<Page>
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: 811-9993
Cohen & Steers Advantage Income Realty Fund, Inc.
(Exact name of registrant as specified in charter)
757 Third Avenue, New York, NY 10017
(Address of principal executive offices) (Zip code)
Robert H. Steers
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, New York 10017
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 832-3232
Date of fiscal year end: December 31
Date of reporting period: December 31, 2002
Item 1. Reports to Stockholders.
The registrant's annual report to shareholders, for the period ended
December 31, 2002, is hereby included.
Item 9. Controls and Procedures.
(b) There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
<Page>
Item 10. Exhibits.
(b) (1) Certification, dated as of February 26, 2003, of Robert H. Steers,
principal executive officer of the registrant.
(b) (2) Certification, dated as of February 26, 2003, of Martin Cohen, principal
financial officer of the registrant.
(b) (3) Certification, dated as of February 26, 2003, of Robert H. Steers, chief
executive officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) (4) Certification, dated as of February 26, 2003, of Martin Cohen, chief
financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
By: /s/ Robert H. Steers, Chairman
Date: February 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert H. Steers, Chairman, Secretary and principal executive officer
Date: February 26, 2003
By: /s/ Martin Cohen, President, Treasurer and principal financial officer
Date: February 26, 2003
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
February 7, 2003
To Our Shareholders:
We are pleased to submit to you our report for the quarter and year ended
December 31, 2002. The net asset value per common share at that date was $13.71.
In addition, during the quarter, three $0.11 per share monthly dividends were
declared and paid to common shareholders.
INVESTMENT REVIEW
For the quarter, Cohen & Steers Advantage Income Realty Fund had a total
return, based on income and change in net asset value, of -1.9%. This compares
to the NAREIT Equity REIT Index's(a) total return of 0.4%. For the year, the
fund's total return was 6.7% compared to NAREIT's 3.8%. In December, the fund
completed its previously announced placement of an additional $51 million of
auction rate cumulative preferred shares. The fund thereafter entered into
interest rate swap transactions that have the economic effect of fixing the cost
of most of this additional leverage at a rate of 3.8% for a nearly six-year
period. The proceeds of this offering have subsequently been invested in
additional REIT common and preferred securities at rates well in excess of the
fund's leveraging costs, which we believe should generate significant
incremental net income to the fund's common shareholders.
For the third year in a row, REITs produced positive absolute returns in a
financial market environment that most equity investors found both challenging
and discouraging. Stock market losses over the past three years reached historic
proportions as expectations for stronger economic growth and, more importantly,
corporate profit growth dimmed continuously throughout the year.
The best performing REIT sectors were those that experienced the highest
earnings growth. Regional mall REITs had a total return of 24.6%, shopping
centers were up 17.8%, and the relatively healthy industrial sector rose 17.4%.
The worst performers were the office and apartment sectors, which returned
-6.3% and -6.2% respectively. For the second year in a row small
capitalization REITs outdistanced larger companies by roughly 9% to 2%, a
phenomenon that in our opinion was more the result of declining interest rates
than superior fundamentals.
The fund's best performing investments were in the regional mall sector, the
shopping center sector and the diversified sector, which generated total returns
of 25.0%, 25.1% and 17.7%, respectively. The common theme among these sectors
was the continued resilience of the consumer even as the economy continued to
weaken throughout the course of the year. Generationally low interest rates
translated into a mortgage refinancing boom, putting more money in consumers'
pockets, clearly a good sign for the retail industry. Conversely, this same
- -------------------
(a) The NAREIT Equity REIT Index is an unmanaged, market capitalization weighted
index of all publicly traded REITs that invest predominantly in the equity
ownership of real estate. The index is designed to reflect the performance
of all publicly traded equity REITs as a whole.
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1
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
phenomenon had dramatically negative implications for the apartment sector, as
home affordability increased and the rate of home ownership reached its highest
level in history. As a result, the fund's apartment investments experienced a
total return of -7.1% during the year. However, we maintained an underweight
position in the apartment sector during the year, so the fund actually benefited
(on a relative basis) from its investment in the apartment sector. Our holdings
in the office sector provided a similar relative benefit, although in the case
of this underperforming sector, what helped our performance most was our stock
selection, as the fund's office investments generated a total return of 1.1% vs.
-5.4% for the overall office sector.
While REIT share prices escaped the throes of the bear market for the year
as a whole, their fundamentals did not. By year end, prices started catching up
with earnings prospects. In the first half of the year, REITs had a 13.5% total
return. By midyear, however, fears of a return to recession, a decline in
earnings expectations, and the growing threats of war shook even REIT investors'
confidence. Toward year end, these fears became justified as vacancy rates began
to rise at a significant rate. Deterioration was experienced in all sectors with
the exception of retail. Consequently, REIT prices retreated, declining by 13.4%
in the four months from July through October. The prospect of a delayed recovery
in real estate fundamentals (and therefore, REIT earnings) until as late as 2004
dictated this correction in prices. Throughout the second half of the year,
earnings estimates for almost all REITs decayed to the point where a modest
decline in REIT industry earnings is expected for 2003.
For the first time in 10 years, expectations of a decline in earnings also
precipitated fears of weakening dividend safety. In fact, two multifamily REITs
reduced their dividends in the fourth quarter. It is expected by many that
several more such cuts, particularly in the apartment sector, are in the offing
this year. Again, the speed with which fundamentals deteriorated for some of
these companies was alarming. At year end 2001, REIT free cash flows covered
dividends by a ratio of 1.5, whereas by year end 2002 this ratio declined to
1.3. We believe it is unlikely to go much lower and, as a result, any notion of
widespread dividend cuts is totally unwarranted in our view. Despite this
cyclical downturn, we believe that our portfolio companies are extremely well
capitalized, well managed and well positioned for a cyclical recovery.
In other developments in 2002, net inflows into REIT mutual funds, at $3.4
billion, plus another $2.3 billion in closed-end REIT funds, were the highest
since 1998 and were consistent throughout the year. This was in contrast to the
persistent flow out of other equity mutual funds. However, despite favorable
investor sentiment REITs raised very little equity capital. There was only one
sizable initial public offering of note, made by Heritage Property Investment
Trust, and $5.8 billion was raised in all other REIT common stock offerings.
Even though interest rates reached and remained at generational lows, REITs in
aggregate did not borrow more in 2002 than in 2001. We believe this lack of
appetite for capital is the result of a shortage of compelling investment
opportunities coupled with a strong investment and capital markets discipline.
Property prices generally rose throughout the year, the result of the strength
of demand for realty investments by those who remained unfazed by moderating
rental income growth. This permitted REITs to transact a record volume of
property sales while at the same time validating our belief that, in general,
REIT stocks continue to trade at discounts to the value of their underlying
assets.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
INVESTMENT OUTLOOK
As has been our outlook for the past year, we believe that economic growth
will continue at a moderate pace over the coming quarters and well into 2004.
