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, 2004
Item 1. Reports to Stockholders.
The registrant's semi-annual report to shareholders, for the period ended June
30, 2004 is included herein.
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 10. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial officer
have concluded that the registrant's disclosure controls and procedures are
sufficient to ensure that information required to be disclosed by the registrant
in this Form N-CSR was recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange
Commission's rules and forms, based upon such officers' evaluation of these
controls and procedures as of a date within 90 days of the filing date of this
report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 11. Exhibits.
(a) (2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(a) under the Investment Company Act of 1940.
(b) Certifications of chief executive officer and chief financial officer as
required by Rule 30a-2(b) under the Investment Company Act of 1940.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
By: /s/ Robert H. Steers
-------------------------------
Name: Robert H. Steers
Title: Chairman
Date: August 19, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert H. Steers By: /s/ Martin Cohen
------------------------------- ---------------------------------------
Name: Robert H. Steers Name: Martin Cohen
Title: Chairman, Secretary Title: President, Treasurer
and principal executive officer and principal financial officer
Date: August 19, 2004
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
July 26, 2004
To Our Shareholders:
We are pleased to submit to you our report for the quarter and six months
ended June 30, 2004. The net asset value at that date was $18.96. In addition,
during the quarter, three $0.12 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 -8.6%. This compares
to the NAREIT Equity REIT Index's(a) total return of -5.8%. For the six months
ended June 30, 2004, the fund's total return was 4.9%, compared to
NAREIT's 5.5%.
The second quarter of 2004 brought further evidence of a strengthening U.S.
economic recovery. The release of the March report on U.S. non-farm payrolls in
early April forced many of the pessimistic economic naysayers to acknowledge
that the recovery was, in fact, for real.
The second quarter began with a dramatic decline in REIT stock prices,
followed by a dramatic rebound and, most importantly, in our view a decisive
rotation in leadership within the REIT market. By way of review, the March jobs
report took the capital markets by surprise on April 2 and sent the bond market
reeling, resulting in the worst quarter for the bond market since the first
quarter of 1994. REITs dropped 18% from their highs at the end of March, before
bottoming on May 10. We characterized this decline as technical in nature,
driven by the valuation concerns of some investors, and one that we believed
presented an attractive investment opportunity. In our view, the very jobs
report that set off the decline in REIT share prices was likely to contribute to
improving real estate fundamentals and greater cash flow for REITs.
We are pleased to report that since then REITs have rebounded significantly,
recording a 14% total return from May 10 through the end of June, and were one
of the best performing asset classes over this time period. The strong returns
of the last two months are certainly inconsistent with the notion put forward by
some pundits that REITs tipped into a bear market in the second quarter in
sympathy with the bond market. In fact, if the first half of 2004 is a proper
guide, we believe REITs are on pace to deliver the low- to mid-teens total
return profile that is consistent with the sector's long-term average.
While many observers focused on the uncharacteristic volatility in REIT
share prices, the more interesting story in the second quarter was a rotation of
leadership within the REIT market. The defensive issues, which had led the REIT
group since 2001, have ceded their market leadership to the more cyclically
inclined companies that we believe will respond to the economic recovery most
quickly and most dramatically. The broad distribution of
- -------------------
(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.
returns across sectors during the quarter highlights in greater detail this
change in leadership, as well as the above-average volatility experienced during
the quarter. The best performing sectors were apartment and hotel, which
generated total returns of 2.2% and -2.6% respectively. Conversely, the worst
performing sectors during the quarter were health care (-13.4% total return)
and regional mall (-11.5%). The obvious difference between the two groups is
the short lease duration and more variable demand patterns of the strong
performing cyclical sectors versus the long lease terms and relatively
consistent demand profiles of the laggards, which tend not to respond quickly to
accelerating economic growth.
The fund's best performing investments during the quarter were in the
apartment and industrial sectors, which produced total returns of 0.9% and
- -2.9% respectively, while the worst performing sector for the fund was the
healthcare sector, which had a -14.3% total return. Apartment companies
AvalonBay Communities and AMLI Residential Properties Trust were the fund's best
performing holdings, contributing total returns of 6.8% and 5.7% respectively.
Laggards during the quarter included Health Care REIT, with a total return of
- -18.5% and Glimcher Realty Trust, which generated a total return of -16.6%.
