issued by real estate companies, such as real estate investment trusts (REITs). Real estate securities include common stocks, preferred stocks, and other equity and debt securities issued by real estate companies, including REITs and similar REIT-like entities.

The Fund’s investments in securities of real estate companies may also include private real estate investments. Private real estate investments include debt or equity investments in private real estate operating companies that own or manage real estate, privately offered REITs, mortgages secured by commercial or residential real estate, securities issued by real estate companies prior to an IPO, private investments in public equity (PIPEs) and joint ventures which invest in residential and commercial real estate. The Fund expects to invest directly or indirectly in certain real estate and real estate-related investments through one or more private, wholly owned REIT subsidiaries (each, a REIT Subsidiary). The Fund’s private real estate investments may consist of real estate joint ventures where the Fund (generally through a REIT Subsidiary) partners with a real estate operator. These investments may include retail, office, hotel, healthcare, multifamily residential, industrial and other properties. The investment manager believes that a REIT Subsidiary will allow it to access more attractive investment opportunities than would otherwise be the case.

Private real estate investments are generally less liquid than public real estate investments and may involve complex investment structures. In addition, private real estate investments may have higher capital requirements, and transactions involving this asset class may be more complex than those of public real estate investments. Making private real estate investments involves a high degree of sophistication, and returns are subject to the skill and decision-making process of the investment manager, as well as local, regional, and national market conditions. As is common in the real estate industry, many of the Fund’s investments in private real estate will be leveraged. For example, the Fund (through a REIT Subsidiary) expects to make investments in private real estate investments which obtain debt financing consisting of property level debt. Property level debt will be secured by the real estate owned through private real estate investment. Typically, these investments would solely own real estate assets and would borrow from a lender using the owned property as mortgage collateral. If one of the Fund’s investments were to default on a loan, the lender’s recourse would be to the mortgaged property and the lender would typically not have a claim to other assets of the Fund or its subsidiaries. Such property level debt is generally not recourse to the Fund and the Fund will not treat these non-recourse borrowings as senior securities (as defined in the 1940 Act) for purposes of complying with the 1940 Act’s limitations on leverage unless the financial statements of the entity holding such property-level debt are consolidated with the Fund’s financial statements. See “Recourse Financings Risk.” The Fund intends to manage its investments to avoid treating such non-recourse borrowings as senior securities, although there is no guarantee that the Fund will be successful in doing so, and failure to do so may impede the Fund’s ability to achieve its investment objective and decrease returns to shareholders.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

There is no guarantee that the Fund’s investments will be able to obtain mortgage loans on attractive terms or at all. In certain limited cases, property level debt may be recourse to the Fund. The Fund’s private real estate investments may also include direct or indirect interests in companies or properties with highly leveraged capital structures. The cumulative effect of the use of leverage by the Fund or the real estate investments in which the Fund invests could result in substantial losses, exceeding those that would have been incurred had leverage not been employed. Because of the leveraged nature of the Fund’s private real estate investments, the Fund’s economic exposure to these investments may be greater than the percentage of the Fund’s total assets invested in such investments.

A real estate company is defined as a company that derives at least 50% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial, or residential real estate or has at least 50% of its assets in such real estate. A REIT is a company dedicated to owning, and usually operating, income producing real estate, or to financing real estate. REITs are generally not taxed on income distributed to shareholders provided they distribute to their shareholders substantially all of their income and otherwise comply with the requirements of the Internal Revenue Code of 1986, as amended (the Code). As a result, REITs generally pay relatively high dividends (as compared to other types of companies) and the Fund seeks to use these REIT dividends in an effort to meet its primary objective of high current income through investment in real estate securities.

The Fund may invest up to 15% of its total assets in debt securities issued or guaranteed by real estate companies. The Fund will not invest more than 20% of the Fund’s total assets in preferred stock or debt securities rated below investment grade (commonly known as “junk bonds”) or unrated securities of comparable quality. Preferred stock or debt securities will be considered to be investment grade if, at the time of investment, such security has a rating of BBB- or higher by S&P Global Ratings (S&P), Baa3 or higher by Moody’s Investors Services, Inc. (Moody’s) or an equivalent rating by a nationally recognized statistical rating agency. The Fund may also invest in preferred stock or debt securities which are unrated but which, in the opinion of the investment manager, are determined to be of equivalent quality. The Fund may invest up to 25% of its managed assets in foreign securities, including up to 15% of its assets in companies located in emerging market countries. The Fund will generally not invest more than 10% of the Fund’s total assets in the securities of one issuer.

The Fund may invest in mortgage- and asset-backed securities. Mortgage-backed securities are mortgage-related securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities, or issued by non-government entities. Mortgage related securities represent pools of mortgage loans assembled for sale to investors by various government agencies, as well as by non-government issuers such as commercial banks, savings and loan institutions, mortgage bankers and private mortgage insurance companies. Other asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements and from sales of personal property.

The Fund may, but is not required to, use, without limit, various derivatives transactions to seek to generate return, facilitate portfolio management and mitigate risks. Although the Fund’s investment adviser may seek to use these kinds of transactions to further the Fund’s investment objectives, no assurance can be given that they will achieve this result. The Fund may enter into (buy or sell) exchange-listed and over-the-counter put and call options on securities (including securities of

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

investment companies and baskets of securities), indices, and other financial instruments; purchase and sell financial futures contracts and options thereon; enter into various interest rate transactions, such as swaps, caps, floors or collars or credit transactions; equity index, total return and credit default swaps; forward contracts; and structured investments. In addition, the Fund may enter into various currency transactions, such as forward currency contracts, currency futures contracts, currency swaps or options on currency or currency futures. The Fund also may purchase and sell derivative instruments that combine features of these instruments. The Fund may invest in other types of derivatives, structured and similar instruments which are not currently available but which may be developed in the future.

Temporary Defensive Positions. For temporary defensive purposes or to keep cash on hand fully invested, the Fund may deviate from its investment objectives and invest all or any portion of its assets in short-term debt instruments, government securities, cash or cash equivalents, without regard to whether the issuer is a real estate company. In such a case, the Fund may not pursue or achieve its investment objectives.

Real Property Valuation: The Fund intends to retain an independent valuation services firm (the Independent Valuation Advisor) to assist the investment manager in the determination of the Funds’ fair value of private real estate investments, including those held a REIT Subsidiary. While the Independent Valuation Advisor will provide valuations of the real property investments, it is not responsible for, and does not calculate, the Fund’s or REIT Subsidiary’s daily NAV. The Fund’s valuation policies may change from time to time.

The REIT Subsidiary’s real property investments will primarily be through joint ventures with an operating partner. The operating partner will be responsible (subject to oversight by the investment manager) for maintaining the joint venture’s official books and records along with other pertinent information that will be the basis upon which the Independent Valuation Advisor will prepare their appraisals as described below.

The Independent Valuation Advisor is expected to administer the real property valuation process for investments held by the REIT Subsidiary and is expected to select (subject to the investment manager’s approval) and manage the process associated with third-party appraisal firms with respect to the valuation of the Fund’s real property investments.

Investments in newly acquired properties are expected to be initially valued at cost. Each property is then expected to be valued by an independent third-party appraisal firm within approximately 90 to 120 days after it was acquired and no less than annually thereafter. Each third-party appraisal will be reviewed by the Independent Valuation Advisor and the Valuation Committee for reasonableness.

Each month, the investment manager, with the assistance of the Independent Valuation Advisor, will determine an accrual schedule for the daily value of each real property investment based on an estimated month-end income accrual for each real property. The Fund expects that the REIT Subsidiary will use the daily values determined in such accrual schedule for purposes of calculating its NAV. Any material changes to the valuation of real property investments of the REIT Subsidiary, and related changes to the daily accrual schedule for any real property investment, will be reflected in the NAV calculation beginning with the first NAV calculated after a revised valuation is determined and approved by the CNS Valuation Committee.

The investment manager will monitor for material events that the investment manager believes may be expected to have a material impact on the most recent estimated fair values of such real property

 

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investment. Possible examples of such a material change include an unexpected termination or renewal of a material lease, a material change in vacancies, an unanticipated structural or environmental event at a property, capital market events, tenant bankruptcy, recent financial results or changes in the capital structure of the property, terrorism events, natural disasters or other force majeure events, any regulatory changes that affect the investment, or a significant industry event or adjustment to the industry outlook that may cause the value of real property to change materially. Upon the occurrence of such a material event that is likely to have a material impact on the most recent estimated values of the impacted real property investments and provided that the investment manager is aware that such event has occurred, the investment manager will instruct the Independent Valuation Advisor to evaluate the impact of the event on the fair value of such investment. However, rapidly changing market conditions or material events may not be immediately reflected in the Fund’s or REIT Subsidiary’s daily NAV.