With unprecedented fiscal and monetary stimulus already in the system, recently
introduced additional stimulus, a weakening dollar and the upcoming presidential
election in 2004, this case has only grown stronger. Perhaps the largest
uncertainties that remain ahead are the war on terror (which will likely last
for a long time) and the potential war in Iraq (which, if it happens, could be
fairly short). Our sense is that these concerns are already discounted in REIT
share prices and perhaps the overall stock market as well. Nonetheless, they
will likely increase the popularity of a more conservative, income-oriented
approach to investing that emphasizes absolute returns -- an approach that we
believe will favor REITs.
Currently, we face two misperceptions in our industry. The first is that
REIT share prices are disconnected from real estate and REIT fundamentals. On
the contrary, the previously noted REIT market decline in the second half of
last year most likely discounted currently weak fundamentals. We believe that
REIT share prices remain connected with net asset values, which have been buoyed
by the robust private market. Looking forward, the key to investment success in
2003 will be to accurately project the outlook for profit growth in 2004.
Because real estate is an asset class that has considerable visibility, any
profit recovery will be evident well in advance. In our opinion, the key factors
are economic and job growth, and how they translate into improving health for
real estate markets. Just as there was a collapse in demand for space in the
past two years, we expect to see an improvement in demand as the economic
recovery continues to unfold. Because the supply of new space has been
relatively low for many property types, our expectation is that as the year
progresses we will see sequential improvement in occupancy rates, rental rates
and profits for just about every sector of the REIT industry. If the economy
responds as strongly as we expect, real estate fundamentals in some sectors may
potentially recover as fast as they deteriorated last year.
The second misperception is that if stocks do well in 2003, REITs will not.
History simply does not corroborate this assertion and the diversification
benefits of REITs are extant irrespective of the stock market cycle. Whereas
many analysts have tried to predict REIT performance relative to the stock
market, we believe that this is simply not an appropriate comparison. In
addition, the stock market debacle of the past three years has disillusioned
many investors and encouraged greater investment in what are viewed as more
predictable asset classes, such as real estate. The continued demand for
property investments has stabilized private market values, and there are a
growing number of institutional and individual investors seeking to increase
their exposure to the real estate asset class. The proven success of the REIT
format has attracted much of this capital to the public market. Early estimates
indicate that in 2002 REITs garnered over 20% of institutional investor real
estate commitments, more than double that in 2001. Real estate values should
hold up as long as the economy grows, interest rates do not soar, and the demand
for property investment remains strong -- all of which we expect to happen.
Finally, with interest rates and total return expectations generally very low,
achieving one's investment objective primarily through current income, rather
than significant capital appreciation, may well attract even more investors to
REITs.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
The persistent strength of real estate prices has left REITs with very
limited new investment opportunities in many sectors. One result is that we have
seen a return to substantial share buybacks by many REITs. In addition, if REIT
share prices languish, we would fully expect that REITs themselves would be
targets of opportunistic investors. Indeed, toward the close of last year, Simon
Property Group, the nation's largest owner of shopping centers, launched a
hostile acquisition campaign for Taubman Centers. While the outcome of this
contest is still undecided, it is representative of the discounts from asset
value at which many public companies today are selling. We believe that for the
companies with the best quality properties, anything more than a modest discount
from NAV will invite corporate action to close that gap, thereby mitigating a
great deal of downside risk.
In terms of portfolio positioning, we enter 2003 with our largest absolute
and relative weighting in the office sector. The major office owners today are
among the most undervalued in our universe, with excellent balance sheets that
afford them significant financial flexibility. They are selling at the greatest
discounts from net asset value, even greater discounts from replacement cost,
and have high dividend yields that we believe are adequately covered by cash
flows. We are maintaining an underweight position in the apartment sector
because of the persistence of new construction despite continually declining
demand. It is unlikely that we will change this view until we see a meaningful
improvement in the employment picture, preferably coupled with a slowdown in the
surge of single-family home ownership. Our expectations for a stronger economy
warrant a significant representation in both the regional mall and industrial
sectors. We are continuing to avoid the hotel sector until the companies are in
a position to begin paying normalized dividends again.
If there are any lingering doubts about REIT investment characteristics,
REITs' performance in 2002 should have laid them to rest. While some investors
may be tempted to become 'market timers' in response to the high volatility and
poor returns from stocks over the past several years, we believe that they would
be much better served by practicing portfolio diversification. The ability of
REITs to produce attractive absolute returns -- with the majority of returns
coming from income -- has earned them an important role in many investors'
portfolios.
THE TAXATION OF DIVIDENDS
The centerpiece of the Bush administration's recently announced economic
stimulus plan is to eliminate the double taxation of corporate dividends by
making them tax-free at the shareholder level. It is a proposal that, depending
on how it is adopted, could have wide ranging implications for the financial
markets and corporate dividend policies. Although details have not yet been
formulated, it is generally believed that REIT dividends would not be eligible
for this tax-exempt status because REITs do not pay taxes. It is also generally
believed that if REIT dividends remain subject to taxation, REITs would be
somewhat less tax-advantaged than they have been historically with respect to
some parts of the investor universe.
Without knowing the final details (such as whether there will be any
limitations on this exclusion), which indeed we may not know until a bill is
signed into law, it is very difficult to draw any firm conclusions. However,
there are a few points worth making. First, this provision would not remove any
of the intrinsic advantages that
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4
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
REITs currently enjoy -- it essentially leaves them unchanged. Second is that
the majority of shareholders at large, including REIT shareholders, are already
tax-exempt. For pension funds, endowments and retirement accounts, as examples,
the high dividends of REITs will remain at least as attractive, if not more so,
no matter what the tax status is for other securities. And third, we believe the
major determinant of all security prices, including those of REITs, will be
fundamentals. Thus, whatever the outcome of this tax bill, our primary focus
will continue to be the analysis and assessment of real estate fundamentals, and
the impact of these fundamentals on REIT share prices.
Sincerely,
<Table>
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
GREG E. BROOKS
GREG E. BROOKS
Portfolio Manager
</Table>
Cohen & Steers is online at COHENANDSTEERS.COM
We have enhanced both the look and features of our Web site
to give you more information about our company, our funds
and the REIT market in general. Check out our new
interactive Asset Allocation Tool, which allows you to
hypothetically add REITs to any portfolio to see how they
impact expected total returns and risk. Or try the Fund
Performance Calculator and see how our funds have performed
versus the S&P 500 Index or Nasdaq Composite. As always, you
can also get daily net asset values, fund fact sheets,
portfolio highlights, recent news articles and our overall
insights on the REIT market.