Our performance during the quarter was also enhanced by our position in
Keystone Property Trust, a small-cap industrial REIT that announced it was being
acquired by a joint venture between ProLogis Trust and affiliates of Eaton Vance
Management for $23.80 per share in cash, a 14% premium to the previous day's
closing price. This transaction is significant for two reasons, among others.
One is that it highlights the fact that, in our view, Wall Street continues to
underestimate real estate values (the consensus net asset value estimate for
Keystone prior to the deal was approximately $18.50 per share). Additionally, we
believe the transaction represents another validation of our strategy, as
Keystone embodied many of the key attributes we look for in investment
candidates. Specifically, these attributes include companies that are relatively
under-followed, small to mid-cap in size with an above-average dividend yield,
and that are trading at a lower price/NAV ratio than their peers.
INVESTMENT OUTLOOK
In the wake of the REIT stock price decline in the second quarter, many
investors have asked us whether REITs can continue to perform well in what many
are concerned (overly so, in our view) may be a period of rising interest rates.
Our view has always been and continues to be that real estate fundamentals
are the primary driver of REIT returns over the long run. Still, we regularly
examine the extent to which REITs are correlated with other asset classes. We
have found that over the long term REIT share price behavior has not been
statistically related in any material way to the performance of bonds or
interest rates. In other words, over time, the performance of the bond market
has explained virtually none of the performance of REITs.
Over the short term, REITs may appear to correlate with interest rates, as
we have seen recently. However, although we can say with certainty that rising
rates result in poor returns for bonds, the REIT return equation cannot be
solved using interest rates as the only input variable. Importantly, we have
also found that in the 12 months following periods of rising interest rates, as
the dampening effect of higher interest rates on security
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2
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
returns has subsided and the acceleration of real estate fundamentals has kicked
in, REIT performance historically has been consistently very strong.
Nonetheless, we cannot ignore the fact that interest rates can have an
impact on REIT earnings and asset values. Higher interest rates will increase
the cost of REITs' debt capital over time, although the impact will be mitigated
by REITs' use of primarily long-term, fixed-rate debt. Higher interest rates may
also result in higher real estate capitalization rates, which would tend to
lower estimates of property values. However, we believe that if interest rates
are rising due to a stronger economy and attendant higher inflationary
expectations (which in the past have been favorable for real estate
fundamentals), this could serve to offset at least some of the impact that
higher interest rates would otherwise have on capitalization rates.
Higher interest rates can also have some beneficial effects on REITs. The
higher inflationary expectations, which are partially driving higher interest
rates, push up the price of building costs, especially inputs like steel,
concrete, lumber, labor and construction period interest. Thus the overall
replacement cost of real estate escalates, which flows through eventually in the
form of higher market rents. Already we are hearing reports that construction
costs have risen by as much as 25% over the past two years. If capitalization
rates were to rise, the return on assets that REITs could achieve on external
acquisitions of property should increase. Furthermore, higher debt costs will
tend to choke off development of new, competitive real estate. These higher debt
costs tend to have a greater impact on the private developers who typically
build the majority of new buildings and use a higher proportion of debt in their
capital structure.
Our conclusion is that, although changes in interest rates have a varied
impact on REITs, the positive and negative impacts have historically tended to
offset one another, such that the overall impact on REIT returns has not
generally been material, thus, the historical lack of correlation. What remains
material is the supply and demand for real estate and how that impacts building
occupancies and rents. The most important thing to recognize about the prospects
for REIT returns, in our view, is that the job growth that occurred in March of
this year was followed up with strong job growth reports for both April and May.
With this key economic driver in place, we believe the prospects for higher
building occupancies and rents, and thus for higher cash flows for REITs, are
excellent.
At this point, with the first dose of Fed tightening already under our belts
and a further rise in interest rates widely anticipated among economists and
investors alike, it is safe to say that whatever impact investors believe rising
interest rates may have on REITs has been well digested by the stock market. The
net effect has been to bring REIT valuations in line with historical averages.
In our view, the favorable prospects for accelerating cash
- --------------------------------------------------------------------------------
3
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
flow growth over the next couple of years in combination with these valuations
give us confidence that REITs can continue to generate attractive total returns.
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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4
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
OUR LEVERAGE STRATEGY
(UNAUDITED)
While we do not attempt to predict what future interest
rates will be, it has been our philosophy to utilize
interest rate swap transactions to seek to reduce the
interest rate risk inherent in our utilization of leverage.