The investment manager will value the real properties using the valuation methodology it deems most appropriate and consistent with industry best practices and market conditions. The investment manager expects the primary methodology used to value real property investments will be the income approach, whereby value is derived by determining the present value of an asset’s stream of future cash flows (for example, discounted cash flow analysis). Consistent with industry practices, the income approach incorporates actual contractual lease income, professional judgments regarding comparable rental and operating expense data, the capitalization or discount rate and projections of future rent and expenses based on appropriate market evidence, and other subjective factors. Other methodologies that may also be used to value properties include, among other approaches, sales comparisons and cost approaches.

Real estate appraisals are reported on a free and clear basis (i.e. any property-level indebtedness that may be in place is not incorporated into the valuation). Property level debt will be valued separately in accordance with GAAP. Real properties held through joint ventures generally will be valued in a manner that is consistent with the methods described above. Once the value of a real property held by the joint venture and the fair value of any other assets and liabilities of the joint venture is determined, the value of the REIT Subsidiary’s interest in the joint venture would then be determined by the investment manager using a hypothetical liquidation calculation to value the REIT Subsidiary’s interest in the joint venture.

Use of Leverage

The Fund currently seeks to enhance the level of its distributions and total return through the use of leverage. The Fund may utilize leverage in an amount up to 3313% of its managed assets through borrowings, including loans from certain financial institutions and/or the issuance of debt securities (collectively, Borrowings). Under the 1940 Act, the Fund may utilize leverage through (i) Borrowings in an aggregate amount of up to 3313% of the Fund’s total assets immediately after such Borrowings and (ii) the issuance of preferred stock (Preferred Shares) in an aggregate amount of up to 50% of the Fund’s total assets immediately after such issuance. In addition, the Fund may utilize leverage through reverse repurchase agreements (Reverse Repurchase Agreements), in an aggregate amount up to 50% of the Fund’s total assets. The Fund also may borrow money as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

The Fund may also engage in various derivatives transactions to seek to generate return, facilitate portfolio management and mitigate risks. Certain derivatives transactions effect a form of economic leverage on the Fund’s portfolio and may be subject to the risks associated with the use of leverage. There is no assurance that the Fund will utilize leverage or, if leverage is utilized, that it will be successful. The net asset value of the Fund’s common shares may be reduced by the issuance or incurrence costs of any leverage. See “Leverage Risk.”

Effects of Leverage.

Assuming that leverage in the form of Borrowings will represent up to 22% of the Fund’s managed assets and charge interest or involve payment at a rate set by an interest rate transaction at an annual average rate of approximately 1.33%, the income generated by the Fund’s portfolio (net of estimated expenses) must exceed 0.30% in order to cover such interest payments or payment rates and other expenses specifically related to leverage. Of course, these numbers are merely estimates, used for illustration. Actual interest, or payment rates may vary frequently and may be significantly higher or lower than the rate estimated above.

The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on common share total return, assuming investment portfolio total returns (comprised of income and changes in the value of investments held in the Fund’s portfolio) of –10%, –5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns expected to be experienced by the Fund. The table assumes leverage in an aggregate amount equal to 22% of the Fund’s managed assets. See “Leverage Risk” below.

 

Assumed Portfolio Total Return

     –10      –5      0      5      10

Common Share Total Return

     –13.2      –6.8      –0.4      6.0      12.5

Common share total return is comprised of two elements—the net investment income of the Fund after paying expenses, including interest expenses on the Fund’s Borrowings as described above and dividend payments on any preferred shares issued by the Fund and gain and losses on the value of the securities the Fund owns. As required by the rules of the SEC, the table assumes the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0%, the Fund must assume that the income it receives on its investments is entirely offset by losses in the value of those securities.

Principal Risks of the Fund

The Fund is a diversified, closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objectives.

General Risks

Risk of Market Price Discount from Net Asset Value. Shares of closed-end investment companies frequently trade at a discount from their NAV. This characteristic is a risk separate and distinct from the

 

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risk that NAV could decrease as a result of investment activities. Whether investors will realize gains or losses upon the sale of the shares will depend not upon the Fund’s NAV but entirely upon whether the market price of the shares at the time of sale is above or below the investor’s purchase price for the shares. Because the market price of the shares is determined by factors such as relative supply of and demand for shares in the market, general market and economic conditions, and other factors beyond the control of the Fund, Fund shares may trade at, above or below NAV.

Market Risk. Your investment in Fund shares represents an indirect investment in the REIT shares and other real estate securities owned by the Fund. The value of these securities, like other investments, may move up or down, sometimes rapidly and unpredictably. Your Fund shares at any point in time may be worth less than what you invested, even after taking into account the reinvestment of Fund dividends and distributions.

Investment Risk. An investment in the Fund is subject to investment risk, including the possible loss of the entire principal amount that you invest.

Common Stock Risk. The Fund may invest in common stocks. Common stocks are subject to special risks. Although common stocks have historically generated higher average returns than fixed-income securities over the long-term, common stocks also have experienced significantly more volatility in returns. Common stocks may be more susceptible to adverse changes in market value due to issuer specific events or general movements in the equities markets. A drop in the stock market may depress the price of common stocks held by the Fund. Common stock prices fluctuate for many reasons, including changes to investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, or the occurrence of political or economic events affecting issuers. For example, an adverse event, such as an unfavorable earnings report, may depress the value of common stock in which the Fund has invested; the price of common stock of an issuer may be particularly sensitive to general movements in the stock market; or a drop in the stock market may depress the price of most or all of the common stocks held by the Fund. Also, common stock of an issuer in the Fund’s portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition. The common stocks in which the Fund will invest are typically subordinated to preferred securities, bonds and other debt instruments in a company’s capital structure in terms of priority to corporate income and assets, and, therefore, will be subject to greater risk than the preferred securities or debt instruments of such issuers. In addition, common stock prices may be sensitive to rising interest rates as the costs of capital rise and borrowing costs increase.

Real Estate Market Risk. The Fund will not invest in real estate directly, but will invest in securities issued by real estate companies. However, because of its policy of concentration in the securities of companies in the real estate industry, the Fund is also subject to the risks associated with the direct ownership of real estate. These risks include:

 

   

declines in the value of real estate;

 

   

risks related to general and local economic conditions;

 

   

possible lack of availability of mortgage funds;

 

   

overbuilding;

 

   

extended vacancies of properties;

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

   

increased competition;

 

   

increases in property taxes and operating expenses;

 

   

changes in zoning laws;

 

   

losses due to costs resulting from the clean-up of environmental problems;

 

   

liability to third parties for damages resulting from environmental problems;

 

   

casualty or condemnation losses;

 

   

limitations on rents;

 

   

changes in neighborhood values and the appeal of properties to tenants;

 

   

changes in interest rates;

 

   

falling home prices;

 

   

failure of borrowers to pay their loans;

 

   

early payment or restructuring of mortgage loans;

 

   

slower mortgage origination; and

 

   

rising construction costs.

Thus, the value of the Fund’s shares may change at different rates compared to the value of shares of a fund with investments in a mix of different industries.

REIT Risk. In addition to the risks of securities linked to the real estate industry, REITs are subject to certain other risks related to their structure and focus. REITs generally are dependent upon management skills and may not be diversified. REITs are also subject to heavy cash flow dependency, defaults by borrowers and self-liquidation. In addition, REITs could possibly fail to (i) qualify for favorable tax treatment under applicable tax law, or (ii) maintain their exemptions from registration under the 1940 Act. Various factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.

Real Estate Cycle Risks. Real estate values have been historically cyclical. As the general economy grows, demand for real estate increases and occupancies and rents increase. As occupancies and rents increase, property values increase, and new development occurs. As development occurs, occupancies, rents and property values may decline. Because leases are usually entered into for long periods and development activities often require extended times to complete, the real estate value cycle often lags the general business cycle. Because of this cycle, real estate companies have historically often incurred large swings in their profits and the prices of their securities.

