<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: June 30, 2003
Item 1. Reports to Stockholders.
The registrant's semi-annual report to shareholders, for the period ended June
30, 2003, is hereby included.
Item 9. Controls and Procedures.
(b) There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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Item 10. Exhibits.
(a)(2)(i) Certification, dated as of August 19, 2003, of Robert H. Steers,
principal executive officer of the registrant.
(a)(2)(ii) Certification, dated as of August 19, 2003, of Martin Cohen,
principal financial officer of the registrant.
(b) (1) Certification, dated as of August 19, 2003, of Robert H. Steers, chief
executive officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) (2) Certification, dated as of August 19, 2003, of Martin Cohen, chief
financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
By: /s/ Robert H. Steers, Chairman
Date: August 19, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert H. Steers, Chairman, Secretary and principal executive
officer
Date: August 19, 2003
By: /s/ Martin Cohen, President, Treasurer and principal financial
officer
Date: August 19, 2003
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
July 23, 2003
To Our Shareholders:
We are pleased to submit to you our report for the quarter and six months
ended June 30, 2003. The net asset value at that date was $15.59. In addition,
during the quarter, three $0.115 per share monthly dividends were declared and
paid.
MIDYEAR REVIEW
For the quarter, Cohen & Steers Advantage Income Realty Fund had a total
return, based on income and change in net asset value, of 18.9%. This compares
to the NAREIT Equity REIT Index's(a) total return of 13.1%. For the six months
ended June 30, 2003, the fund's total return was 19.1%, compared to NAREIT's
13.9%.
At long last, nearly every sector of the U.S. financial markets provided
exceptional returns in the second quarter. REITs extended their winning streak
to over three years, and posted their best quarterly return since the fourth
quarter of 1996. In addition, the stock market arose from its three year slump
and posted its best performance (15.4% total return for the S&P 500 Index) since
the fourth quarter of 1998. Bonds extended what has now been, effectively, a
22-year bull market, with the 30-year Treasury bond registering a total return
of 5.4%.
There was an avalanche of geopolitical and economic news in the past three
months, most of it with positive implications. War in Iraq abated while steps
toward peace in the Middle East were promising. Congress passed tax cut
legislation, with a great deal of benefit going to investors by virtue of
lowered levies on dividends and capital gains. Interest rates reached their
lowest level in over 50 years, as the Fed's accommodative monetary policy
continued unabated. Consumer and business confidence clearly began to rise, and
more Americans now own homes than ever before.
While these positive developments have yet to ignite job creation, capital
spending and strong overall economic growth -- with the exception of
housing -- we believe that forecasts for accelerated growth in the second half
of 2003 and beyond have clearly gained credibility. We believe this renewed
optimism has helped the outlook for both real estate and REITs.
We are very pleased with our performance relative to our benchmarks. The
strongest contributors to our out-performance were our overweight in the
regional mall sector and our underweight in the apartment, hotel and self
storage sectors. Also contributing to our out-performance was our stock
selection in the health care, apartment and industrial sectors. Our investment
in REIT preferred stocks detracted from our performance, as the total return of
these securities, though positive, lagged that of the overall REIT market.
REITs are operating in an environment that they have never before
experienced. In nearly all of the previous cycles that we can remember, when
coming out of a recession real estate fundamentals have been dismal, property
owners were in distress, and equity and debt capital was unavailable at a
reasonable price as investors and lenders shunned the asset class. In this
cycle, however, there is virtually no distress on the part of any major property
owners. While there is no doubt that real estate fundamentals are
weak -- vacancy rates are high and many property-level cash flows have been flat
or declining -- fundamentals are more disparate across sectors than we
- -------------------
(a) The NAREIT Equity REIT Index is an unmanaged, market-capitalization-weighted
index of all publicly traded REITs that invest predominantly in the equity
ownership of real estate. The index is designed to reflect the performance
of all publicly traded equity REITs as a whole.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
have ever seen coming out of a recession. Most notable is the retail sector
where occupancies and rents remain very strong. Instead of capital fleeing the
industry, it is now more plentiful than ever and has never carried a lower cost.
Investors that have been waiting for an opportunity to acquire assets at bargain
prices have been disappointed, as prices have remained firm, or even risen,
nearly across the board.
Consequently, the opportunity set for REITs is entirely different from past
history. Instead of an asset pricing opportunity, property owners now have a
liability pricing opportunity. Record low interest rates have allowed REITs to
refinance existing higher cost debt and boost earnings, just as homeowners and
homebuyers have been doing as they finance and refinance their mortgages. In
addition, REITs have been able to take advantage of the strong demand for
property by selling assets, enabling them to reposition and upgrade the quality
of their portfolios, while simultaneously strengthening their balance sheets.
For some investors, REITs themselves are the opportunity -- there were four
major acquisitions of public REITs in the first half of the year, and we suspect
that there will be even more merger and acquisition activity in the second half
of the year.