Our leverage strategy involves issuing auction market
preferred shares (AMPS) to raise additional capital for the
fund, with an objective of increasing the net income
available for shareholders. As of June 30, 2004, AMPS
represented 32% of the fund's managed net assets.
Considering that AMPS have variable dividend rates, we seek
to lock in the rate on a majority of this additional capital
through interest rate swap agreements (where we effectively
convert our variable rate obligation to a fixed rate
obligation for the term of the swap agreements).
Specifically, we have fixed the rate on 70% of our
borrowings at an average interest rate of 4.75%, for an
average remaining period of 4.4 years (when we first entered
into the swaps, the average term was 6.6 years). By locking
in a large portion of our leveraging costs, we have
endeavored to adequately protect the dividend-paying ability
of the fund, which is one of the reasons the fund has been
able to increase its monthly dividend on several occasions.
The use of leverage increases the volatility of the fund's
net asset value in both up and down markets. However, we
believe that locking in a portion of the fund's leveraging
costs for the term of the swap agreements partially protects
the fund from any impact that an increase in short-term
interest rates may have as a result of the use of leverage.
LEVERAGE FACTS
<Table>
Leverage (as % of managed net assets)............... 32%
% Fixed Rate........................................ 70%
% Variable Rate..................................... 30%
Average Rate on Swaps............................... 4.75%
Average Term on Swaps............................... 4.4 years
Current Rate on AMPS................................ 1.5%
</Table>
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5
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 2004 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD(a)
--------- ------------ ------------
EQUITIES 145.99%(b)
COMMON STOCK 117.73%
DIVERSIFIED 13.52%
Colonial Properties Trust.............. 392,900 $ 15,138,437 6.96%
Crescent Real Estate Equities Co....... 970,400 15,642,848 9.31
iStar Financial........................ 265,900 10,636,000 6.98
Vornado Realty Trust................... 433,700 24,768,607 4.97
------------
66,185,892
------------
HEALTH CARE 17.73%
Health Care Property Investors......... 1,066,000 25,626,640 6.95
Health Care REIT....................... 379,500 12,333,750 7.38
LTC Properties......................... 86,000 1,427,600 6.63
Nationwide Health Properties........... 799,400 15,108,660 7.83
Ventas................................. 1,382,400 32,279,040 5.57
------------
86,775,690
------------
HOTEL 2.32%
Hospitality Properties Trust........... 268,000 11,336,400 6.81
------------
INDUSTRIAL 3.56%
First Industrial Realty Trust.......... 472,700 17,433,176 7.43
------------
MORTGAGE 2.99%
Newcastle Investment Corp.............. 488,337 14,625,693 8.01
------------
</Table>
- -------------------
(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.
(b) Percentages indicated are based on the net assets of the fund.
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)
JUNE 30, 2004 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- ------------ ------------
OFFICE 31.55%
Arden Realty........................... 529,100 $ 15,560,831 6.87%
Brandywine Realty Trust................ 633,100 17,213,989 6.47
CarrAmerica Realty Corp................ 627,800 18,978,394 6.62
Equity Office Properties Trust......... 777,800 21,156,160 7.35
Highwoods Properties................... 588,300 13,825,050 7.23
HRPT Properties Trust.................. 425,200 4,256,252 7.99
Kilroy Realty Corp..................... 92,200 3,144,020 5.81
Mack-Cali Realty Corp.................. 726,200 30,050,156 6.09
Maguire Properties..................... 398,800 9,878,276 6.46
Prentiss Properties Trust.............. 606,500 20,329,880 6.68
------------
154,393,008
------------
OFFICE/INDUSTRIAL 10.06%
Liberty Property Trust................. 651,000 26,176,710 6.02
Reckson Associates Realty Corp......... 840,100 23,069,146 6.18
------------
49,245,856
------------
RESIDENTIAL 16.18%
APARTMENT 15.66%
AMLI Residential Properties Trust...... 166,200 4,876,308 6.54
Archstone-Smith Trust.................. 651,300 19,102,629 5.86
AvalonBay Communities.................. 179,400 10,139,688 4.95
Camden Property Trust.................. 228,600 10,469,880 5.55
Gables Residential Trust............... 385,900 13,112,882 7.09
Home Properties........................ 171,600 6,688,968 6.36
Mid-America Apartment Communities...... 223,200 8,457,048 6.18
Town & Country Trust................... 150,000 3,786,000 6.81
------------
76,633,403
------------
MANUFACTURED HOME 0.52%
Affordable Residential Communities..... 153,500 2,548,100 7.53
------------
TOTAL RESIDENTIAL...................... 79,181,503
------------
SELF STORAGE 4.73%
Public Storage -- Series A............. 802,400 20,950,664 9.38
Sovran Self Storage.................... 57,300 2,187,714 6.31
------------
23,138,378
------------
</Table>
See accompanying notes to financial statements.