Mortgage REIT Risks. Mortgage REITs are pooled investment vehicles that invest the majority of their assets in real property mortgages and which generally derive income primarily from interest payments thereon. Investing in mortgage REITs involves certain risks related to investing in real property mortgages. In addition, mortgage REITs must satisfy highly technical and complex requirements in order to qualify for the favorable tax treatment accorded to REITs under the Code. No assurances can be given that a mortgage REIT in which the Fund invests will be able to continue to qualify as a REIT or that complying with the REIT requirements under the Code will not adversely affect such REIT’s ability to execute its business plan.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

REIT Tax and Regulatory Risks. REITs are subject to a highly technical and complex set of provisions in the Code. It is possible that the Fund may invest in a real estate company which purports to be a REIT and that the company could fail to qualify as a REIT. In the event of any such unexpected failure to qualify as a REIT, the company would be subject to corporate-level taxation, significantly reducing the return to the Fund on its investment in such company. Alternatively, a REIT’s attempted compliance with the REIT requirements under the Code could adversely affect such REIT’s ability to execute its business plan. REITs could also possibly fail to maintain their exemptions from registration under the 1940 Act. The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.

Small- and Medium-Sized Companies Risk. Real estate companies in the industry tend to be small- to medium-sized companies in relation to the equity markets as a whole. There may be less trading in a smaller company’s stock, which means that buy and sell transactions in that stock could have a larger impact on the stock’s price than is the case with larger company stocks. Smaller companies also may have fewer lines of business so that changes in any one line of business may have a greater impact on a smaller company’s stock price than is the case for a larger company. Further, smaller company stocks may perform differently in different cycles than larger company stocks. Accordingly, real estate company shares can, and at times will, perform differently than large company stocks.

Common Stock Risk. The Fund may invest in common stocks. Common stocks are subject to special risks. Although common stocks have historically generated higher average returns than fixed-income securities over the long-term, common stocks also have experienced significantly more volatility in returns. Common stocks may be more susceptible to adverse changes in market value due to issuer specific events or general movements in the equities markets. A drop in the stock market may depress the price of common stocks held by the Fund. Common stock prices fluctuate for many reasons, including changes to investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, or the occurrence of political or economic events affecting issuers. For example, an adverse event, such as an unfavorable earnings report, may depress the value of common stock in which the Fund has invested; the price of common stock of an issuer may be particularly sensitive to general movements in the stock market; or a drop in the stock market may depress the price of most or all of the common stocks held by the Fund. Also, common stock of an issuer in the Fund’s portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition. The common stocks in which the Fund will invest are typically subordinated to preferred securities, bonds and other debt instruments in a company’s capital structure in terms of priority to corporate income and assets, and, therefore, will be subject to greater risk than the preferred securities or debt instruments of such issuers. In addition, common stock prices may be sensitive to rising interest rates as the costs of capital rise and borrowing costs increase.

Preferred Securities Risk. There are various risks associated with investing in preferred securities, including those described below. In addition, the on-going COVID-19 outbreak has increased certain risks associated with investing in preferred securities. The impact of the COVID-19 outbreak could be short- or long-term and the full impact to financial markets is not yet known. See “Geopolitical Risk” below for additional information regarding the COVID-19 outbreak.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

   

Deferral and Omission Risk. Preferred securities may include provisions that permit the issuer, at its discretion, to defer or omit distributions for a stated period without any adverse consequences to the issuer. In certain cases, deferring or omitting distributions may be mandatory. If the Fund owns a preferred security that is deferring its distributions, the Fund may be required to report income for tax purposes although it has not yet received such income. In addition, recent changes in bank regulations may increase the likelihood for issuers to defer or omit distributions.

 

   

Credit and Subordination Risk. Credit risk is the risk that a preferred security in the Fund’s portfolio will decline in price or the issuer of the security will fail to make dividend, interest or principal payments when due because the issuer experiences a decline in its financial status. Preferred securities are generally subordinated to bonds and other debt instruments in a company’s capital structure in terms of having priority to corporate income, claims to corporate assets and liquidation payments, and therefore will be subject to greater credit risk than more senior debt instruments.

 

   

Interest Rate Risk. Interest rate risk is the risk that preferred securities will decline in value because of changes in market interest rates. When market interest rates rise, the market value of such securities generally will fall, and therefore the Fund may underperform during periods of rising interest rates. The Fund may be subject to a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and the effect of government monetary policy initiatives and resulting market reaction to those initiatives. Preferred securities without maturities or with longer periods before maturity may be more sensitive to interest rate changes.

 

   

Prepayment and Extension Risk. Prepayment risk is the risk that changes in interest rates, credit spreads or other factors will result in the call (repayment) of a preferred security more quickly than expected, such that the Fund may have to invest the proceeds in lower yielding securities, or that expectations of such early call will negatively impact the market price of the security. Extension risk is the risk that changes in the interest rates or credit spreads may result in diminishing call expectations, which can cause prices to fall.

 

   

Call, Reinvestment and Income Risk. During periods of declining interest rates, an issuer may be able to exercise an option to redeem its issue at par earlier than scheduled which is generally known as call risk. Recent regulatory changes may increase call risk with respect to certain types of preferred securities. If this occurs, the Fund may be forced to reinvest in lower yielding securities. This is known as reinvestment risk. Preferred securities frequently have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem preferred securities if the issuer can refinance the preferred securities at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer, or in the event of regulatory changes affecting the capital treatment of a security. Another risk associated with a declining interest rate environment is that the income from the Fund’s portfolio may decline over time when the Fund invests the proceeds from new share sales at market rates that are below the portfolio’s current earnings rate.

 

   

Liquidity Risk. Certain preferred securities may be substantially less liquid than many other securities, such as common stocks or U.S. government securities. Illiquid securities involve the risk that the securities will not be able to be sold at the time desired by the Fund or at prices approximating the value at which the Fund is carrying the securities on its books.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

   

Limited Voting Rights Risk. Generally, traditional preferred securities offer no voting rights with respect to the issuer unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may elect a number of directors to the issuer’s board of directors. Generally, once all the arrearages have been paid, the preferred security holders no longer have voting rights. Hybrid-preferred security holders generally have no voting rights.

 

   

Special Redemption Rights. In certain varying circumstances, an issuer of preferred securities may redeem the securities prior to a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by a change in U.S. federal income tax or securities laws. As with call provisions, a redemption by the issuer may have a negative impact on the return of the security held by the Fund.

 

   

New Types of Securities. From time to time, preferred securities, including hybrid-preferred securities, have been, and may in the future be, offered having features other than those described herein. The Fund reserves the right to invest in these securities if the investment manager believes that doing so would be consistent with the Fund’s investment objectives and policies. Since the market for these instruments would be new, the Fund may have difficulty disposing of them at a suitable price and time. In addition to limited liquidity, these instruments may present other risks, such as high price volatility.

Foreign (Non-U.S.) Securities Risk. Investing in foreign securities involves certain risks not involved in domestic investments, including, but not limited to:

 

   

future foreign economic, financial, political and social developments;

 

   

different legal systems;

 

   

the possible imposition of exchange controls or other foreign governmental laws or restrictions;

 

   

less governmental supervision;

 

   

regulation changes;

 

   

less publicly available information about foreign companies due to less rigorous disclosure and accounting standards or regulatory practices;

 

   

high and volatile rates of inflation;

 

   

foreign currency devaluation;

 

   

fluctuating interest rates; and

 

   

different accounting, auditing and financial record-keeping standards and requirements.

Investments in foreign securities, especially in emerging market countries, will expose the Fund to the direct or indirect consequences of political, social or economic changes in the countries that issue the securities or in which the issuers are located. Political developments in foreign countries or the United States may at times subject such countries to sanctions from the U.S. government, foreign governments and/or international institutions that could negatively affect the Fund’s investments in issuers located in, doing business in or with assets in such countries. Certain countries in which the Fund may invest, especially emerging market countries, have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

unemployment. Many of these countries are also characterized by political uncertainty and instability. The cost of servicing external debt will generally be adversely affected by rising international interest rates because many external debt obligations bear interest at rates which are adjusted based upon international interest rates. In addition, with respect to certain foreign countries, there is a risk of:

 

   

the possibility of expropriation of assets;

 

   

confiscatory taxation;

 

   

difficulty in obtaining or enforcing a court judgment;

 

   

economic, political or social instability; and

 

   

diplomatic developments that could affect investments in those countries.

In addition, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as:

 

   

growth of gross domestic product;

 

   

rates of inflation;

 

   

capital reinvestment;

 

   

resources;

 

   

self-sufficiency; and

 

   

balance of payments position.