So visit us today at COHENANDSTEERS.COM
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2002
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD(a)
--------- ------------ --------
EQUITIES 150.43%
COMMON STOCK 110.28%
DIVERSIFIED 4.41%
Colonial Properties Trust.................... 454,400 $ 15,422,336 7.78%
------------
HEALTH CARE 15.69%
Health Care Property Investors............... 300,700 11,516,810 8.67
Health Care REIT............................. 491,000 13,281,550 8.65
Nationwide Health Properties................. 1,003,100 14,976,283 12.32
Ventas....................................... 1,320,100 15,115,145 8.30
------------
54,889,788
------------
INDUSTRIAL 4.94%
First Industrial Realty Trust................ 493,200 13,809,600 9.79
Keystone Property Trust...................... 204,300 3,466,971 7.66
------------
17,276,571
------------
OFFICE 37.35%
Arden Realty................................. 529,100 11,719,565 9.12
Brandywine Realty Trust...................... 475,900 10,379,379 8.07
CarrAmerica Realty Corp. .................... 528,800 13,246,440 7.98
Crescent Real Estate Equities Co. ........... 970,400 16,147,456 9.01
Equity Office Properties Trust............... 403,100 10,069,438 8.01
Highwoods Properties......................... 750,500 16,586,050 10.59
Mack-Cali Realty Corp. ...................... 658,100 19,940,430 8.32
Prentiss Properties Trust.................... 576,300 16,297,764 7.92
Vornado Realty Trust......................... 437,700 16,282,440 7.31
------------
130,668,962
------------
OFFICE/INDUSTRIAL 11.46%
Kilroy Realty Corp. ......................... 92,200 2,125,210 8.59
Liberty Property Trust....................... 640,000 20,441,600 7.51
Reckson Associates Realty Corp. ............. 75,000 1,578,750 8.08
Reckson Associates Realty Corp. -- Class B... 712,500 15,960,000 11.56
------------
40,105,560
------------
</Table>
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(a) Dividend yield is computed by dividing the security's current annual
dividend rate by the last sale price on the principal exchange, or market,
on which such security trades. The dividend yield has not been audited by
PricewaterhouseCoopers LLP.
See accompanying notes to financial statements.
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6
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2002
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- ------------ --------
RESIDENTIAL -- APARTMENT 11.41%
Apartment Investment & Management
Co. -- Class A............................. 243,200 $ 9,115,136 8.75%
Archstone-Smith Trust........................ 319,900 7,530,446 7.26
AvalonBay Communities........................ 90,000 3,522,600 7.15
Gables Residential Trust..................... 340,400 8,486,172 9.67
Home Properties of New York.................. 152,200 5,243,290 7.08
Post Properties.............................. 159,300 3,807,270 7.53
Summit Properties............................ 125,700 2,237,460 7.58
------------
39,942,374
------------
SELF STORAGE 6.13%
Public Storage -- Series A................... 802,400 21,440,128 9.17
------------
SHOPPING CENTER 18.89%
COMMUNITY CENTER 5.84%
Developers Diversified Realty Corp. ......... 45,800 1,007,142 6.91
Federal Realty Investment Trust.............. 155,700 4,378,284 6.90
Kramont Realty Trust......................... 800,000 11,720,000 8.87
Urstadt Biddle Properties -- Class A......... 300,000 3,324,000 7.58
------------
20,429,426
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REGIONAL MALL 13.05%
Glimcher Realty Trust........................ 309,100 5,486,525 10.82
Macerich Co. ................................ 704,700 21,669,525 7.41
Mills Corp. ................................. 509,000 14,934,060 7.46
Taubman Centers.............................. 219,400 3,560,862 6.41
------------
45,650,972
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TOTAL SHOPPING CENTER........................ 66,080,398
------------
TOTAL COMMON STOCK (Identified
cost -- $384,740,940)................. 385,826,117
------------
PREFERRED STOCK 40.15%
DIVERSIFIED 0.15%
Colonial Properties Trust, 8.75%, Series A... 12,600 315,252 8.75
Colonial Properties Trust, 9.25%, Series C... 8,200 214,840 8.82
------------
530,092
------------
</Table>
See accompanying notes to financial statements.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2002
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- ------------ --------
FINANCE 1.90%
iStar Financial, 9.375%, Series B............ 91,200 $ 2,325,600 9.18%
iStar Financial, 9.20%, Series C............. 55,700 1,414,780 9.06
iStar Financial, 8.00%, Series D............. 121,500 2,897,775 8.39
------------
6,638,155
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HEALTH CARE 4.78%
Health Care REIT, 8.875%, Series B........... 17,600 441,056 8.86
Nationwide Health Properties, 7.677%,
Series P................................... 221,000 16,271,125 10.43
------------
16,712,181
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HOTEL 4.18%
FelCor Lodging Trust, $1.95, Series A
(Convertible).............................. 114,500 2,387,325 9.35
FelCor Lodging Trust, 9.00%, Series B........ 55,400 1,362,840 9.15
Host Marriott Corp., 10.00%, Series B........ 2,500 64,125 9.75
Host Marriott Corp., 10.00%, Series C........ 25,300 654,005 9.67
Innkeepers USA, 8.625%, Series A............. 200,500 4,852,100 8.93
LaSalle Hotel Properties, 10.25%, Series A... 200,000 5,300,000 9.66
------------
14,620,395
------------
OFFICE 8.66%
Alexandria Real Estate Equities, 9.10%,
Series B................................... 53,900 1,407,868 8.73
CarrAmerica Realty Corp., 8.55%, Series C.... 30,000 758,400 8.47
Crescent Real Estate Equities Co., 6.75%,
Series A (Convertible)..................... 371,300 7,166,090 8.76
HRPT Properties Trust, 8.75%, Series B....... 128,000 3,269,120 8.57
Highwoods Properties, 8.625%, Series A....... 18,550 17,703,656 9.04
------------
30,305,134
------------
OFFICE/INDUSTRIAL 5.98%
PS Business Parks, 9.50%, Series D(a)........ 800,000 20,920,000 9.10
------------
</Table>
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(a) 238,000 shares segregated as collateral for the interest rate swap
transactions (Note 6).
See accompanying notes to financial statements.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2002
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- ------------ --------
RESIDENTIAL -- APARTMENT 8.97%
Apartment Investment & Management Co.,
9.00%, Series C............................ 14,600 $ 364,270 9.02%
Apartment Investment & Management Co.,
8.75%, Series D............................ 58,100 1,437,975 8.85
Apartment Investment & Management Co.,
9.375%, Series G........................... 52,800 1,382,304 8.94
Apartment Investment & Management Co.,
9.50%, Series H............................ 10,500 264,810 9.44
Apartment Investment & Management Co.,
10.10%, Series Q........................... 18,600 492,900 9.55
Apartment Investment & Management Co.,
10.00%, Series R(b)........................ 917,500 24,084,375 9.52
Mid-America Apartment Communities, 9.50%,
Series A................................... 15,600 396,630 9.32
Mid-America Apartment Communities, 8.875%,
Series B................................... 58,300 1,451,670 8.92
Mid-America Apartment Communities, 9.375%,
Series C................................... 61,100 1,528,111 9.36
------------
31,403,045
------------
SHOPPING CENTER 5.53%
COMMUNITY CENTER 1.37%
Developers Diversified Realty Corp.,
8.68%, Series D............................ 1,000 25,320 8.57
Developers Diversified Realty Corp.,
8.60%, Series F............................ 100,000 2,580,000 8.33
Federal Realty Investment Trust, 8.50%,
Series B................................... 20,100 517,575 8.27
New Plan Excel Realty Trust, 7.80%,
Series D................................... 20,000 948,750 8.22
Realty Income Corp., 9.375%, Series B........ 28,000 726,600 9.02
------------
4,798,245
------------
OUTLET CENTER 0.46%
Chelsea Property Group, 8.375%, Series A..... 33,800 1,611,838 8.79
------------
REGIONAL MALL 3.70%
Crown American Realty Trust, 11.00%,
Series A................................... 125,600 6,951,960 9.94
Mills Corp., 9.00%, Series B................. 83,800 2,157,850 8.74
Mills Corp., 9.00%, Series C(c).............. 85,000 2,125,000 9.00
Rouse Co., 9.25%, Series Z................... 17,700 448,695 9.11
Taubman Centers, 8.30%, Series A............. 51,100 1,244,285 8.54
------------
12,927,790
------------
TOTAL SHOPPING CENTER........................ 19,337,873
------------
TOTAL PREFERRED STOCK (Identified
cost -- $132,967,469)................. 140,466,875
------------
TOTAL EQUITIES (Identified
cost -- $517,708,409)................. 526,292,992
------------
</Table>
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(b) 191,000 shares segregated as collateral for the interest rate swap
transactions (Note 6).