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7
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- ------------ ------------
SHOPPING CENTER 15.09%
COMMUNITY CENTER 5.47%
Cedar Shopping Centers................. 150,000 $ 1,723,500 7.83%
Heritage Property Investment Trust..... 307,000 8,307,420 7.76
Kramont Realty Trust................... 800,000 12,800,000 8.13
New Plan Excel Realty Trust............ 151,700 3,543,712 7.06
Urstadt Biddle Properties -- Class A... 26,100 386,541 5.81
------------
26,761,173
------------
REGIONAL MALL 9.62%
CBL & Associates Properties............ 54,000 2,970,000 5.27
Glimcher Realty Trust.................. 400,800 8,865,696 8.69
Macerich Co............................ 358,100 17,142,247 5.10
Mills Corp............................. 345,600 16,139,520 5.10
Simon Property Group................... 38,000 1,953,960 5.06
------------
47,071,423
------------
TOTAL SHOPPING CENTER.................. 73,832,596
------------
TOTAL COMMON STOCK
(Identified
cost -- $440,057,939)........... 576,148,192
------------
PREFERRED STOCK 28.26%
DIVERSIFIED 2.39%
Colonial Properties Trust, 9.25%,
Series C............................ 8,300 215,385 8.91
Crescent Real Estate Equities Co.,
6.75%, Series A (Convertible)....... 371,300 7,418,574 8.45
iStar Financial, 8.00%, Series D....... 111,000 2,713,950 8.18
iStar Financial, 7.65%, Series G....... 55,000 1,332,375 7.90
------------
11,680,284
------------
HEALTH CARE 4.32%
Nationwide Health Properties, 7.677%,
Series P............................ 221,000 21,119,313 8.03
------------
</Table>
See accompanying notes to financial statements.
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8
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- ------------ ------------
HOTEL 2.45%
FelCor Lodging Trust, $1.95,
Series A (Convertible).............. 114,500 $ 2,719,375 8.21%
FelCor Lodging Trust, 9.00%,
Series B............................ 36,000 900,000 9.00
Host Marriott Corp., 10.00%,
Series A............................ 4,700 120,085 9.77
Host Marriott Corp., 10.00%,
Series B............................ 11,200 289,072 9.69
Host Marriott Corp., 10.00%,
Series C............................ 39,100 1,028,330 9.51
Host Marriott Corp., 8.875%,
Series E............................ 10,000 254,500 8.72
Innkeepers USA, 8.00%, Series C........ 56,000 1,349,600 8.30
LaSalle Hotel Properties, 10.25%,
Series A............................ 200,000 5,355,000 9.57
------------
12,015,962
------------
INDUSTRIAL 0.31%
Keystone Property Trust, 9.125%,
Series D............................ 57,900 1,499,610 8.81
------------
OFFICE 5.34%
Alexandria Real Estate Equities,
9.10%, Series B..................... 53,900 1,440,208 8.51
HRPT Properties Trust, 8.75%,
Series B............................ 128,000 3,366,400 8.32
Highwoods Properties, 8.625%,
Series A............................ 18,550 18,596,375 8.60
Maguire Properties, 7.625%,
Series A............................ 72,200 1,743,630 7.89
SL Green Realty Corp., 7.625%,
Series C............................ 40,000 1,000,000 7.63
------------
26,146,613
------------
OFFICE/INDUSTRIAL 4.34%
PS Business Parks, 9.50%, Series D..... 800,000 21,264,000 8.94
------------
</Table>
<Table>
RESIDENTIAL -- APARTMENT 4.43%
Apartment Investment & Management Co.,
8.75%, Series D..................... 37,364 938,210 8.71
Apartment Investment & Management Co.,
9.375%, Series G.................... 52,800 1,367,520 9.05
Apartment Investment & Management Co.,
10.10%, Series Q.................... 18,600 487,320 9.64
Apartment Investment & Management Co.,
10.00%, Series R(a)................. 616,800 16,258,848 9.48
Mid-America Apartment Communities,
8.30%, Series H..................... 103,600 2,605,540 8.25
------------
21,657,438
------------
</Table>
- -------------------
(a) 190,300 shares segregated as collateral for the interest rate swap
transactions.