The strong REIT equity market offered renewed opportunities in the first
half of the year. Two initial public offerings were completed in late June, as
American Financial Realty and Maguire Properties together raised $1.4 billion in
common stock. This compares to just one IPO in 2002 (Heritage Properties), which
raised $450 million. Lower interest rates enabled REITs to tap the preferred
stock market as $1.7 billion was raised in the first half of 2003, compared to
$1.2 billion in the first half of 2002. Much of this capital was used to
refinance, at lower rates, preferred issues that reached their call dates. An
important source of demand for these securities has been mutual funds
specializing strictly in preferred stocks. REITs also issued $6.8 billion of
unsecured debt, mostly at historically low interest rates.
Despite such market conditions, equity issuance was modest in the first half
of the year, as was demand for REIT shares. Common equity issuance, at $1.4
billion, was at a historical low and well below last year's $2.1 billion pace at
mid-year. Capital flows into real estate mutual funds were $1.6 billion,
compared to $2.5 billion in the first half of 2002. Largely due to capital
appreciation, real estate mutual fund assets stood at a record $20 billion at
mid-year, up from $15 billion just six months ago. Some observers have suggested
that REITs were relatively disadvantaged by the recent tax bill's exclusion of
REITs from the lowered 15% dividend tax rate for investors, because REITs
already don't pay taxes at the corporate level. Nonetheless their substantial
dividend yield potential (still superior to nearly all alternatives on an
after-tax basis) and growth potential have enabled REITs to remain the
investment of choice for many real estate and income-oriented investors.
Finally, the matter of corporate governance has become one of the most
important issues in the financial world. As the nation's leading REIT investor
and a very long-term holder of these securities, we view corporate governance as
one of our most important responsibilities. While REITs in general tend to score
rather well in comparison to other industries, many concerns remain. In the
proxy-voting period of 2003, Cohen & Steers voted in opposition to management
proposals or directors on 22 separate occasions. Most of these related to poison
pills, board classification and independence, and compensation. Our emphasis on
corporate governance issues is not new; in 2002 we voted in opposition to
management 17 times, and in 2001, 21 times.
INVESTMENT OUTLOOK
In our opinion, the single most important investment variable today relates
to the current interest rate climate and the prospect of a low-return
environment for the foreseeable future. We have experienced a secular
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
re-pricing of the cost of money, as the inflation risk premium has effectively
been extinguished from the bond market. As short-term interest rates approach
zero, investors, savers, retirees, pension funds, foundations and endowments,
and a host of financial managers are at a loss to find appropriate means to
fulfill both long-term and short-term obligations. For example, a recent survey
by Morgan Stanley Research found that nearly 90% of the 292 S&P 500 component
companies they surveyed have annual return expectations of 8% or more for their
pension fund assets. These obligations simply cannot be satisfied through U.S.
Treasury or investment grade corporate debt securities whose coupons are far
below this minimum return expectation. The experience of the equity markets over
the past several years has served to rein in exposure to the volatility and low
current income of stocks in general. Ironically, despite this aversion to the
risk of equity markets, there has been a marked shift towards alternative and
riskier investments, including high yield bonds, commodities, foreign
securities, hedge funds and other vehicles, a trend that, frankly, we have
difficulty figuring out.
In today's market environment, many investors are finding REITs to be a very
appealing asset class. Offering the potential for high income, tangible
underlying asset value, low correlation to other assets and long-term growth,
REITs are becoming increasingly more appreciated by investors. Further, we
believe that the prudent use of leverage -- which is plentiful today at a modern
record low cost -- by real estate owners and investors has helped real estate
prices have remained firm despite weak fundamentals. Moreover, in our view, it
explains why REITs are trading closer to some analysts' net asset value
estimates than might otherwise be expected.
The entire notion of net asset value is subject to considerable debate. It
is our opinion that many analysts are underestimating REIT NAVs because they are
ignoring three important variables. First, the capitalization rate used to value
current rental streams and the discount rate used to value future rental streams
are at a low point in history, suggesting that higher valuations are warranted.
Second is the replacement cost of REIT assets. From Class A downtown office
buildings to dominant regional malls, the cost to replace these
assets -- assuming that one could at all -- far exceeds most current value
estimates of such properties. And third, since we believe we are just beginning
new economic and real estate growth cycles, investors should consider the
potential for real assets to appreciate as economic conditions improve. With
little or no speculative building taking place, except in the apartment sector,
it is unlikely that there will be a glut of new space coming on to the market
just as demand is increasing. This should necessarily precipitate an increase in
occupancy rates, rents and asset values.
In our view, the key to continued positive returns from REITs is the future
course of the U.S. economy. As mentioned, signs of a recovery are beginning to
emerge. In light of the massive fiscal and monetary stimulus currently in place,
we are confident that in the coming quarters the economy will demonstrate
increasing strength.
With respect to strategy, we are encouraged that our office sector holdings
are beginning to produce positive results. In our opinion, we are early in this
cycle and are making few changes except with respect to some individual
holdings. We believe that regional malls, the stars of the REIT industry over
the past three years, are likely to show the strongest earnings growth and
therefore remain a slight overweight position. We continue to maintain a
well-below market position in the shopping center sector, based on our belief
that this sector is currently trading at the greatest premium to net asset value
in our universe. Additionally, we remain underweight in the apartment sector,
due to low demand created by ongoing incentives for, and the unparalleled
attractiveness of, single-family home ownership.