(c) The fund prices this security at fair value using procedures approved by the
fund's board of directors.
See accompanying notes to financial statements.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2002
<Table>
<Caption>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
----------- -------------
CORPORATE BOND 1.51%
Host Marriott LP, 9.50%, due 1/15/07............... $ 3,700,000 $ 3,852,625
LNR Property Corp., 10.50%, due 1/15/09............ 500,000 507,500
New Plan Realty Trust, 6.90%, due 2/15/28.......... 1,000,000 930,893
-------------
TOTAL CORPORATE BOND (Identified
cost -- $4,968,932)......................... 5,291,018
-------------
COMMERCIAL PAPER 4.91%
United Bank of Switzerland Financial, 1.13%, due
01/02/03 (Identified cost -- $17,151,461)........ 17,152,000 17,151,461
-------------
TOTAL INVESTMENTS (Identified
cost -- $539,828,802) ............................ 156.85% 548,735,471
LIABILITIES IN EXCESS OF OTHER ASSETS ............. (6.54)% (22,878,603)
LIQUIDATION VALUE OF AUCTION RATE CUMULATIVE PREFERRED
SHARES SERIES M, SERIES W, and SERIES TH (Equivalent
to $25,000 per share based on 2,500 shares outstanding
for Series M and Series W and 2,040 shares outstanding
for Series TH) ................................. (50.31)% (176,000,000)
-------------
NET ASSETS -- COMMON STOCK (Equivalent to $13.71 per share
based on 25,521,922 shares of capital stock
outstanding) ..................................... 100.00% $ 349,856,868
-------------
-------------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
10
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2002
<Table>
ASSETS:
Investments in securities, at value (Identified
cost -- $539,828,802) (Note 1)....................... $548,735,471
Cash.................................................... 909
Dividends and interest receivable....................... 3,409,479
Receivable for investment securities sold............... 22,665
Other assets............................................ 26,255
------------
Total Assets....................................... 552,194,779
------------
LIABILITIES:
Payable for investment securities purchased............. 13,813,638
Unrealized depreciation on interest rate swap
transactions (Note 6)................................ 11,947,298
Payable to investment manager........................... 182,353
Payable for dividends declared on preferred shares...... 74,422
Interest payable on interest rate swap transactions..... 52,210
Other liabilities....................................... 267,990
------------
Total Liabilities.................................. 26,337,911
------------
LIQUIDATION VALUE OF PREFERRED SHARES:
Auction rate cumulative preferred shares, Series M
($25,000 liquidation value, $0.001 par value, 2,500
shares issued and outstanding) (Notes 1 and 5)....... 62,500,000
Auction rate cumulative preferred shares, Series W
($25,000 liquidation value, $0.001 par value, 2,500
shares issued and outstanding) (Notes 1 and 5)....... 62,500,000
Auction rate cumulative preferred shares, Series TH
($25,000 liquidation value, $0.001 par value, 2,040
shares issued and outstanding) (Notes 1 and 5)....... 51,000,000
------------
176,000,000
------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES................ $349,856,868
------------
------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES consist of:
Common stock ($0.001 par value, 25,521,922 shares issued
and outstanding) (Notes 1 and 5)..................... $347,557,898
Accumulated net realized gain on investments............ 5,339,599
Net unrealized depreciation on investments and interest
rate swap transactions............................... (3,040,629)
------------
$349,856,868
------------
------------
NET ASSET VALUE PER COMMON SHARE:
($349,856,868[div]25,521,922 shares outstanding)........ $ 13.71
------------
------------
MARKET PRICE PER COMMON SHARE............................... $ 14.02
------------
------------
MARKET PRICE PREMIUM TO NET ASSET VALUE PER COMMON SHARE.... 2.26%
------------
------------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
11
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
<Table>
Investment Income (Note 1):
Dividend income......................................... $ 41,332,280
Interest income......................................... 565,810
------------
Total Income....................................... 41,898,090
------------
Expenses:
Investment management fees (Note 2)..................... 4,183,337
Interest expense on interest rate swap transactions
(Note 6)............................................. 3,614,482
Administration fees (Note 2)............................ 208,687
Reports to shareholders................................. 169,226
Professional fees....................................... 99,416
Custodian fees and expenses............................. 44,929
Directors' fees and expenses (Note 2)................... 41,382
Transfer agent fees..................................... 21,677
Miscellaneous........................................... 372,902
------------
Total Expenses..................................... 8,756,038
Reduction of Expenses (Note 2).......................... (2,067,061)
------------
Net Expenses....................................... 6,688,977
------------
Net Investment Income....................................... 35,209,113
------------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain on investments........................ 13,425,608
Net change in unrealized depreciation on investments.... (11,224,910)
Net change in unrealized depreciation on interest rate
swap transactions.................................... (10,141,661)
------------
Net realized and unrealized gain/(loss) on
investments..................................... (7,940,963)
------------
Net Increase Resulting from Operations...................... 27,268,150
------------
Less Dividends and Distributions to Preferred Stock
Shareholders from:
Net investment income................................... (2,351,365)
------------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $ 24,916,785
------------
------------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
12
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES
<Table>
<Caption>
FOR THE PERIOD
FOR THE MAY 31, 2001(a)
YEAR ENDED THROUGH
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Change in Net Assets Applicable to Common
Shares:
From Operations:
Net investment income.................. $ 35,209,113 $ 20,476,953
Net realized gain/(loss) on
investments......................... 13,425,608 (23,889,564)
Net change in unrealized
appreciation/(depreciation) on
investments and interest rate swap
transactions........................ (21,366,571) 18,325,942
------------ ------------
Net increase resulting from
operations...................... 27,268,150 14,913,331
------------ ------------
Less Dividends and Distributions to
Preferred
Shareholders from:
Net investment income.................. (2,351,365) (1,691,250)
------------ ------------
Net increase in net assets from
operations applicable to common
shares.......................... 24,916,785 13,222,081
Less Dividends and Distributions to Common
Shareholders from:
Net investment income.................. (32,631,285) (14,417,520)
Tax return of capital.................. -- (3,540,737)
------------ ------------
Total dividends and distributions
to common stock shareholders.... (32,631,285) (17,958,257)
------------ ------------
Capital Stock Transactions (Note 5):
Increase in net assets from common
share transactions.................. -- 355,315,090
Increase in net assets from shares
issued to common shareholders for
reinvestment of dividends........... 6,745,672 2,748,440
Decrease in net assets from
underwriting commissions and
offering expenses from issuance of
preferred shares.................... (785,092) (1,816,841)
------------ ------------
Net increase in net assets from
capital stock transactions...... 5,960,580 356,246,689
------------ ------------
Total increase/(decrease) in net
assets applicable to common
shares.......................... (1,753,920) 351,510,513
Net Assets Applicable to Common Shares:
Beginning of period.................... 351,610,788 100,275
------------ ------------
End of period.......................... $349,856,868 $351,610,788
------------ ------------
------------ ------------
</Table>
- -------------------
(a) Commencement of Operations.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
13
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a common share outstanding
throughout each period and other performance information derived from the
financial statements. It should be read in conjunction with the Financial
Statements and notes thereto.