See accompanying notes to financial statements.
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9
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- ------------ ------------
SHOPPING CENTER 4.68%
COMMUNITY CENTER 1.20%
Developers Diversified Realty Corp.,
8.60%, Series F..................... 100,000 $ 2,585,000 8.33%
Federal Realty Investment Trust,
8.50%, Series B..................... 20,100 531,645 8.03
New Plan Excel Realty Trust, 7.80%,
Series D............................ 20,000 1,021,250 7.64
Urstadt Biddle Properties, 8.50%,
Series C............................ 16,000 1,752,000 7.76
------------
5,889,895
------------
OUTLET CENTER 0.39%
Chelsea Property Group, 8.375%,
Series A............................ 33,800 1,916,037 7.39
------------
REGIONAL MALL 3.09%
Glimcher Realty Trust, 8.75%,
Series F............................ 40,000 1,012,000 8.65
Mills Corp., 9.00%, Series B........... 83,800 2,232,432 8.45
Mills Corp., 9.00%, Series C........... 85,000 2,254,625 8.52
Pennsylvania Real Estate Investment
Trust,
11.00%, Series A.................... 125,600 7,397,840 9.34
Taubman Centers, 8.30%, Series A....... 88,600 2,201,710 8.35
------------
15,098,607
------------
TOTAL SHOPPING CENTER.................. 22,904,539
------------
TOTAL PREFERRED STOCK
(Identified
cost -- $124,011,594)........... 138,287,759
------------
TOTAL EQUITIES (Identified
cost -- $564,069,533)........... 714,435,951
------------
</Table>
See accompanying notes to financial statements.
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10
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
<Table>
<Caption>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
---------- -------------
CORPORATE BOND 0.83%
Host Marriott LP, 9.50%,
due 1/15/07 (Identified
cost -- $3,702,576).................. $3,700,000 $ 4,060,750
-------------
COMMERCIAL PAPER 0.71%
State Street Corp., 1.10%,
due 07/01/04 (Identified
cost -- $3,479,000).................. 3,479,000 3,479,000
-------------
TOTAL INVESTMENTS (Identified
cost -- $571,251,109)............... 147.53% 721,975,701
LIABILITIES IN EXCESS OF OTHER
ASSETS.............................. (0.53)% (2,595,125)
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)... (35.96)% (176,000,000)
LIQUIDATION VALUE OF AUCTION MARKET
PREFERRED SHARES: SERIES F28
(Equivalent to $25,000 per share
based on 2,160 shares outstanding).. (11.04)% (54,000,000)
------ -------------
NET ASSETS APPLICABLE TO COMMON SHARES
(Equivalent to $18.96 per share
based on 25,810,480 shares
of capital stock outstanding)....... 100.00% $ 489,380,576
------ -------------
------ -------------
</Table>
See accompanying notes to financial statements.