In light of the continued bull market for bonds, which only seemed to
accelerate during the second quarter, some comments regarding our thoughts on
REIT preferred stocks are in order. The good news for REITs is that
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
strength in the bond market and demand generated by significant capital entering
the market have presented very attractively priced opportunities. Many companies
have taken advantage by issuing new preferreds, with proceeds being used to
redeem higher-priced existing preferreds and for other corporate purposes.
However, these factors have made REIT preferred stocks less attractive. As a
result, we marginally reduced our allocation to REIT preferreds during the
quarter. Subsequent to quarter-end, we have observed a reversal in the strength
of the bond market, and will look to take advantage if REIT preferred pricing
adjusts accordingly.
When any sector performs as well as -- and for as long as -- REITs have, an
abundance of skeptics invariably appear, both among industry analysts as well as
outside observers. We remain firm in our belief that we are at the beginning of
a new cycle and that real estate owners are entering the new cycle in a very
strong position. Further, we are not inclined to be market timers because we
have not seen any timing strategies that have been consistently successful. We
are confident that REITs will continue to play an important role in investors'
portfolio needs.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
GREG E. BROOKS
GREG E. BROOKS
Portfolio Manager
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Cohen & Steers is online at cohenandsteers.com
We have enhanced both the look and features of our Web site to give you
more information about our company, our funds and the REIT market in
general. Check out our interactive Asset Allocation Tool, which allows
you to hypothetically add REITs to any portfolio to see how they impact
expected total returns and risk. Or try the Fund Performance Calculator
and see how our funds have performed versus the S&P 500 Index or Nasdaq
Composite. As always, you can also get daily net asset values, fund fact
sheets, portfolio highlights, recent news articles and our overall
insights on the REIT market.
So visit us today at cohenandsteers.com
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 2003 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD(a)
--------- ------------ --------
EQUITIES 144.69%
COMMON STOCK 108.01%
DIVERSIFIED 14.09%
Colonial Properties Trust.................. 367,900 $ 12,946,401 7.56%
Crescent Real Estate Equities Co........... 970,400 16,118,344 9.03
iStar Financial............................ 157,400 5,745,100 7.26
Vornado Realty Trust....................... 496,200 21,634,320 6.24
------------
56,444,165
------------
HEALTH CARE 14.06%
Health Care Property Investors............. 355,700 15,063,895 7.84
Health Care REIT........................... 280,200 8,546,100 7.67
Nationwide Health Properties............... 799,400 12,734,442 9.29
Ventas..................................... 1,320,100 19,999,515 7.06
------------
56,343,952
------------
INDUSTRIAL 3.88%
First Industrial Realty Trust.............. 372,500 11,771,000 8.67
Keystone Property Trust.................... 204,300 3,781,593 7.02
------------
15,552,593
------------
OFFICE 32.61%
Arden Realty............................... 529,100 13,730,145 7.78
Brandywine Realty Trust.................... 633,100 15,586,922 7.15
CarrAmerica Realty Corp.................... 580,800 16,152,048 7.19
Equity Office Properties Trust............. 777,800 21,008,378 7.40
Highwoods Properties....................... 750,500 16,736,150 7.62
Mack-Cali Realty Corp...................... 682,200 24,818,436 6.93
Maguire Properties......................... 231,600 4,458,300 8.31
Prentiss Properties Trust.................. 606,500 18,188,935 7.47
------------
130,679,314
------------
</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.
See accompanying notes to financial statements.