<Table>
<Caption>
FOR THE PERIOD
FOR THE MAY 31, 2001(a)
YEAR ENDED THROUGH
PER SHARE OPERATING PERFORMANCE: DECEMBER 31, 2002 DECEMBER 31, 2001
- -------------------------------- ----------------- -----------------
Net asset value per common share, beginning of period....... $ 14.03 $ 14.33
-------- --------
Income from investment operations:
Net investment income................................... 1.30 0.75
Net realized and unrealized gain/(loss) on
investments........................................... (0.21) (0.13)
-------- --------
Total income from investment operations............. 1.09 0.62
-------- --------
Less dividends and distributions to preferred shareholders
from:
Net investment income................................... (0.09) (0.07)
-------- --------
Total from investment operations applicable to
common shares..................................... 1.00 0.55
-------- --------
Less: Offering and organization costs charged to paid-in
capital -- common shares.................................. -- (0.03)
Offering and organization costs charged to paid-in
capital -- preferred shares............................... (0.03) (0.07)
Dilutive effect of common share offering................. -- (0.03)
-------- --------
Total offering and organization costs............... (0.03) (0.13)
-------- --------
Less: dividends and distributions to common shareholders
from:
Net investment income.................................... (1.29) (0.58)
Tax return of capital.................................... -- (0.14)
-------- --------
Total dividends and distributions to common
shareholders...................................... (1.29) (0.72)
-------- --------
Net decrease in net asset value per common share............ (0.32) (0.30)
-------- --------
Net asset value, per common share, end of period............ $ 13.71 $ 14.03
-------- --------
-------- --------
Market value, per common share, end of period............... $ 14.02 $ 14.70
-------- --------
-------- --------
Net asset value total return(b)............................. 6.72% 3.27%(c)
-------- --------
-------- --------
Market value return(b)...................................... 4.16% 3.15%(c)
-------- --------
-------- --------
</Table>
- -------------------
(a) Commencement of operations.
(b) Dividends and distributions, if any, are assumed for purposes of this
calculation, to be reinvested at prices obtained under the fund's dividend
reinvestment plan. Total net asset value return measures the changes in
value over the period indicated, taking into account dividends as
reinvested.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
14
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS -- (CONTINUED)
<Table>
<Caption>
FOR THE PERIOD
FOR THE MAY 31, 2001(a)
YEAR ENDED THROUGH
DECEMBER 31, 2002 DECEMBER 31, 2001
RATIOS/SUPPLEMENTAL DATAA; ----------------- -----------------
Net assets applicable to common shares, end of period (in
millions)................................................. $ 349.9 $ 351.6
-------- --------
-------- --------
Ratio of expenses to average daily net assets applicable to
common shares (before expense reduction).................. 2.41% 1.93%(d)
-------- --------
-------- --------
Ratio of expenses to average daily net assets applicable to
common shares (net of expense reduction).................. 1.84% 1.40%(d)
-------- --------
-------- --------
Ratio of net investment income to average daily net assets
applicable to common shares (before expense reduction).... 9.13% 9.59%(d)
-------- --------
-------- --------
Ratio of net investment income to average daily net assets
applicable to common shares (net of expense reduction).... 9.70% 10.12%(d)
-------- --------
-------- --------
Ratio of expenses to average daily managed assets (before
expense reduction)(e)..................................... 1.78% 1.52%(d)
-------- --------
-------- --------
Ratio of expenses to average daily managed assets (net of
expense reduction)(e)..................................... 1.36% 1.10%(d)
-------- --------
-------- --------
Portfolio turnover rate..................................... 22.27% 23.95%(c)
-------- --------
-------- --------
PREFERRED SHARES:
- ----------------
Liquidation value, end of period (in 000's)................. $176,000 $125,000
-------- --------
-------- --------
Total shares outstanding (in 000's)......................... 7 5
-------- --------
-------- --------
Asset coverage per share.................................... $ 74,695 $ 95,322
-------- --------
-------- --------
Liquidation preference per share............................ $ 25,000 $ 25,000
-------- --------
-------- --------
Average market value per share(f)........................... $ 25,000 $ 25,000
-------- --------
-------- --------
</Table>
- -------------------
(c) Not annualized.
(d) Annualized.
(e) Represents net assets applicable to common shares plus liquidation
preference of preferred shares.
(f) Based on weekly prices.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
15
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Advantage Income Realty Fund, Inc. (the fund) was
incorporated under the laws of the State of Maryland on June 21, 2000 and is
registered under the Investment Company Act of 1940, as amended, as a
closed-end, nondiversified management investment company. The fund had no
operations until May 15, 2001 when it sold 7,000 shares of common stock for
$100,275 to Cohen & Steers Capital Management, Inc. (the investment manager).
Investment operations commenced on May 31, 2001.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the board of directors shall determine in good faith
to reflect its fair market value.
Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. (Nasdaq) national
market system are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
manager to be over-the-counter, but excluding securities admitted to trading on
the Nasdaq National List, are valued at the mean of the current bid and asked
prices as reported by Nasdaq, the National Quotations Bureau or such other
comparable sources as the board of directors deems appropriate to reflect their
fair market value. However, certain fixed-income securities may be valued on the
basis of prices provided by a pricing service when such prices are believed by
the board of directors to reflect the fair market value of such securities.
Where securities are traded on more than one exchange and also over-the-counter,
the securities will generally be valued using the quotations the board of
directors believes reflect most closely the value of such securities.
Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost which approximates value.
- --------------------------------------------------------------------------------
16
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest Rate Swaps: The fund uses interest rate swaps in connection with
the sale of auction rate cumulative preferred shares. In an interest rate swap,
the fund agrees to pay the other party to the interest rate swap (which is known
as the counterparty) a fixed rate payment in exchange for the counterparty
agreeing to pay the fund a variable rate payment that is intended to approximate
the fund's variable rate payment obligation on the auction rate cumulative
preferred shares. The payment obligation is based on the notional amount of the
swap. Depending on the state of interest rates in general, the use of interest
rate swaps could enhance or harm the overall performance of the common shares.