To the extent the Fund’s investments are focused in a geographic region or country, the Fund will be subject, to a greater extent than if the Fund’s assets were less geographically focused, to the risks of adverse changes in that region or country. In addition, certain investments in foreign securities also may be subject to foreign withholding or other taxes, which would reduce the Fund’s return on those securities.

Certain non-U.S. real estate companies in which the Fund invests may constitute “passive foreign investment companies.” This may subject the Fund to U.S. federal tax and interest charges, or may cause the Fund to recognize taxable income without a corresponding receipt of cash. The Fund may be required to liquidate other investments (including when it is not advantageous to do so) to meet its distribution requirements or otherwise qualify for treatment as a “regulated investment company” (RIC).

Debt Securities Risk. Debt securities generally present two primary types of risk—credit risk, which refers to the possibility that the issuer of a security will not be able to make payments of interest and principal when due, and interest rate risk, which is the risk that debt securities will decline in value because of changes in market interest rates. Debt securities also are subject to other similar risks as preferred securities, including call risk, extension risk and liquidity risk.

Below Investment Grade Securities Risk. The Fund may invest in below investment grade securities or securities that are unrated but judged to be below investment grade by the investment manager. Below investment grade securities, or equivalent unrated securities, generally involve greater volatility of price and risk of loss of income and principal, and may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher grade securities. It is reasonable to expect that any adverse economic condition could disrupt the market for below investment grade securities, have an adverse impact on the value of those securities and adversely affect the ability of the issuers of those securities to repay principal and interest on those securities.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

Warrants and Rights Risk. If the price of the underlying stock does not rise above the exercise price before the warrant expires, the warrant generally expires without any value and the Fund loses any amount it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying stock.

The failure to exercise subscription rights to purchase common stock would result in the dilution of the Fund’s interest in the issuing company. The market for such rights is not well developed, and, accordingly, the Fund may not always realize full value on the sale of rights.

Options Risk. Gains on options transactions depend on the investment manager’s ability to predict correctly the direction of stock prices, indexes, interest rates, and other economic factors, and unanticipated changes may cause poorer overall performance for the Fund than if it had not engaged in such transactions. A rise in the value of the security or index underlying a call option written by the Fund exposes the Fund to possible loss or loss of opportunity to realize appreciation in the value of any portfolio securities underlying or otherwise related to the call option. By writing a put option, the Fund assumes the risk of a decline in the underlying security or index. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position, and for certain options not traded on an exchange no market usually exists. Trading could be interrupted, for example, because of supply and demand imbalances arising from a lack of either buyers or sellers, or an options exchange could suspend trading after the price has risen or fallen more than the maximum specified by the exchange. Although the Fund may be able to offset to some extent any adverse effects of being unable to liquidate an option position, that Fund may experience losses in some cases as a result of such inability, may not be able to close its position and, in such an event would be unable to control its losses.

Convertible Securities Risk. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. In the absence of adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund’s holding may occur in the event the underlying stock is subdivided, additional equity securities are issued for below market value, a stock dividend is declared or the issuer enters into another type of corporate transaction that has a similar effect.

U.S. Government Securities Risk. The Fund may invest in direct obligations of the government of the United States or its agencies. Obligations issued or guaranteed by the U.S. government, its agencies, authorities and instrumentalities and backed by the full faith and credit of the U.S. guarantee only that principal and interest will be timely paid to holders of the securities. These entities do not guarantee that the value of such obligations will increase, and, in fact, the market values of such obligations may fluctuate. In addition, not all obligations of the U.S. Government, its agencies and instrumentalities are backed by the full faith and credit of the U.S. Treasury. Some obligations are backed only by the credit of the issuing agency or instrumentality, and in some cases there may be some risk of default by the issuer. Any guarantee by the U.S. Government or its agencies or instrumentalities of a security held by the Fund does not apply to the market value of such security or to Fund shares. In addition, a security backed by the U.S. Treasury or the full faith and credit of the United States is guaranteed only as to the timely payment of interest and principal when held to maturity, but the market prices of such securities are not guaranteed and will fluctuate. In addition, because many

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

types of U.S. Government securities trade actively outside the United States, their prices may rise and fall as changes in global economic conditions affect the demand for these securities

Restricted and Illiquid Securities Risk. The Fund may invest in investments that may be illiquid (i.e., securities that may be difficult to sell at a desirable time or price). Illiquid securities are securities that are not readily marketable and may include some restricted securities, which are securities that may not be resold to the public without an effective registration statement under the Securities Act or, if they are unregistered, may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. Illiquid investments involve the risk that the securities will not be able to be sold at the time desired by the Fund or at prices approximating the value at which the Fund is carrying the securities on its books. Restricted securities and illiquid securities are often more difficult to value and the sale of such securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of liquid securities trading on national securities exchanges or in the OTC markets. Contractual restrictions on the resale of securities result from negotiations between the issuer and purchaser of such securities and therefore vary substantially in length and scope. To dispose of a restricted security that the Fund has a contractual right to sell, the Fund may first be required to cause the security to be registered. A considerable period may elapse between a decision to sell the securities and the time when the Fund would be permitted to sell, during which time the Fund would bear market risks.

Derivatives and Hedging Transactions Risk. The Fund’s use of derivatives, including for the purpose of hedging interest rate or foreign, presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities. In certain types of derivatives transactions the Fund could lose the entire amount of its investment; in other types of derivatives transactions the potential loss is theoretically unlimited. Although both OTC and exchange-traded derivatives markets may experience lack of liquidity, OTC non-standardized derivatives transactions are generally less liquid than exchange-traded instruments. In addition, the liquidity of a secondary market in an exchange-traded derivative contract may be adversely affected by “daily price fluctuation limits” established by the exchanges which once reached, would prevent the liquidation of open positions. If it is not possible to close an open derivative position entered into by the Fund, the Fund may be required to make cash payments of variation (or mark-to-market) margin and, if the Fund has insufficient cash, it may have to sell portfolio securities to meet variation margin requirements at a time when it may be disadvantageous to do so. The inability to close derivatives transactions positions also could have an adverse impact on the Fund’s ability to effectively hedge its portfolio. Derivatives transactions entered into to seek to manage the risks of the Fund’s portfolio of securities may have the effect of limiting gains from otherwise favorable market movements. The use of derivatives transactions may result in losses greater than if they had not been used. The Fund may enter into swap, cap or other transactions to attempt to protect itself from increasing interest or dividend expenses resulting from increasing short-term interest rates on any leverage it incurs or increasing interest rates on securities held in its portfolio. A decline in interest rates may result in a decline in the value of the transaction, which may result in a decline in the NAV of the Fund. In the event the Fund enters into forward currency contracts for hedging purposes, the Fund will be subject to currency exchange rates risk. Currency exchange rates may fluctuate significantly over short periods of time and also can be affected unpredictably by intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments in the United States or abroad. Furthermore, the ability to successfully use derivative instruments depends on the ability of the investment manager to predict pertinent market

 

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movements, which cannot be assured. Structured notes and other related instruments carry risks similar to those of more traditional derivatives such as futures, forward and option contracts. However, structured instruments may entail a greater degree of market risk and volatility than other types of debt obligations. The Fund will be subject to credit risk with respect to the counterparties to certain derivatives transactions entered into by the Fund and may experience losses in the event a counterparty fails to perform its obligations under a derivative contract.

The investment manager is registered with the Commodity Futures Trading Commission as a commodity pool operator (“CPO”). However, with respect to the Fund, the investment manager has claimed an exclusion from the definition of the CPO under the Commodity Exchange Act, as amended (the “CEA”). Accordingly, the investment manager, with respect to the Fund, is not subject to registration or regulation as a CPO under the CEA.

Private Real Estate Risk: The Fund’s investments in private real estate include additional risks. For example, lease defaults, terminations by one or more tenants or landlord-tenant disputes may reduce the Fund’s revenues and net income. Any of these situations may result in extended periods during which there is a significant decline in revenues or no revenues generated by a property. If this occurred, it could adversely affect the Fund’s results of operations.

The Fund’s financial position and its ability to make distributions may also be adversely affected by financial difficulties experienced by any major ten ants, including bankruptcy, insolvency or a general downturn in the business, or in the event any major tenants do not renew or extend their relationship as their lease terms expire. A tenant in bankruptcy may be able to restrict the ability to collect unpaid rents or interest during the bankruptcy proceeding. Furthermore, dealing with a tenants’ bankruptcy or other default may divert management’s attention and cause the Fund to incur substantial legal and other costs.