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5
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2003 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- ------------ --------
OFFICE/INDUSTRIAL 10.03%
Kilroy Realty Corp......................... 92,200 $ 2,535,500 7.20%
Liberty Property Trust..................... 604,000 20,898,400 6.94
Reckson Associates Realty Corp............. 75,000 1,564,500 8.15
Reckson Associates Realty Corp. -- Class B. 712,500 15,176,250 12.16
------------
40,174,650
------------
RESIDENTIAL -- APARTMENT 12.34%
Archstone-Smith Trust...................... 651,300 15,631,200 7.13
AvalonBay Communities...................... 178,800 7,624,032 6.57
Camden Property Trust...................... 185,600 6,486,720 7.27
Gables Residential Trust................... 385,900 11,665,757 7.97
Home Properties of New York................ 171,600 6,047,184 6.92
Mid-America Apartment Communities.......... 900 24,309 8.66
Post Properties............................ 74,500 1,974,250 6.79
------------
49,453,452
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SELF STORAGE 5.76%
Public Storage -- Series A................. 802,400 22,788,160 8.63
Sovran Self Storage........................ 9,700 305,550 7.62
------------
23,093,710
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SHOPPING CENTER 15.24%
COMMUNITY CENTER 5.51%
Heritage Property Investment Trust......... 217,300 5,884,484 7.75
Kramont Realty Trust....................... 800,000 13,200,000 7.88
Urstadt Biddle Properties -- Class A....... 231,600 2,978,376 6.53
------------
22,062,860
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REGIONAL MALL 9.73%
Glimcher Realty Trust...................... 336,100 7,528,640 8.57
Macerich Co................................ 450,300 15,819,039 6.49
Mills Corp................................. 466,400 15,647,720 6.74
------------
38,995,399
------------
TOTAL SHOPPING CENTER...................... 61,058,259
------------
TOTAL COMMON STOCK (Identified
cost -- $390,109,386)............... 432,800,095
------------
</Table>
See accompanying notes to financial statements.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2003 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- ------------ --------
PREFERRED STOCK 36.68%
DIVERSIFIED 3.42%
Colonial Properties Trust, 9.25%, Series
C....................................... 8,300 $ 223,685 8.57%
Crescent Real Estate Equities Co., 6.75%,
Series A (Convertible).................. 371,300 8,094,340 7.75
iStar Financial, 9.375%, Series B.......... 52,700 1,335,945 9.23
iStar Financial, 9.20%, Series C........... 49,900 1,274,945 9.00
iStar Financial, 8.00%, Series D........... 111,000 2,789,430 7.96
------------
13,718,345
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HEALTH CARE 4.37%
Health Care REIT, 8.875%, Series B......... 17,600 439,472 8.89
Nationwide Health Properties, 7.677%,
Series P................................ 221,000 17,072,250 9.94
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17,511,722
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HOTEL 3.55%
FelCor Lodging Trust, $1.95, Series A
(Convertible)........................... 114,500 2,249,925 9.92
FelCor Lodging Trust, 9.00%, Series B...... 36,000 794,880 10.19
Host Marriott Corp., 10.00%, Series B...... 2,100 52,500 10.00
Host Marriott Corp., 10.00%, Series C...... 22,200 554,334 10.01
Innkeepers USA, 8.625%, Series A........... 200,500 5,062,625 8.55
LaSalle Hotel Properties, 10.25%, Series A. 200,000 5,520,000 9.28
------------
14,234,264
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INDUSTRIAL 0.47%
Keystone Property Trust, 9.125%, Series D.. 67,500 1,873,125 8.22
------------
OFFICE 6.04%
Alexandria Real Estate Equities, 9.10%,
Series B................................ 53,900 1,522,675 8.07
CarrAmerica Realty Corp., 8.55%, Series
C....................................... 30,000 761,100 8.44
HRPT Properties Trust, 8.75%, Series B..... 128,000 3,526,400 7.95
Highwoods Properties, 8.625%, Series A..... 18,550 18,399,281 8.70
------------
24,209,456
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OFFICE/INDUSTRIAL 5.48%
PS Business Parks, 9.50%, Series D(a)...... 800,000 21,968,000 8.67
------------
</Table>
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(a) 324,000 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)
JUNE 30, 2003 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- ------------ --------
RESIDENTIAL -- APARTMENT 7.92%
Apartment Investment & Management Co.,
8.75%, Series D......................... 58,100 $ 1,463,539 8.69%
Apartment Investment & Management Co.,
9.375%, Series G........................ 52,800 1,459,920 8.46
Apartment Investment & Management Co.,
9.50%, Series H......................... 10,500 263,970 9.47
Apartment Investment & Management Co.,
10.10%, Series Q........................ 18,600 502,386 9.37
Apartment Investment & Management Co.,
10.00%, Series R(a)..................... 917,500 25,001,875 9.17
Mid-America Apartment Communities,
8.875%, Series B........................ 58,300 1,472,075 8.79
Mid-America Apartment Communities,
9.375%, Series C........................ 61,100 1,559,883 9.17
------------
31,723,648
------------
SHOPPING CENTER 5.43%
COMMUNITY CENTER 1.64%
Developers Diversified Realty Corp., 8.68%,
Series D................................ 1,000 25,320 8.57
Developers Diversified Realty Corp., 8.60%,
Series F................................ 100,000 2,686,000 8.00
Federal Realty Investment Trust, 8.50%,
Series B................................ 20,100 546,720 7.83
New Plan Excel Realty Trust, 7.80%, Series
D....................................... 20,000 1,032,500 7.55
Realty Income Corp., 9.375%, Series B...... 28,000 738,080 8.88
Urstadt Biddle Properties, 8.50%, Series C,
144A(b)................................. 16,000 1,559,760 8.72
------------
6,588,380
------------
OUTLET CENTER 0.46%
Chelsea Property Group, 8.375%, Series A... 33,800 1,825,200 7.76
------------
REGIONAL MALL 3.33%
Crown American Realty Trust, 11.00%, Series
A....................................... 125,600 7,404,120 9.33
Mills Corp., 9.00%, Series B............... 83,800 2,304,500 8.18
Mills Corp., 9.00%, Series C............... 85,000 2,337,500 8.18
Taubman Centers, 8.30%, Series A........... 51,100 1,285,165 8.27
------------
13,331,285
------------
TOTAL SHOPPING CENTER...................... 21,744,865
------------
TOTAL PREFERRED STOCK (Identified
cost -- $132,903,274)............... 146,983,425
------------
TOTAL EQUITIES (Identified
cost -- $523,012,660)............... 579,783,520
------------
</Table>
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(a) 266,000 shares segregated as collateral for the interest rate swap
transactions (Note 6).