The market value of interest rate swaps is based on pricing models that consider
the time value of money, volatility, the current market and contractual prices
of the underlying financial instrument.
Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost for accounting and tax purposes.
Interest income is recorded on the accrual basis. Dividend income is recorded on
the ex-dividend date. Discounts and premiums of securities purchased are
amortized using the scientific method over their respective lives.
Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid to common shareholders monthly. Distributions to
shareholders are recorded on the ex-dividend date. A portion of the fund's
dividend may consist of amounts in excess of net investment income derived from
nontaxable components of the dividends from the fund's portfolio investments.
Net realized capital gains, unless offset by any available capital loss
carryforward, are distributed to shareholders annually.
Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. federal income tax regulations which may
differ from generally accepted accounting principles.
Preferred shares pay dividends based on a variable interest rate set at
auctions, normally held every seven days. Dividends for preferred shares are
accrued for the subsequent seven day period on the auction date. In most
instances, dividends are payable every seven days, on the first business day
following the end of the dividend period.
Federal Income Taxes: It is the policy of the fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for federal income or excise tax is necessary.
NOTE 2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS
WITH AFFILIATES.
Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
investment manager) serves as the investment manager to the fund, pursuant to an
investment management agreement (the management agreement). The investment
manager furnishes a continuous investment program for the fund's portfolio,
makes the day-to-day investment decisions for the fund and generally manages the
fund's investments in accordance with the stated polices of the fund, subject to
the general supervision of the board of directors of the fund. For the
- --------------------------------------------------------------------------------
17
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
services under the management agreement, the fund pays the investment manager a
management fee, computed daily and paid monthly at an annual rate of 0.85% of
the fund's average daily managed asset value. Managed asset value is the net
asset value of the common shares plus the liquidation preference of the
preferred shares. For the year ended December 31, 2002, the fund incurred
investment management fees of $4,183,337.
The investment manager has contractually agreed to waive its investment
management fee in the amount of 0.42% of average daily managed asset value for
the first five fiscal years of the fund's operations, 0.35% of average daily
managed asset value in year six, 0.28% of average daily managed asset value in
year seven, 0.21% of average daily managed asset value in year eight, 0.14% of
average daily managed asset value in year nine and 0.07% of average daily
managed asset value in year 10. As long as this expense cap continues, it may
lower the fund's expenses and increase its total return. For the year ended
December 31, 2002, the investment manager waived management fees of $2,067,061.
Administration Fees: Pursuant to an administration agreement, the investment
manager also performs certain administrative and accounting functions for the
fund and receives a fee of 0.02% of the fund's average daily managed asset
value. For the year ended December 31, 2002, the fund incurred $98,432 in
administration fees.
Director's Fees: Certain directors and officers of the fund are also
directors, officers and/or employees of the investment manager. None of the
directors and officers so affiliated received compensation from the fund for
their services. Fees and related expenses accrued for nonaffiliated directors
totaled $41,382 for the year ended December 31, 2002.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments, for the
year ended December 31, 2002, totaled $164,383,573 and $109,407,199,
respectively.
NOTE 4. INCOME TAXES
The fund did not have a return of capital for the year ended December 31,
2002. Short-term capital gains are reflected in the financial statements as
realized gains on investments but are typically reclassified as ordinary income
for tax purposes.
- --------------------------------------------------------------------------------
18
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The dividends and distributions to shareholders are characterized for tax
purposes as follows:
<Table>
<Caption>
For the Year Ended
December 31,
-------------------------
2002 2001
---- ----
Preferred Shareholders:
Ordinary Income.............................. $ 2,351,365 $ 1,691,250
----------- -----------
----------- -----------
Common Shareholders:
Ordinary income.............................. $32,631,285 $14,417,520
Tax return of capital........................ -- 3,540,737
----------- -----------
Total dividends and distributions to
shareholders......................... $32,631,285 $17,958,257
----------- -----------
----------- -----------
</Table>
At December 31, 2002 the cost of investments and net unrealized appreciation
for federal income tax purposes were as follows:
<Table>
Aggregate cost.................................... $530,220,806
------------
------------
Gross unrealized appreciation..................... $ 38,025,941
Gross unrealized depreciation..................... (19,511,276)
------------
Net unrealized appreciation on investments........ 18,514,665
Net unrealized depreciation on interest rate swap
transactions.................................... (11,947,298)
------------
Net unrealized appreciation....................... $ 6,567,367
------------
------------
</Table>
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to return of capital and capital gain
distributions received by the fund on portfolio securities. To the extent such
differences are permanent in nature, such amounts are reclassified within the
capital accounts. During the year ended December 31, 2002, the fund decreased
undistributed net investment income by $226,463, decreased paid-in capital by
$11,208,909 and increased accumulated net realized gain on investments by
$11,435,372.
For the year ended December 31, 2002, the fund utilized capital loss
carryovers of $17,627,058. At December 31, 2002, the fund had tax basis capital
losses of $4,268,396 which may be carried over to offset future capital gains
and which expire in 2009.
NOTE 5. CAPITAL STOCK
The fund is authorized to issue 100 million shares of common stock at a par
value of $0.001 per share.
On May 31, 2001 the fund completed the initial public offering of 22,000,000
shares of common stock. Proceeds paid to the fund amounted to $314,490,000 after
deduction of underwriting commissions and offering expenses of $15,510,000.
- --------------------------------------------------------------------------------
19
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On June 19, 2001, the fund completed a subsequent offering of 2,000,000
shares of common stock. Proceeds paid to the fund amounted to $28,590,000 after
deduction of underwriting commissions and offering expenses of $1,410,000.
On July 9, 2001, the fund's underwriters exercised an option to purchase an
additional 855,900 shares. Proceeds paid to the fund amounted to $12,235,090
after deduction of underwriting commissions and offering expenses of $603,410.
During the period May 31, 2001 (commencement of operations) through December
31, 2001, the fund issued 196,566 shares of common stock for the reinvestment of
dividends.
During the year ended December 31, 2002, the fund issued 462,456 shares of
common stock for the reinvestment of dividends.
The fund's articles of incorporation authorize the issuance of an unlimited
number of fund preferred shares, par value $0.001 per share, in one or more
classes or series, with rights as determined by the board of directors, by
action of the board of directors without the approval of the common
shareholders.
On July 25, 2001, the fund issued 2,500 auction rate cumulative preferred
shares, Series M (par value $0.001) and 2,500 auction rate cumulative preferred
shares, series W (par value $0.001). Proceeds paid to the fund amounted to
$123,183,159 after deduction of underwriting commissions and offering expenses
of $1,816,841. This issue has received a 'AAA/Aaa'rating from Standard & Poor's
and Moody's.
On December 13, 2002, the fund issued 2,040 auction rate cumulative
preferred shares, Series TH (par value $0.001). Proceeds paid to the fund
amounted to $50,214,908 after deduction of underwriting commissions and offering
expenses of $785,092. This issue has received a 'AAA/Aaa' rating from Standard &
Poor's and Moody's.