The Fund’s investments in real estate will be pressured in challenging economic and rental market conditions. If the private real estate investment is unable to re-let or renew leases for all or substantially all of the space at these properties, if the rental rates upon such renewal or re-letting are significantly lower than expected, or if the investment’s reserves for these purposes prove inadequate, the Fund will experience a reduction in net income and may be required to reduce or eliminate cash distributions.

The Fund may obtain only limited warranties when it purchases an equity investment in private commercial real estate. The purchase of properties with limited warranties increases the risk that the Fund may lose some or all of its invested capital in the property, as well as the loss of rental income from that property if an issue should arise that decreases the value of that property and is not covered by the limited warranties. If any of these results occur, it may have a material adverse effect on the Fund’s business, financial condition and results of operations and the Fund’s ability to make distributions.

The Fund’s investments in private real estate are expected to be substantially less liquid than many other securities, such as common stocks or U.S. government securities.

REIT Subsidiary Risk: Investments in a REIT Subsidiary are subject to risks associated with the direct ownership of real estate. A REIT Subsidiary, and therefore the Fund, may be affected by changes in the real estate markets generally as well as changes in the values of any properties owned by a REIT Subsidiary or securing any mortgages owned by a REIT Subsidiary (which changes in value could be influenced by market conditions for real estate in general or issues related to the particular property). If a REIT Subsidiary’s underlying assets are concentrated in properties used by a particular industry, it will be subject to risks associated with such industry. Each REIT Subsidiary will be wholly-owned (except for its preferred shareholders) by the Fund.

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

Restrictions under the Internal Revenue Code applicable to regulated investment companies such as the Fund can limit investments in private real estate, or cause such investments to be structured in a less tax-advantaged manner. Each REIT Subsidiary will not be diversified and will be subject to heavy cash flow dependency, possible lack of availability of financing, changes in interest rates, prepayment and defaults by borrowers, self-liquidation, adverse economic conditions, adverse changes in tax laws, and the possibility of failing to maintain an exemption under the 1940 Act. Any rental income or income from the disposition of real estate could adversely affect a REIT Subsidiary’s ability to retain its tax status, which would have adverse tax consequences. Each REIT Subsidiary is subject to the risk that it will need to liquidate a holding at an economically inopportune time.

By investing through a REIT Subsidiary, the Fund bears the fees and expenses of the REIT Subsidiary (including, among other things operating costs, transaction expenses, administrative and custody fees, legal expenses and custody expenses). Thus, investing through a REIT Subsidiary may cause the Fund to be subject to higher operating expenses than if it invested directly.

To the extent a REIT Subsidiary holds mortgages, it will be subject to the following risks: (1) during periods of declining interest rates, mortgagors may be inclined to prepay their mortgages, which prepayment may diminish the yield on securities issued by the REIT Subsidiary; and (2) when interest rates rise, the value of the REIT Subsidiary’s investment in fixed rate obligations can be expected to decline.

A REIT Subsidiary may have limited diversification because it may invest in a limited number of properties, a narrow geographic area, or a single type of property. The private real estate investments owned by a REIT Subsidiary will not be traded on a national securities exchange and an investment therein is, therefore, illiquid. These investments are also more difficult to value than publicly traded real estate investments.

A REIT Subsidiary, and therefore the Fund, will be affected by changes in the value of the underlying real property, fluctuations in the demand for real estate, defaults by tenants, and decreases in market rates for rent. To the extent it invests in mortgages or otherwise derives income from the collection of interest payments, a REIT Subsidiary may be affected by the quality of credit extended, prepayments and defaults by borrowers, and changes in market interest rates, and may be more susceptible to interest rate risk.

Each REIT Subsidiary likely will depend on its ability to generate cash flow to make distributions to the Fund. The Fund’s investments in a REIT Subsidiary could cause the Fund to recognize income in excess of cash received from those investments and, as a result, the Fund may be required to sell portfolio investments, including when it is not advantageous to do so, in order to make distributions. By investing in a REIT Subsidiary, the Fund is indirectly exposed to risks associated with the REIT Subsidiary’s investments. A REIT Subsidiary may invest in real estate and real estate-related investments through wholly-owned special purpose companies. Because each REIT Subsidiary will not be registered under the 1940 Act, the Fund, as an investor in the REIT Subsidiary, will not have the protections afforded to investors in registered investment companies. Changes in the laws of the United States, under which the Fund and a REIT Subsidiary are organized, including the regulations under the Code, could result in the inability of the Fund and/or a REIT Subsidiary to operate as intended and could negatively affect the Fund and its shareholders. Ownership of and investment through a REIT Subsidiary by a closed-end management investment company is relatively novel investment strategy. Differences between the statutory and regulatory regimes applicable to a management investment company and a

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

REIT present additional challenges and risks with regard to a REIT Subsidiary’s qualification as a REIT under the Code, which could result in the REIT Subsidiary and the Fund having additional tax liability, and reduce the Fund’s current income.

A REIT Subsidiary could default on its obligations or go bankrupt. Each REIT Subsidiary will be operated as a separate company and will observe its own corporate formalities (i.e., it will maintain its own separate books & records, and execute agreements in its own name and on its own behalf). Accordingly, creditors and other claimants should only be able to look to the REIT Subsidiary and its assets for settlement of their claims against the REIT Subsidiary. Creditors and other claimants against the REIT Subsidiary will not have general recourse against the Fund unless the Fund guarantees the debt or obligations of the REIT Subsidiary. See “Recourse Financings Risk.” Each REIT Subsidiary is responsible for its own legal costs in defending against any such claims, but those legal costs may diminish its returns, and thus ultimately diminish returns to Fund shareholders. Although each REIT Subsidiary will be organized so that it is generally responsible for its own debts and obligations, there is no guarantee that creditors and other claimants against the REIT Subsidiary will not try to reach the assets of the Fund, even where there is no legal basis for recourse to the Fund’s assets. The Fund intends to dispute any such claims, but to the extent it does so it may incur legal costs that will diminish its returns to shareholders.

The REIT Subsidiary may use derivatives for speculative or hedging purposes and non-hedging purposes (that is, to seek to increase total return). The REIT Subsidiary may incur leverage for investment or other purposes, which may increase its volatility. The REIT Subsidiary may invest without limitation in restricted and illiquid investments and equity securities without limitation as to market capitalization, including micro-cap companies, the prices of which may be subject to erratic market movements.

Potential Conflicts of Interest Risk. The investment manager and its affiliates are involved worldwide with a broad spectrum of financial services and asset management activities and may engage in the ordinary course of business in activities in which their interests or the interests of their other clients may conflict with those of the Fund. The investment manager and its affiliates provide investment management services to other funds and discretionary managed accounts that follow an investment program similar to that of the Fund. Subject to the requirements of the 1940 Act, the investment manager and its affiliates intend to engage in such activities and receive compensation from third parties for their services. Neither the investment manager nor its affiliates are under any obligation to share any investment opportunity, idea or strategy with the Fund. As a result, other accounts of the investment manager and its affiliates may compete with the Fund for appropriate investment opportunities. The results of the Fund’s investment activities, therefore, may differ from those of other accounts managed by the investment manager or its affiliates, and it is possible that the Fund could sustain losses during periods in which one or more of the proprietary or other accounts managed by the investment manager or its affiliates achieve profits. The investment professionals associated with the investment manager are actively involved in other investment activities not concerning the Fund and will not be able to devote all of their time to the Fund’s business and affairs. The investment manager and its affiliates have adopted policies and procedures designed to address potential conflicts of interests and to allocate investments among the accounts managed by the investment manager and its affiliates in a fair and equitable manner. The Fund depends to a significant extent on the investment manager’s access to the investment professionals and senior management of the investment manager and the information and deal flow generated by the investment manager’s investment professionals and senior

 

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management during the normal course of their investment and portfolio management activities. The senior management and the investment professionals of the investment manager source, evaluate, analyze and monitor the Fund’s investments. The Fund’s future success will depend on the continued service of the senior management team and investment professionals of the investment manager.