(b) As of June 30, 2003, this security is subject to Rule 144A and is pending
registration with the Securities and Exchange Commission. The fund prices
this security at fair value using procedures approved by the fund's board of
directors.
See accompanying notes to financial statements.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2003 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
---------- ------------
CORPORATE BOND 1.13%
Host Marriott LP, 9.50%, due 1/15/07.............. $3,700,000 $ 3,996,000
LNR Property Corp., 10.50%, due 1/15/09........... 500,000 538,750
------------
TOTAL CORPORATE BOND
(Identified cost -- $4,211,492)............ 4,534,750
------------
COMMERCIAL PAPER 0.67%
State Street Boston Corp., 1.10%, due 7/1/03
(Identified cost -- $2,694,000)................ 2,694,000 2,694,000
------------
TOTAL INVESTMENTS (Identified
cost -- $529,918,152) ........................... 146.49% 587,012,270
LIABILITIES IN EXCESS OF OTHER ASSETS ............ (2.57)% (10,306,747)
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)....................... (43.92)% (176,000,000)
------------
NET ASSETS -- COMMON STOCK (Equivalent to $15.59
per share based on 25,709,535 shares of capital
stock outstanding) .............................. 100.00% $400,705,523
------------
------------
</Table>
See accompanying notes to financial statements.
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2003 (UNAUDITED)
<Table>
ASSETS:
Investments in securities, at value (Identified
cost -- $529,918,152) (Note 1)....................... $587,012,270
Cash.................................................... 586
Dividends and interest receivable....................... 3,181,497
Receivable for investment securities sold............... 1,868,266
Other assets............................................ 30,925
------------
Total Assets....................................... 592,093,544
------------
LIABILITIES:
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6)......................... 14,876,041
Payable to investment manager........................... 200,932
Payable for investment securities purchased............. 129,148
Payable for dividends declared on preferred shares...... 57,625
Other liabilities....................................... 124,275
------------
Total Liabilities.................................. 15,388,021
------------
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................ $400,705,523
------------
------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES consist of:
Common stock ($0.001 par value, 25,709,535 shares issued
and outstanding)
(Notes 1 and 5)...................................... $350,275,169
Undistributed net investment income..................... 3,140,472
Accumulated net realized gain on investments............ 5,071,805
Net unrealized appreciation/(depreciation) on
investments and interest rate swap transactions...... 42,218,077
------------
$400,705,523
------------
------------
NET ASSET VALUE PER COMMON SHARE:
($400,705,523[div]25,709,535 shares outstanding)........ $ 15.59
------------
------------
MARKET PRICE PER COMMON SHARE............................... $ 16.16
------------
------------
MARKET PRICE PREMIUM TO NET ASSET VALUE PER COMMON SHARE.... 3.66%
------------
------------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
10
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
<Table>
Investment Income (Note 1):
Dividend income......................................... $23,113,052
Interest income......................................... 258,959
-----------
Total Income....................................... 23,372,011
-----------
Expenses:
Investment management fees (Note 2)..................... 2,242,579
Auction agent fees...................................... 229,730
Reports to shareholders................................. 165,133
Administration fees (Note 2)............................ 106,898
Professional fees....................................... 74,491
Custodian fees and expenses............................. 33,588
Directors' fees and expenses (Note 2)................... 21,785
Transfer agent fees and expenses........................ 11,322
Miscellaneous........................................... 48,144
-----------
Total Expenses..................................... 2,933,670
Reduction of Expenses (Note 2).......................... (1,108,098)
-----------
Net Expenses....................................... 1,825,572
-----------
Net Investment Income....................................... 21,546,439
-----------
Net Realized and Unrealized Gain/(Loss) on Investments (Note
1):
Net realized gain on investments........................ 2,123,475
Net realized loss on interest rate swap transactions.... (2,443,479)
Net change in unrealized appreciation on investments.... 48,187,449
Net change in unrealized depreciation on interest rate
swap transactions.................................... (2,876,533)
-----------
Net realized and unrealized gain/(loss) on
investments..................................... 44,990,912
-----------
Net Increase Resulting from Operations...................... 66,537,351
-----------
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (1,122,671)
-----------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $65,414,680
-----------
-----------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
11
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES (UNAUDITED)
<Table>
<Caption>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31, 2002
---------------- ------------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income................... $ 21,546,439 $38,823,595(a)
Net realized gain/(loss) on investments
and interest rate swap
transactions......................... (320,004) 9,848,823(a)
Net change in unrealized
appreciation/(depreciation) on
investments and interest rate swap
transactions......................... 45,310,916 (21,404,268)(a)
------------ ------------
Net increase in net assets
resulting from operations........ 66,537,351 27,268,150
------------ ------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income................... (1,122,671) (2,351,365)
------------ ------------
Net increase in net assets from
operations applicable to common
shares........................... 65,414,680 24,916,785
------------ ------------
Less Dividends and Distributions to Common
Shareholders from:
Net investment income................... (17,283,296) (32,631,285)
------------ ------------
Capital Stock Transactions (Note 5):
Increase in net assets from shares
issued to common shareholders for
reinvestment of dividends............ 2,717,271 6,745,672
Decrease in net assets from underwriting
commissions and offering expenses
from issuance of preferred shares.... -- (785,092)
------------ ------------
Net increase in net assets from
capital stock transactions....... 2,717,271 5,960,580
------------ ------------
Total increase/(decrease) in net
assets applicable to common
shares........................... 50,848,655 (1,753,920)
Net Assets Applicable to Common Shares:
Beginning of period..................... 349,856,868 351,610,788
------------ ------------
End of period........................... $400,705,523 $349,856,868
------------ ------------
------------ ------------
</Table>
- -------------------
(a) See Note 1.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
12
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.