The fund's articles of incorporation authorize the issuance of an unlimited
number of fund preferred shares, par value $0.001 per share, in one or more
classes or series, with rights as determined by the board of directors, by
action of the board of directors without the approval of the common
shareholders.
Preferred shares are senior to the fund's common shares and will rank on a
parity with shares of any other series of preferred shares, and with shares of
any other series of preferred stock of the fund, as to the payment of dividends
and the distribution of assets upon liquidation. If the fund does not timely
cure a failure to (1) maintain a discounted value of its portfolio equal to the
preferred shares basic maintenance amount, as required by the fund's articles
supplementary for preferred shares (2) maintain the 1940 Act preferred shares
asset coverage, or (3) file a required certificate related to asset coverage on
time, the preferred shares will be subject to a mandatory redemption at the
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon to the date fixed for redemption. To the extent
permitted under the 1940 Act and Maryland Law, the fund at its option may
without consent of the holders of preferred shares, redeem preferred shares
having a dividend period of one year or less, in whole, or in part, on the
business day after the last day of such dividend period upon not less than 15
calendar days and not more than 40 calendar days prior to notice.
- --------------------------------------------------------------------------------
20
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The optional redemption price is $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon to the date fixed for redemption.
The fund's common shares and preferred shares have equal voting rights of
one vote per share and vote together as a single class. In addition, the
affirmative vote of the holders of a majority, as defined in the 1940 Act, of
the outstanding preferred shares shall be required to (1) approve any plan of
reorganization that would adversely affect the auction rate cumulative preferred
shares and (2) any matter that materially and adversely affects the rights,
preferences, or powers of that series.
NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS
The fund has entered into five interest rate swap agreements with Salomon
Swapco Inc. Under the agreements the fund receives a floating rate of interest
and pays a respective fixed rate of interest on the nominal values of the swaps.
Details of the swaps at December 31, 2002 are as follows:
<Table>
<Caption>
NOTIONAL FLOATING RATE(a) UNREALIZED
AMOUNT FIXED RATE (RATE RESET MONTHLY) TERMINATION DATE DEPRECIATION
------ ---------- -------------------- ----------------- ------------
$31,250,000 5.3025% 1.4200% July 30, 2006 $ (2,926,092)
$19,125,000 3.4065% 1.4200% June 18, 2007 (335,665)
$31,250,000 5.5920% 1.4200% July 30, 2008 (3,772,912)
$19,125,000 4.0800% 1.4200% December 18, 2009 (471,578)
$31,250,000 5.8240% 1.4200% July 30, 2011 (4,441,051)
------------
$(11,947,298)
------------
------------
</Table>
- -------------------
(a) Based on LIBOR (London Interbank Offered Rate).
- --------------------------------------------------------------------------------
21
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Cohen & Steers Advantage Income Realty Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Cohen & Steers Advantage Income
Realty Fund, Inc. (the 'Fund') at December 31, 2002, the results of its
operations for the year then ended, the changes in its net assets and the
financial highlights for the year then ended and for the period May 31, 2001
(commencement of operations) to December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 2002 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 7, 2003
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<Page>
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
AVERAGE ANNUAL TOTAL RETURNS(a)
(PERIODS ENDED DECEMBER 31, 2002)
<Table>
<Caption>
SINCE INCEPTION
ONE YEAR (5/31/01)
-------- ---------
6.72% 6.32%
</Table>
REINVESTMENT PLAN
We urge shareholders who want to take advantage of this plan
and whose shares are held in 'street name' to consult your
broker, as soon as possible to determine if you must change
registration into your own name to participate
Notice is hereby given in accordance with Section 23(c) of
the Investment Company Act of 1940 that the fund may
purchase, from time to time, shares of its common stock in
the open market
- -------------------
(a) Based on net asset value.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
DIVIDEND REINVESTMENT PLAN
The fund has a dividend reinvestment plan (the plan) commonly referred to as
an 'opt-out' plan. Each shareholder will have all distributions of dividends and
capital gains automatically reinvested in additional common shares by EquiServe
Trust Company, NA as agent for common shareholders pursuant to the plan (the
plan agent), unless they elect to receive cash. The plan agent will either
(i) effect purchases of common shares under the plan in the open market or
(ii) distribute newly issued common shares of the fund. Shareholders who elect
not to participate in the plan will receive all distributions in cash paid by
check mailed directly to the shareholder of record (or if the shares are held in
street or other nominee name, then to the nominee) by the plan agent, as
dividend disbursing agent. Shareholders whose common shares are held in the name
of a broker or nominee should contact the broker or nominee to determine whether
and how they may participate in the plan.
The plan agent serves as agent for the common shareholders in administering
the plan. After the fund declares a dividend or makes a capital gain
distribution, the plan agent will, as agent for the participants, either
(i) receive the cash payment and use it to buy common shares in the open market,
on the NYSE or elsewhere, for the participants' accounts or (ii) distribute
newly issued common shares of the Fund on behalf of the participants. The plan
agent will receive cash from the fund with which to buy common shares in the
open market if, on the determination date, the net asset value per share exceeds
the market price per share plus estimated brokerage commissions on that date.
The plan agent will receive the dividend or distribution in newly issued common
shares of the fund if, on the determination date, the market price per share
plus estimated brokerage commissions equals or exceeds the net asset value per
share of the fund on that date. The number of shares to be issued will be
computed at a per share rate equal to the greater of (i) the net asset value or
(ii) 95% of the closing market price per share on the payment date.
Participants in the plan may withdraw from the plan upon written notice to
the plan agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a distribution record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the plan or upon termination of the plan as provided below, certificates
for whole common shares credited to his or her account under the plan will be
issued and a cash payment will be made for any fraction of a common share
credited to such account. In the alternative, upon receipt of the participant's
instructions, common shares will be sold and the proceeds sent to the
participant less brokerage commissions and any applicable taxes.
The plan agent maintains each common shareholder's account in the plan and
furnishes confirmations of all acquisitions made for the participant as soon as
practicable but no later than 60 days. Common shares in the account of each plan
participant will be held by the plan agent on behalf of the participant. Proxy
material relating to shareholders' meetings of the fund will include those
shares purchased as well as shares held pursuant to the plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
common shares for others who are the beneficial owners, the plan agent will
administer the plan on the basis of the number of common shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are participants in the plan. Common
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
shares may be purchased through any of the underwriters, acting as broker or,
after the completion of this offering, dealer.
The plan agent's fees for the handling of reinvestment of dividends and
other distributions will be paid by the fund. Each participant will pay a pro
rata share of brokerage commissions incurred with respect to the plan agent's
open market purchases in connection with the reinvestment of distributions.
There are no other charges to participants for reinvesting dividends or capital
gain distributions. See 'Taxation.'
The automatic reinvestment of dividends and other distributions will not
relieve participants of any income tax that may be payable or required to be
withheld on such dividends or distributions.
Experience under the plan may indicate that changes are desirable.