The investment manager will not cause the Fund to engage in certain negotiated investments alongside affiliates unless the Fund has received an order granting an exemption from Section 17 of the 1940 Act or unless such investments are not prohibited by Section 17(d) of the Investment Company Act or interpretations of Section 17(d) as expressed in SEC no-action letters or other available guidance. A private real estate investment may be owned by multiple Cohen & Steers funds, including the Fund. The investment manager believes that having multiple funds invest in a single private real estate investment may result in economies of scale for shareholders as expenses will be shared across a larger asset base. However, investing alongside other Cohen & Steers funds involves certain risks. Although any funds investing in the same private real estate investment will have similar investment strategies with respect to private real estate investments and therefore are likely to be aligned with respect to their acquisition, holding and disposition of the investment, it is possible that the strategies of one fund might change to the extent that it no longer wishes to invest in the investment. In such a case, its ability to dispose of its interest in the private real estate investment will be limited. Similarly, it is possible that the other fund owners of the investment may wish to dispose of their interest in the investment, potentially necessitating a sale of the investment at a time or price that the Fund believes is disadvantageous.

Real Estate Joint Venture Risk. The Fund through a REIT Subsidiary may enter into real estate joint ventures with third parties to make investments. The Fund may also make investments in partnerships or other co-ownership arrangements or participations. Such investments may involve risks not otherwise present with other methods of investment, including, for instance, the following risks and conflicts of interest:

 

   

the real estate joint venture partner in an investment could become insolvent or bankrupt;

 

   

fraud or other misconduct by the real estate joint venture partner;

 

   

the joint venture partner will typically have day-to-day control over the investment, and the Fund’s rights regarding certain major decisions affecting the ownership of the real estate joint venture and the joint venture property, such as the sale of the property or the making of additional capital contributions for the benefit of the property, will typically be limited. These factors may prevent the Fund from taking actions that are opposed by its real estate joint venture partner;

 

   

under certain real estate joint venture arrangements, neither party may have the power to unilaterally direct certain activities of the venture and, under certain circumstances, an impasse could result regarding cash distributions, reserves, or a proposed sale or refinancing of the investment, and this impasse could have an adverse impact on the real estate joint venture, which could adversely impact the operations and profitability of the real estate joint venture and/or the amount and timing of distributions the Fund receives from the real estate joint venture;

 

   

the real estate joint venture partner may at any time have economic or business interests or goals that are or that become in conflict with the Fund’s business interests or goals, including, for instance, the operation of the properties;

 

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COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

 

   

the real estate joint venture partner may be structured differently than the Fund for tax purposes and this could create conflicts of interest;

 

   

the Fund will typically rely upon its real estate joint venture partner to manage the day-to day operations of the real estate joint venture and underlying assets, as well as to prepare financial information for the real estate joint venture and any failure to perform these obligations appropriately may have a negative impact on the Fund’s performance and results of operations;

 

   

the real estate joint venture partner may experience a change of control, which could result in new management of the real estate joint venture partner with less experience or conflicting interests to the Fund and be disruptive to the Fund’s business;

 

   

the real estate joint venture partner may be in a position to take action contrary to the Fund’s instructions or requests or contrary to the Fund’s policies or objectives;

 

   

the terms of the real estate joint ventures could restrict the Fund’s ability to sell or transfer its interest to a third party when it desires on advantageous terms, which could result in reduced liquidity;

 

   

the Fund or its real estate joint venture partner may have the right to cause the Fund to sell its interest, or acquire its partner’s interest, at a time when the Fund otherwise would not have initiated such a transaction; and

 

   

the real estate joint venture partner may not have sufficient personnel or appropriate levels of expertise to adequately support the Fund’s initiatives.

In addition, disputes between the Fund and its real estate joint venture partners may result in litigation or arbitration that would increase the Fund’s expenses and prevent the Fund’s officers and trustees from focusing their time and efforts on the Fund’s business. Any of the above might subject the Fund to liabilities and thus reduce its returns on the investment with that real estate joint venture partner.

Recourse Financings Risk: In certain cases, financings for the Fund’s commercial real estate properties may be recourse to the Fund. Generally, commercial real estate financings are structured as non-recourse to the borrower, which limits a lender’s recourse to the property pledged as collateral for the loan, and not the other assets of the borrower or to any parent of borrower, in the event of a loan default. However, lenders customarily will require that a creditworthy parent entity enter into so-called “recourse carveout” guarantees to protect the lender against certain bad-faith or other intentional acts of the borrower in violation of the loan documents.

Valuation Risk: The Fund is subject to valuation risk, which is the risk that one or more of the assets in which the Fund invests are priced incorrectly, due to factors such as incomplete data, market instability or human error. If the Fund ascribes a higher value to assets and their value subsequently drops or fails to rise because of market factors, returns on the Fund’s investment may be lower than expected and could experience losses. Within the parameters of the Fund’s valuation guidelines, the valuation methodologies used to value the Fund’s assets, in particular the Fund’s private real estate investments, will involve subjective judgments and projections and that ultimately may not materialize. Ultimate realization of the value of an asset depends to a great extent on economic, market and other conditions beyond the Fund’s control and the control of the investment manager and the Fund’s independent valuation firms. Rapidly changing market conditions or material events may not be immediately reflected in the Fund’s daily NAV.

 

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Active Management Risk. As an actively managed portfolio, the value of the Fund’s investments could decline because the financial condition of an issuer may change (due to such factors as management performance, reduced demand or overall market changes), financial markets may fluctuate or overall prices may decline, or the investment manager’s investment techniques could fail to achieve the Fund’s investment objectives or negatively affect the Fund’s investment performance.

Selection Risk. Different types of stocks tend to shift into and out of favor with stock market investors, depending on market and economic conditions. The performance of funds that invest in value-style stocks may at times be better or worse than the performance of stock funds that focus on other types of stocks or that have a broader investment style.

Cyber Security Risk. With the increased use of technologies such as the Internet and the dependence on computer systems to perform necessary business functions, the Fund and its service providers (including the investment manager) may be susceptible to operational and information security risks resulting from cyber-attacks and/or other technological malfunctions. In general, cyber-attacks are deliberate, but unintentional events may have similar effects. Cyber-attacks include, among others, stealing or corrupting data maintained online or digitally, preventing legitimate users from accessing information or services on a website, releasing confidential information without authorization, gaining unauthorized access to digital systems for purposes of misappropriating assets and causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service. Successful cyber-attacks against, or security breakdowns of, the Fund, the investment manager, or a custodian, transfer agent, or other affiliated or third-party service provider may adversely affect the Fund or its shareholders. For instance, cyber-attacks may interfere with the processing of shareholder transactions, affect the Fund’s ability to calculate its NAV, cause the release of private shareholder information or confidential Fund information, impede trading, cause reputational damage, and subject the Fund to regulatory fines, penalties or financial losses, reimbursement or other compensation costs, and additional compliance costs. Furthermore, as a result of breaches in cyber security or other operational and technology disruptions or failures, an exchange or market may close or issue trading halts on specific securities or an entire market, which may result in the Fund being, among other things, unable to buy or sell certain securities or financial instruments or unable to accurately price its investments. While the Fund has established business continuity plans and systems designed to prevent cyber-attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Similar types of cyber security risks also are present for issuers of securities in which the Fund invests, which could result in material adverse consequences for such issuers, and may cause the Fund’s investment in such securities to lose value.

Each of the Fund and the investment manager may have limited ability to prevent or mitigate cyber-attacks or security or technology breakdowns affecting the Fund’s third-party service providers. While the Fund has established business continuity plans and systems designed to prevent or reduce the impact of cyber-attacks, such plans and systems are subject to inherent limitations.

Geopolitical Risk: Occurrence of global events similar to those in recent years, such as war, terrorist attacks, natural or environmental disasters, country instability, infectious disease epidemics, such as that caused by the COVID-19 virus, market instability, debt crises and downgrades, embargoes, tariffs, sanctions and other trade barriers and other governmental trade or market control programs, the potential exit of a country from its respective union and related geopolitical events, may

 

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result in market volatility and may have long-lasting impacts on both the U.S. and global financial markets. Additionally, those events, as well as other changes in foreign and domestic political and economic conditions, could adversely affect individual issuers or related groups of issuers, securities markets, interest rates, secondary trading, credit ratings, inflation, investor sentiment and other factors affecting the value of the Fund’s investments.