<Table>
<Caption>
FOR THE PERIOD
FOR THE FOR THE MAY 31, 2001(a)
SIX MONTHS ENDED YEAR ENDED THROUGH
PER SHARE OPERATING PERFORMANCE: JUNE 30, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
- -------------------------------- ------------- ----------------- -----------------
Net asset value per common share, beginning of
period...................................... $13.71 $14.03 $14.33
------ ------ ------
Income from investment operations:
Net investment income..................... 0.85 1.44 (b) 0.80 (b)
Net realized and unrealized gain/(loss) on
investments............................. 1.75 (0.35)(b) (0.18)(b)
------ ------ ------
Total income from investment
operations.......................... 2.60 1.09 0.62
------ ------ ------
Less dividends and distributions to preferred
shareholders from:
Net investment income..................... (0.04) (0.09) (0.07)
------ ------ ------
Total from investment operations
applicable to common shares......... 2.56 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..................... (0.68) (1.29) (0.58)
Tax return of capital..................... -- -- (0.14)
------ ------ ------
Total dividends and distributions to
common shareholders................. (0.68) (1.29) (0.72)
------ ------ ------
Net increase/(decrease) in net asset value per
common share................................ 1.88 (0.32) (0.30)
------ ------ ------
Net asset value, per common share, end of
period...................................... $15.59 $13.71 $14.03
------ ------ ------
------ ------ ------
Market value, per common share, end of
period...................................... $16.16 $14.02 $14.70
------ ------ ------
------ ------ ------
Net asset value total return(c)............... 19.11%(d) 6.72% 3.27%(d)
------ ------ ------
------ ------ ------
Market value return(c)........................ 20.73%(d) 4.16% 3.15%(d)
------ ------ ------
------ ------ ------
</Table>
- -------------------
(a) Commencement of operations.
(b) See Note 1.
(c) Total market value return is computed based upon the New York Stock Exchange
market price of the fund's shares and excludes the effects of brokerage
commissions. Dividends and distributions, if any, are assumed for purposes
of this calculation, to be reinvested at prices obtained under the fund's
dividend reinvestment plan. Total net asset value return measures the
changes in value over the period indicated, taking into account dividends as
reinvested.
(d) Not annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
13
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
FOR THE PERIOD
FOR THE FOR THE MAY 31, 2001(a)
SIX MONTHS ENDED YEAR ENDED THROUGH
RATIOS/SUPPLEMENTAL DATA: JUNE 30, 2003 DECEMBER 31, 2002 DECEMBER 31, 2001
- ------------------------- ------------- ----------------- -----------------
Net assets applicable to common shares, end of
period (in millions)........................ $ 400.7 $ 349.9 $ 351.6
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (before expense
reduction).................................. 1.66%(b) 1.41%(d) 1.39%(b),(d)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (net of expense
reduction).................................. 1.03%(b) 0.84%(d) 0.86%(b),(d)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average
daily net assets applicable to common shares
(before expense reduction).................. 11.58%(b) 10.13%(d) 10.13%(b),(d)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average
daily net assets applicable to common shares
(net of expense reduction).................. 12.20%(b) 10.70%(d) 10.66%(b),(d)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed
assets (before expense reduction)(e)........ 1.11%(b) 1.04%(d) 1.10%(b),(d)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed
assets (net of expense reduction)(e)........ 0.69%(b) 0.62%(d) 0.68%(b),(d)
-------- -------- --------
-------- -------- --------
Portfolio turnover rate....................... 12.40%(c) 22.27% 23.95%(c)
-------- -------- --------
-------- -------- --------
PREFERRED SHARES:
- -----------------
Liquidation value, end of period (in 000's)... 176,000 176,000 125,000
-------- -------- --------
-------- -------- --------
Total shares outstanding (in 000's)........... 7 7 5
-------- -------- --------
-------- -------- --------
Asset coverage per share...................... $ 81,918 $ 74,695 $ 95,322
-------- -------- --------
-------- -------- --------
Liquidation preference per share.............. $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
Average market value per share(f)............. $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
</Table>
- -------------------
(a) Commencement of operations.
(b) Annualized.
(c) Not annualized.
(d) See Note 1.
(e) Average daily managed assets represents net assets applicable to common
shares plus liquidation preference of preferred shares.