Accordingly, the fund reserves the right to amend or terminate the plan as
applied to any distribution paid subsequent to written notice of the change sent
to all shareholders of the fund at least 90 days before the record date for the
dividend or distribution. The plan also may be amended or terminated by the plan
agent by at least 90 days' written notice to all shareholders of the fund. All
correspondence concerning the plan should be directed to the plan agent at
(telephone 800-426-5523).
ADDITIONAL INFORMATION
During the period, there have been no material changes in the fund's
investment objectives or fundamental policies that have not been approved by the
shareholders. There have been no changes in the fund's charter or by-laws that
would delay or prevent a change in control of the fund which have not been
approved by shareholders. There have been no changes in the principal risk
factors associated with the investment in the fund.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
PRIVACY POLICY
The fund is committed to maintaining the privacy of its shareholders
and to safeguarding their personal information. The following is provided
to help you understand what personal information the fund collects, how we
protect that information, and why in certain cases we may share this
information with others.
The fund does not receive any personal information relating to shareholders
who purchase shares through an intermediary that acts as the record owner
of the shares. In the case of shareholders who are record owners of the
fund, to conduct and process your business in an accurate and efficient
manner, we must collect and maintain certain personal information about
you. This is the information we collect on applications or other forms, and
from the transactions you make with us.
The fund does not disclose any personal information about its shareholders
or former shareholders to anyone, except as required or permitted by law
or as is necessary to service shareholder accounts. We will share
information with organizations, such as the fund's transfer agent, that
assist the fund in carrying out its daily business operations. These
organizations will use this information only for purposes of providing the
services required or as otherwise as may be required by law. These
organizations are not permitted to share or use this information for any
other purpose. In addition, the fund restricts access to personal
information about its shareholders to employees of the investment manager
who have a legitimate business need for the information.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
INFORMATION ABOUT FUND DIRECTORS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
OVERSEEN
WITHIN THE
POSITION(S) HELD TERM OF LENGTH OF PRINCIPAL OCCUPATION(S) FUND
NAME, ADDRESS AND AGE WITH FUND OFFICE TIME SERVED DURING PAST FIVE YEARS COMPLEX
- ------------------------ ------------------ ----------- ----------- ----------------------- ----------
Robert H. Steers ....... Director, chairman 2003 Since Chairman of Cohen & 8
757 Third Avenue and secretary inception Steers Capital
New York, New York Management, Inc., the
Age: 49 fund's investment
manager.
Martin Cohen ........... Director, 2004 Since President of Cohen & 8
757 Third Avenue president and inception Steers Capital
New York, New York treasurer Management, Inc., the
Age: 54 fund's investment
manager.
Gregory C. Clark ....... Director 2005 Since Private Investor. Prior 8
99 Jane Street inception thereto, President of
New York, New York Wellspring Management
Age: 55 Group (investment
advisory firm).
Bonnie Cohen ........... Director 2005 Since Consultant. Prior 8
1824 Phelps Place, N.W. inception thereto, Undersecretary
Washington, D.C. of State, United States
Age: 60 Department of State.
George Grossman ........ Director 2003 Since Attorney-at-law. 8
17 Elm Place inception
Rye, New York
Age: 49
Richard J. Norman ...... Director 2004 Since Private Investor. Prior 8
7520 Hackamore Drive inception thereto, Investment
Potomac, Maryland Representative of
Age: 59 Morgan Stanley Dean
Witter.
Willard H. Smith, Jr. .. Director 2005 Since Director. Board member 8
7231 Encelia Drive inception of Essex Property
La Jolla, California Trust, Inc., Highwoods
Age: 66 Properties, Inc. and
Realty Income
Corporation. Managing
director at Merrill
Lynch & Co., Equity
Capital Markets
Division from 1983 to
1995.
</Table>
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
MEET THE COHEN & STEERS FAMILY OF OPEN-END FUNDS:
<Table>
FOR HIGH CURRENT INCOME: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
EQUITY INCOME FUND REALTY SHARES
IDEAL FOR INVESTORS SEEKING A HIGH DIVIDEND IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
YIELD AND CAPITAL APPRECIATION, INVESTING RETURN THROUGH BOTH CURRENT INCOME AND
PRIMARILY IN REITS CAPITAL APPRECIATION, INVESTING PRIMARILY IN
A, B, C AND I SHARES AVAILABLE REITS
SYMBOLS: CSEIX, CSBIX, CSCIX, CSDIX SYMBOL: CSRSX
FOR CAPITAL APPRECIATION: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
------------------ -----------------
SPECIAL EQUITY FUND INSTITUTIONAL REALTY SHARES
IDEAL FOR INVESTORS SEEKING MAXIMUM CAPITAL IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
APPRECIATION, INVESTING IN A LIMITED NUMBER RETURN THROUGH BOTH CURRENT INCOME AND
OF REITS AND OTHER REAL ESTATE COMPANIES CAPITAL APPRECIATION, INVESTING PRIMARILY IN
CONCENTRATED, HIGHLY FOCUSED PORTFOLIO REITS
SYMBOL: CSSPX OFFERS LOW TOTAL EXPENSE RATIO
HIGHER MINIMUM PURCHASE REQUIRED
SYMBOL: CSRIX
FOR MORE INFORMATION ABOUT ANY COHEN & STEERS FUND
OR TO OBTAIN A PROSPECTUS PLEASE CONTACT US AT:
1-800-330-REIT, OR VISIT OUR WEB SITE AT COHENANDSTEERS.COM
THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT EACH FUND INCLUDING ALL CHARGES AND EXPENSES,
AND SHOULD BE READ CAREFULLY BEFORE YOU INVEST.
COHEN & STEERS SECURITIES, LLC, DISTRIBUTOR
</Table>
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
<Table>
OFFICERS AND DIRECTORS KEY INFORMATION
Robert H. Steers INVESTMENT MANAGER
Director and Chairman Cohen & Steers Capital Management, Inc.
757 Third Avenue
Martin Cohen New York, NY 10017
Director and President (212) 832-3232
Gregory C. Clark FUND SUBADMINISTRATOR AND CUSTODIAN
Director State Street Bank and Trust Company
225 Franklin Street
Bonnie Cohen Boston, MA 02110
Director
TRANSFER AGENT -- COMMON SHARES
George Grossman Equiserve Trust Company
Director 150 Royall Street
Canton, MA 02021
Richard J. Norman (800) 426-5523
Director
TRANSFER AGENT -- PREFERRED SHARES
Willard H. Smith Jr. The Bank of New York
Director 100 Church Street
New York, NY 10007
Adam Derechin
Vice President and assistant LEGAL COUNSEL
treasurer Simpson Thacher & Bartlett
425 Lexington Avenue
Lawrence B. Stoller New York, NY 10017
Assistant secretary
New York Stock Exchange Symbol: RLF
Web site: cohenandsteers.com
This report is for shareholder
information. This is not a prospectus
intended for use in the purchase or
sale of fund shares. Past performance is of
course no guarantee of future results and your
investment may be worth more or less at the
time you sell.
</Table>
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29
<Page>
COHEN & STEERS
ADVANTAGE INCOME REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
ADVANTAGE INCOME REALTY FUND
------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 2002
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................. 'SS'
The division sign shall be expressed as....................................[div]