The outbreak of COVID-19 and efforts to contain its spread have resulted in, among other things, extreme volatility in the financial markets and severe losses, reduced liquidity of many instruments, significant travel restrictions, significant disruptions to business operations, supply chains and customer activity, lower consumer demand for goods and services, service and event cancellations, reductions and other changes, strained healthcare systems, as well as general concern and uncertainty. The impact of the COVID-19 outbreak has negatively affected the global economy, the economies of individual countries, and the financial performance of individual issuers, sectors, industries, asset classes, and markets in significant and unforeseen ways. Pandemics may also exacerbate other pre-existing political, social, economic, market and financial risks. The effects of the outbreak in developing or emerging market countries may be greater due to generally less established health care systems and supply chains. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty. The foregoing could impair the Fund’s ability to maintain operational standards (such as with respect to satisfying redemption requests), disrupt the operations of the Fund’s service providers, adversely affect the value and liquidity of the Fund’s investments, and negatively impact the Fund’s performance and your investment in the Fund.

On January 31, 2020, the United Kingdom (UK) withdrew from the European Union (EU) (referred to as Brexit), commencing a transition period that ended on December 31, 2020. The EU-UK Trade and Cooperation Agreement, a bilateral trade and cooperation deal governing the future relationship between the UK and the EU (TCA), provisionally went into effect on January 1, 2021, and entered into force officially on May 1, 2021. Notwithstanding the TCA, following the transition period, there is likely to be considerable uncertainty as to the UK’s post-transition framework, including how the financial markets will react. As this process unfolds, markets may be further disrupted. Given the size and importance of the UK’s economy, uncertainty about its legal, political and economic relationship with the remaining member states of the EU may continue to be a source of instability.

Growing tensions, including trade disputes, between the United States and other nations, or among foreign powers, and possible diplomatic, trade or other sanctions could adversely impact the global economy, financial markets and the Fund. The strengthening or weakening of the U.S. dollar relative to other currencies may, among other things, adversely affect the Fund’s investments denominated in non-U.S. dollar currencies. It is difficult to predict when similar events affecting the U.S. or global financial markets may occur, the effects that such events may have, and the duration of those effects.

Regulatory Risk: The U.S. government has proposed and adopted multiple regulations that could have a long-lasting impact on the Fund and on the mutual fund industry in general. The SEC’s final rules, related requirements and amendments to modernize reporting and disclosure, along with other potential upcoming regulations, could, among other things, restrict the Fund’s ability to engage in transactions and/or increase overall expenses of the Fund. In addition, the SEC, Congress, various exchanges and regulatory and self-regulatory authorities, both domestic and foreign, have undertaken reviews of the

 

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use of derivatives by registered investment companies, which could affect the nature and extent of instruments used by the Fund. While the full extent of all of these regulations is still unclear, these regulations and actions may adversely affect both the Fund and the instruments in which the Fund invests and its ability to execute its investment strategy. Similarly, regulatory developments in other countries may have an unpredictable and adverse impact on the Fund.

The SEC recently adopted Rule 18f-4 under the 1940 Act relating to a registered investment company’s use of derivatives and certain financing transactions (such as reverse repurchase transactions) that could potentially require the Fund to observe more stringent requirements than are currently imposed by the 1940 Act. Among other things, Rule 18f-4 will require funds that invest in derivative instruments beyond a specified limited amount to apply a value-at-risk based limit to their use of certain derivative instruments and financing transactions and to adopt and implement a derivatives risk management program. A fund that uses derivative instruments in a limited amount will not be subject to the full requirements of Rule 18f-4. In connection with the adoption of Rule 18f-4, funds will no longer be required to comply with the asset segregation framework arising from prior SEC guidance for covering certain derivative instruments and related transactions. Rule 18f-4 may substantially curtail the Fund’s ability to use derivative instruments as part of the Fund’s investment strategy and could ultimately prevent the Fund from being able to achieve its investment goals. Compliance with Rule 18f-4 will not be required until approximately August 2022. As the Fund comes into compliance, the Fund’s approach to asset segregation and coverage requirements will be impacted.

Deflation Risk. Deflation risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market valuation of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Fund’s portfolio.

Inflation Risk. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Fund’s shares and distributions thereon can decline. In addition, during any periods of rising inflation, dividend rates of any debt securities issued by the Fund would likely increase, which would tend to further reduce returns to common shareholders.

Loans of Portfolio Securities. Consistent with applicable regulatory requirements and the Fund’s investment restrictions, the Fund may lend its portfolio securities to securities broker-dealers or financial institutions, provided that such loans are callable at any time by the Fund, and are at all times collateralized in accordance with applicable regulatory requirements. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the same time earning interest on the cash amounts deposited as collateral, which will be invested in short term obligations. The Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which its shares are qualified for sale.

Tax Risk. The Fund may invest in preferred securities or other securities the Federal income tax treatment of which may not be clear or may be subject to recharacterization by the Internal Revenue Service. It could be more difficult for the Fund to comply with the tax requirements applicable to regulated investment companies if the tax characterization of the Fund’s investments or the tax treatment of the income from such investments were successfully challenged by the Internal Revenue Service.

 

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Leverage Risk. The Fund currently uses financial leverage for investment purposes by borrowing from BNPP and is also permitted to use other types of financial leverage, such as through the issuance of debt securities or preferred shares and borrowing from other financial institutions. As provided in the 1940 Act and subject to certain exceptions, the Fund may issue additional senior securities (which may be stock, such as preferred shares, and/or securities representing debt) only if immediately after such issuance the value of the Fund’s total assets, less certain ordinary course liabilities, exceeds 300% of the amount of the debt outstanding and exceeds 200% of the amount of preferred shares and debt outstanding.

The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds having a similar investment objectives and policies. These include the possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund. Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make principal or interest payments on borrowings, or to repay borrowings, when it may be disadvantageous to do so. The Fund’s use of leverage may require it to sell portfolio investments at inopportune times in order to raise cash to de-leverage so as to maintain required asset coverage amounts or comply with the mandatory redemption terms of any outstanding preferred shares. The use of leverage magnifies both the favorable and unfavorable effects of price movements in the investments made by the Fund. To the extent that the Fund employs leverage in its investment operations, the Fund is subject to substantial risk of loss. The Fund cannot assure you that borrowings or the issuance of preferred shares will result in a higher yield or return to the holders of the common shares. Also, since the Fund utilizes leverage, a decline in net asset value could affect the ability of the Fund to make common share distributions and such a failure to make distributions could result in the Fund ceasing to qualify as a RIC under the Code. Any decline in the net asset value of the Fund’s investments would be borne entirely by the holders of common shares. Therefore, if the market value of the Fund’s portfolio declines, the leverage will result in a greater decrease in net asset value to the holders of common shares than if the Fund were not leveraged. This greater net asset value decrease will also tend to cause a greater decline in the market price for the common shares. The Fund might be in danger of failing to maintain the required asset coverage of its borrowings or, in an extreme case, the Fund’s current investment income might not be sufficient to meet the interest requirements on the borrowings. In order to counteract such an event, the Fund might need to liquidate investments in order to fund a repayment of some or all of the borrowings. In some market conditions, the Fund may not be able to employ leverage to the extent or at the cost desired. This could prevent the Fund from executing its portfolio strategies or could otherwise depress shareholder returns.

Anti-Takeover Provisions. The Charter and By-Laws of the Fund include provisions that could limit the ability of other entities or persons to acquire control of the Fund or change the Fund’s structure. The provisions may have the effect of depriving common stockholders of an opportunity to sell their shares at a premium over prevailing market prices or have the effect of inhibiting conversion of the Fund to an open-end fund.

LIBOR Risk: Many financial instruments are tied to the London Interbank Offered Rate, or “LIBOR,” to determine payment obligations, financing terms, hedging strategies, or investment value. LIBOR is the offered rate for short-term Eurodollar deposits between major international banks. The Head of the UK Financial Conduct Authority the (FCA) and LIBOR’s administrator, ICE Benchmark Administration (IBA) announced that most LIBOR settings will no longer be published after the end of 2021 and that a majority of U.S. dollar LIBOR settings will no longer be published after June 30, 2023. It is possible that

 

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the FCA may compel the IBA to publish a subset of LIBOR settings after these dates on a “synthetic” basis, but any such publications would be considered non-representative of the underlying market. Alternatives to LIBOR are in development in many major financial markets, including a Secured Overnight Financing Rate (SOFR), a broad measure of secured overnight U.S. Treasury repo rates, which is intended to replace U.S. dollar LIBOR. Bank working groups and regulators in other countries have suggested other alternatives for their markets, including the Sterling Overnight Interbank Average Rate “SONIA” in England. Other countries are introducing their own local-currency-denominated alternative reference rates for short-term lending and global consensus on alternative rates is lacking.