(f) Based on weekly prices.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
14
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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
nondiversified, closed-end management investment company.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the board of directors shall determine in good faith
to reflect its fair market value.
Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. (Nasdaq) national
market system are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
manager to be over-the-counter, but excluding securities admitted to trading on
the Nasdaq National List, are valued at the official closing prices as reported
by Nasdaq, the National Quotations Bureau or such other comparable sources as
the board of directors deems appropriate to reflect their fair market value.
However, certain fixed-income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed by the board of
directors to reflect the fair market value of such securities. Where securities
are traded on more than one exchange and also over-the-counter, the securities
will generally be valued using the quotations the board of directors believes
reflect most closely the value of such securities.
Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost which approximates value.
- --------------------------------------------------------------------------------
15
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Interest Rate Swaps: The fund uses interest rate swaps in connection with
the leverage created by the sale of auction rate cumulative preferred shares.
The interest rate swaps are intended to reduce or eliminate the risk that an
increase in short-term interest rates could have on the performance of the
fund's common shares as a result of the floating rate nature of leverage. In an
interest rate swap, the fund agrees to pay the other party to the interest rate
swap (which is known as the counterparty) a fixed rate payment in exchange for
the counterparty agreeing to pay the fund a variable rate payment that is
intended to approximate the fund's variable rate payment obligation on the
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.
Revision of Financial Information: As required, effective January 1, 2003,
the fund has adopted the requirements of EITF Issue 02-3, Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities, which requires that
periodic payments under interest rate swap transactions be reported as a
component of realized and unrealized gains/losses on the fund's statement of
operations. The fund has reclassified amounts previously reported as interest
expense on interest rate swap transactions, thereby revising certain amounts in
the Statement of Changes in Net Assets and the Financial Highlights. For the
year ended December 31, 2002, net investment income was increased by $3,614,482
($0.14 per share), and net realized loss on investments and interest rate swap
transactions and net change in unrealized depreciation on investments and
interest rate swap transactions were increased by $3,576,785 and $37,697,
respectively (a total of $0.14 per share). Additionally, for the period ended
December 31, 2001, net investment income per share was increased by $0.05 and
net realized and unrealized gain/(loss) on investments per share was increased
by $0.05.
Additionally, the ratios of net investment income to average daily net
assets applicable to common shares (before expense reduction and net of expense
reduction) increased 1.00% and 0.54% for the year ended December 31, 2002 and
the period ended December 31, 2001, respectively; the ratios of expenses to
average daily net assets applicable to common shares (before expense reduction
and net of expense reduction) decreased 1.00% and 0.54% for the year ended
December 31, 2002 and the period ended December 31, 2001, respectively; and the
ratios of expenses to average daily managed assets (before expense reduction and
net of expense reduction) decreased 0.74% and 0.42% for the year ended December
31, 2002 and for the period ended December 31, 2001, respectively. The
reclassifications had no effect on net assets or on the net increase in net
assets from operations applicable to common shares.
- --------------------------------------------------------------------------------
16
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 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 six months ended June 30, 2003, the
fund incurred investment management fees of $2,242,579.
- --------------------------------------------------------------------------------
17
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 six months
ended June 30, 2003, the investment manager waived management fees of
$1,108,098.
Administration Fees: Pursuant to an administration agreement, the investment
manager also performs certain administrative and accounting functions for the
fund and receives a fee of 0.02% of the fund's average daily managed asset
value. For the six months ended June 30, 2003, the fund incurred $52,767 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 $21,785 for the six months ended June 30, 2003.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments, for the
six months ended June 30, 2003, totaled $66,610,747 and $65,608,096,
respectively.
NOTE 4. INCOME TAXES
At June 30, 2003 the cost of investments and net unrealized appreciation for
federal income tax purposes were as follows:
<Table>
Aggregate cost.................................... $529,918,152
------------
------------
Gross unrealized appreciation..................... $ 68,026,290
Gross unrealized depreciation..................... (10,932,172)
------------
Net unrealized appreciation on investments........ 57,094,118
Net unrealized depreciation on interest rate swap
transactions.................................... (14,876,041)
------------
Net unrealized appreciation....................... $ 42,218,077
------------
------------
</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
- --------------------------------------------------------------------------------
18
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
differences are permanent in nature, such amounts are reclassified within the
capital accounts. Short-term capital gains are reflected in the financial
statements as realized gains on investments but are typically reclassified as
ordinary income for tax purposes.
NOTE 5. CAPITAL STOCK
The fund is authorized to issue 100 million shares of common stock at a par
value of $0.001 per share.
During the six months ended June 30, 2003 the fund issued 187,613 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.
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. 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,
- --------------------------------------------------------------------------------
19
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 June 30, 2003 are as follows:
<Table>
<Caption>
NOTIONAL FLOATING RATE(a) TERMINATION UNREALIZED
AMOUNT FIXED RATE (RATE RESET MONTHLY) DATE DEPRECIATION
------ ---------- -------------------- ---- ------------
$31,250,000 5.3025% 1.113% July 30, 2006 $ (3,199,395)
$19,125,000 3.4065% 1.107% June 18, 2007 (786,415)
$31,250,000 5.5920% 1.113% July 30, 2008 (4,395,293)
$19,125,000 4.0800% 1.107% December 18, 2009 (1,053,957)
$31,250,000 5.8240% 1.113% July 30, 2011 (5,440,981)
------------
$(14,876,041)
------------
------------
</Table>
- -------------------
(a) Based on LIBOR (London Interbank Offered Rate).
- --------------------------------------------------------------------------------
20
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
AVERAGE ANNUAL TOTAL RETURNS(a)
(PERIODS ENDED JUNE 30, 2003) (UNAUDITED)
<Table>
<Caption>
SINCE INCEPTION
ONE YEAR (5/31/01)
-------- ---------
8.87% 13.94%
</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.
- --------------------------------------------------------------------------------
21
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
PROXY RESULTS
Cohen & Steers Advantage Income Realty Fund, Inc. shareholders voted on the
following proposals at the annual meeting held on April 24, 2003. The
description of each proposal and number of shares voted are as follows:
Common Shares
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
SHARES VOTED SHARES VOTED
FOR AUTHORITY WITHHELD
- -----------------------------------------------------------------------------------------
1. To elect Directors
George Grossman.................................... 24,758,684 209,222
Robert H. Steers................................... 24,638,265 329,641
</Table>
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
SHARES VOTED SHARES VOTED SHARES VOTED
FOR AGAINST ABSTAIN
- -----------------------------------------------------------------------------------------
2. To ratify PricewaterhouseCoopers LLP as the
fund's independent accountants.............. 24,767,122 95,553 105,231
</Table>
Preferred Shares
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
SHARES VOTED SHARES VOTED
FOR AUTHORITY WITHHELD
1. To elect Directors
George Grossman.................................... 5,101 0
Robert H. Steers................................... 5,098 3
- -----------------------------------------------------------------------------------------
</Table>
- --------------------------------------------------------------------------------
22
<Page>
- --------------------------------------------------------------------------------
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.
<Table>
MEET THE COHEN & STEERS FAMILY OF OPEN-END FUNDS:
FOR HIGH CURRENT INCOME: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
EQUITY INCOME FUND REALTY SHARES
IDEAL FOR INVESTORS SEEKING A HIGH DIVIDEND IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
YIELD AND CAPITAL APPRECIATION, INVESTING RETURN THROUGH BOTH CURRENT INCOME AND
PRIMARILY IN REITS CAPITAL APPRECIATION, INVESTING PRIMARILY IN
A, B, C AND I SHARES AVAILABLE REITS
SYMBOLS: CSEIX, CSBIX, CSCIX, CSDIX SYMBOL: CSRSX
FOR CAPITAL APPRECIATION: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
SPECIAL EQUITY FUND INSTITUTIONAL REALTY SHARES
IDEAL FOR INVESTORS SEEKING MAXIMUM CAPITAL IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
APPRECIATION, INVESTING IN A LIMITED NUMBER RETURN THROUGH BOTH CURRENT INCOME AND
OF REITS AND OTHER REAL ESTATE COMPANIES CAPITAL APPRECIATION, INVESTING PRIMARILY IN
CONCENTRATED, HIGHLY FOCUSED PORTFOLIO REITS
SYMBOL: CSSPX OFFERS LOW TOTAL EXPENSE RATIO
HIGHER MINIMUM PURCHASE REQUIRED
SYMBOL: CSRIX
FOR MORE INFORMATION ABOUT ANY COHEN & STEERS FUND
OR TO OBTAIN A PROSPECTUS PLEASE CONTACT US AT:
1-800-330-REIT, OR VISIT OUR WEB SITE AT cohenandsteers.com
THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT EACH FUND INCLUDING ALL CHARGES AND EXPENSES,
AND SHOULD BE READ CAREFULLY BEFORE YOU INVEST.
COHEN & STEERS SECURITIES, LLC, DISTRIBUTOR
</Table>
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24
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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
George Grossman TRANSFER AGENT -- COMMON SHARES
Director Equiserve Trust Company
150 Royall Street
Richard J. Norman Canton, MA 02021
Director (800) 426-5523
Willard H. Smith Jr. TRANSFER AGENT -- PREFERRED SHARES
Director The Bank of New York
100 Church Street
Greg E. Brooks New York, NY 10007
Vice president
Adam Derechin LEGAL COUNSEL
Vice president and assistant Simpson Thacher & Bartlett
treasurer 425 Lexington Avenue
New York, NY 10017
Lawrence B. Stoller
Assistant secretary
New York Stock Exchange Symbol: RQI
Web site: cohenandsteers.com
This report is for shareholder
information. This is not a prospectus
intended for use in the purchase or sale
of fund shares. Past performance is of
course no guarantee of future results
and your investment may be worth more or
less at the time you sell.
</Table>
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25
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COHEN & STEERS
ADVANTAGE INCOME REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
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ADVANTAGE INCOME REALTY FUND
SEMIANNUAL REPORT
JUNE 30, 2003
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................ 'SS'
The division sign shall be expressed as....................................[div]