There remains uncertainty and risk regarding the willingness and ability of issuers and lenders to include enhanced provisions in new and existing contracts or instruments, the suitability of the proposed replacement rates, and the process for amending existing contracts and instruments remains unclear. As such, the transition away from LIBOR may lead to increased volatility and illiquidity in markets that are tied to LIBOR, reduced values of, inaccurate valuations of, and miscalculations of payment amounts for LIBOR-related investments or investments in issuers that utilize LIBOR, increased difficulty in borrowing or refinancing and reduced effectiveness of hedging strategies, adversely affecting the Fund’s performance or NAV. In addition, any alternative reference rate may be an ineffective substitute resulting in prolonged adverse market conditions for the Fund. Since the usefulness of LIBOR as a benchmark could deteriorate during the transition period, these effects could occur prior to the cessation of LIBOR publications.

Mortgage- and Asset-Backed Securities. The Fund may invest in mortgage- and asset-backed securities. Mortgage-backed securities are mortgage-related securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities, or issued by non-government entities. Mortgage related securities represent pools of mortgage loans assembled for sale to investors by various government agencies, as well as by non-government issuers such as commercial banks, savings and loan institutions, mortgage bankers and private mortgage insurance companies. Although certain mortgage-related securities are guaranteed by a third party or otherwise similarly secured, the market value of the security, which may fluctuate, is not guaranteed.

Other asset-backed securities are structured like mortgage-backed securities, but instead of mortgage loans or interests in mortgage loans, the underlying assets may include such items as motor vehicle installment sales or installment loan contracts, leases of various types of real and personal property, and receivables from credit card agreements and from sales of personal property. Regular payments received in respect of such securities include both interest and principal. Asset-backed securities typically have no U.S. Government backing. Additionally, the ability of an issuer of asset-backed securities to enforce its security interest in the underlying assets may be limited.

If a Fund purchases a mortgage-backed or other asset-backed security at a premium, that portion may be lost if there is a decline in the market value of the security whether resulting from changes in interest rates or prepayments in the underlying collateral. As with other interest-bearing securities, the prices of such securities are inversely affected by changes in interest rates. Although the value of a mortgage-backed or other asset-backed security may decline when interest rates rise, the converse is not necessarily true, since in periods of declining interest rates the mortgages and loans underlying the securities are prone to prepayment, thereby shortening the average life of the security and shortening the period of time over which income at the higher rate is received. When interest rates are rising, the rate of prepayment tends to decrease, thereby lengthening the period of time over which income at the

 

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lower rate is received. For these and other reasons, a mortgage-backed or other asset-backed security’s average maturity may be shortened or lengthened as a result of interest rate fluctuations and, therefore, it is not possible to predict accurately the security’s return.

Investment Restrictions

Fundamental Investment Restrictions

The Fund has adopted certain investment limitations limiting the following activities except as specifically authorized. Under these limitations, the Fund may not:

 

  1.

Issue senior securities (including borrowing money for other than temporary purposes) except in conformity with the limits set forth in the 1940 Act; or pledge its assets other than to secure such issuances or borrowings or in connection with permitted investment strategies; notwithstanding the foregoing, the Fund may borrow up to an additional 5% of its managed assets for temporary purposes;

 

  2.

Act as an underwriter of securities issued by other persons, except insofar as the Fund may be deemed an underwriter in connection with the disposition of securities;

 

  3.

Purchase or sell real estate, mortgages on real estate or commodities, except that the Fund may invest in securities of companies that deal in real estate or are engaged in the real estate business, including REITs, and securities secured by real estate or interests therein and the Fund may hold and sell real estate or mortgages on real estate acquired through default, liquidation, or other distributions of an interest in real estate as a result of the Fund’s ownership of such securities;

 

  4.

Purchase or sell commodities or commodity futures contracts, except that the Fund may invest in financial futures contracts, options thereon and such similar instruments;

 

  5.

Make loans to other persons except through the lending of securities held by it (but not to exceed a value of one-third of managed assets), through the use of repurchase agreements, and by the purchase of debt securities, all in accordance with its investment policies; and

 

  6.

Invest more than 25% of its managed assets in securities of issuers in any one industry other than the U.S. real estate industry, in which at least 25% of the Fund’s managed assets will be invested; provided, however, that such limitation shall not apply to obligations issued or guaranteed by the United States Government or by its agencies or instrumentalities.

The investment restrictions above have been adopted as fundamental policies of the Fund. Under the 1940 Act, a fundamental policy may not be changed without the approval of the holders of a “majority of the outstanding” voting securities of the Fund.

Additional Non-Fundamental Investment Restrictions

Non-fundamental policies may be changed by the Fund’s Board without shareholder approval. Currently, the Fund may not:

 

  1.

Invest more than 10% of its total assets in debt securities issued or guaranteed by real estate companies;

 

  2.

Pledge, mortgage or hypothecate its assets except in connection with permitted borrowings;

 

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  3.

Acquire or retain securities of any investment company, except up to the limits permitted by Section 12(d)(1) of the 1940 Act or any exemption or acquired as part of a merger.

 

  4.

Invest more than 20% of the Fund’s total assets in preferred stock or debt securities rated below investment grade (commonly known as “junk bonds”) or unrated securities of comparable quality; or

 

  5.

Invest in oil, gas or other mineral exploration programs, development programs or leases, except that the Fund may purchase securities of companies engaging in whole or in part in such activities.

 

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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 investment manager, administrator, co-administrator, custodian and transfer agent. The management of the Fund’s day-to-day operations is delegated to its officers, the investment manager, administrator and co-administrator, subject always to the investment objective and policies of the Fund and to the general supervision of the Board of Directors.

The Board of Directors and officers of the Fund and their principal occupations during at least the past five years are set forth below.

 

Name, Address and

Year of Birth1

  

Position(s) Held

With Fund

  

Term of

Office2

  

Principal Occupation

During At Least

The Past 5 Years

(Including Other

Directorships Held)

  

Number of

Funds Within

Fund

Complex

Overseen by

Director

(Including

the Fund)

    

Length

of Time

Served3

Interested Directors4               

Joseph M. Harvey5

1963

   Director, Chairman    Until Next Election of Directors    President of Cohen & Steers Capital Management, Inc. (CSCM or the Advisor) (since 2003) and President of Cohen & Steers, Inc. (CNS) (since 2004). Chief Investment Officer of CSCM from 2003 to 2019. Prior to that, Senior Vice President and Director of Investment Research of CSCM.      20      Since 2014

Adam M. Derechin6

1964

   Director    Until Next Election of Directors    Chief Operating Officer of CSCM since 2003 and CNS since 2004.      20      Since 2021
Independent Directors            

Michael G. Clark

1965

   Director    Until Next Election of Directors    From 2006 to 2011, President and Chief Executive Officer of DWS Funds and Managing Director of Deutsche Asset Management.      20      Since 2011

George Grossman

1953

   Director    Until Next Election of Directors    Attorney-at-law.      20      Since 1993

(table continued on next page)

 

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(table continued from previous page)

 

Name, Address and

Year of Birth1

  

Position(s) Held

With Fund

  

Term of

Office2

  

Principal Occupation

During At Least

The Past 5 Years

(Including Other

Directorships Held)

  

Number of

Funds Within

Fund

Complex

Overseen by

Director

(Including

the Fund)

  

Length

of Time

Served3

Dean A. Junkans

1959

   Director    Until Next Election of Directors    CFA; Advisor to SigFig (a registered investment advisor) since July, 2018; Adjunct Professor and Executive–In–Residence, Bethel University since 2015; Chief Investment Officer at Wells Fargo Private Bank from 2004 to 2014 and Chief Investment Officer of the Wealth, Brokerage and Retirement group at Wells Fargo & Company from 2011 to 2014; former Member and Chair, Claritas Advisory Committee at the CFA Institute from 2013 to 2015; Board Member and Investment Committee member, Bethel University Foundation since 2010; formerly Corporate Executive Board Member of the National Chief Investment Officers Circle, 2010 to 2015; formerly, Member of the Board of Governors of the University of Wisconsin Foundation, River Falls, 1996 to 2004; U.S. Army Veteran, Gulf War.    20    Since 2015

(table continued on next page)

 

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(table continued from previous page)

 

Name, Address and