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11
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2004 (UNAUDITED)
<Table>
ASSETS:
Investments in securities, at value (Identified
cost -- $571,251,109) (Note 1)....................... $721,975,701
Cash.................................................... 600
Dividends and interest receivable....................... 3,522,186
Unrealized appreciation on interest rate swap
transactions (Notes 1 and 6)......................... 846,598
Other assets............................................ 38,010
------------
Total Assets....................................... 726,383,095
------------
LIABILITIES:
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6)......................... 5,833,078
Payable for dividends declared on common shares......... 436,201
Payable to investment manager........................... 250,577
Payable for investment securities purchased............. 199,771
Payable for dividends declared on preferred shares...... 130,101
Payable for administration fees......................... 41,887
Payable for directors fees.............................. 2,929
Other liabilities....................................... 107,975
------------
Total Liabilities.................................. 7,002,519
------------
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
Auction market preferred shares, Series F28 ($25,000
liquidation value, $0.001 par value, 2,160 shares
issued and outstanding) (Notes 1 and 5).............. 54,000,000
------------
230,000,000
------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES................ $489,380,576
------------
------------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
12
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
<Table>
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES consist of:
Common stock ($0.001 par value, 25,810,480 shares issued
and outstanding) (Notes 1 and 5)..................... $346,371,044
Distributions in excess of net investment income........ (4,394,809)
Accumulated net realized gain on investments and
interest rate swap transactions...................... 1,666,229
Net unrealized appreciation/(depreciation) on
investments and interest rate swap transactions...... 145,738,112
------------
$489,380,576
------------
------------
NET ASSET VALUE PER COMMON SHARE:
($489,380,576[div]25,810,480 shares outstanding)........ $ 18.96
------------
------------
MARKET PRICE PER COMMON SHARE............................... $ 17.42
------------
------------
MARKET PRICE PREMIUM/(DISCOUNT) TO NET ASSET VALUE PER
COMMON SHARE.............................................. (8.12)%
------------
------------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
<Table>
Investment Income (Note 1):
Dividend income......................................... $17,130,386
Interest income......................................... 197,716
-----------
Total Income....................................... 17,328,102
-----------
Expenses:
Investment management fees (Note 2)..................... 3,044,938
Preferred remarketing fee............................... 286,200
Reports to shareholders................................. 139,366
Administration fees (Note 2)............................ 127,783
Professional fees....................................... 66,218
Custodian fees and expenses............................. 22,069
Directors' fees and expenses (Note 2)................... 20,507
Transfer agent fees and expenses........................ 11,057
Miscellaneous........................................... 47,143
-----------
Total Expenses..................................... 3,765,281
Reduction of Expenses (Note 2).......................... (1,504,558)
-----------
Net Expenses....................................... 2,260,723
-----------
Net Investment Income....................................... 15,067,379
-----------
Net Realized and Unrealized Gain/(Loss) on Investments
(Note 1):
Net realized gain on investments........................ 4,660,191
Net realized loss on interest rate swap transactions.... (2,967,760)
Net change in unrealized appreciation/(depreciation) on
investments.......................................... 2,724,949
Net change in unrealized appreciation/(depreciation) on
interest rate swap transactions...................... 4,451,517
-----------
Net realized and unrealized gain/(loss) on
investments..................................... 8,868,897
-----------
Net Increase Resulting from Operations...................... 23,936,276
-----------
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (1,354,581)
-----------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $22,581,695
-----------
-----------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
14
- --------------------------------------------------------------------------------
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, 2004 DECEMBER 31, 2003
---------------- ------------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income.............................. $ 15,067,379 $ 28,593,225
Net realized gain on investments and interest rate
swap transactions................................ 1,692,431 11,114,034
Net change in unrealized appreciation/
(depreciation) on investments and interest rate
swap transactions................................ 7,176,466 132,032,766
------------ ------------
Net increase in net assets resulting from
operations................................... 23,936,276 171,740,025
------------ ------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income.............................. (1,354,581) (1,644,347)
Net realized gain on investments................... -- (717,573)
------------ ------------
Total dividends and distributions to preferred
shareholders................................. (1,354,581) (2,361,920)
------------ ------------
Net increase in net assets from operations
applicable to common shares.................. 22,581,695 169,378,105
------------ ------------
Less Dividends and Distributions to Common Shareholders
from:
Net investment income.............................. (18,196,389) (25,982,706)
Net realized gain on investments................... -- (11,338,539)
Tax return of capital.............................. -- (581,826)
------------ ------------
Total dividends and distributions to common
shareholders................................. (18,196,389) (37,903,071)
------------ ------------
Capital Stock Transactions (Note 5):
Increase in net assets from shares issued to common
shareholders for reinvestment of dividends....... -- 4,390,201
Increase in net assets from preferred share
offering cost adjustment......................... 148,454 --
Decrease in net assets from underwriting
commissions and offering expenses from issuance
of preferred shares.............................. -- (875,287)
------------ ------------
Net increase in net assets from capital stock
transactions................................. 148,454 3,514,914
------------ ------------
Total increase in net assets applicable to
common shares................................ 4,533,760 134,989,948
Net Assets Applicable to Common Shares:
Beginning of period................................ 484,846,816 349,856,868
------------ ------------
End of period(a)................................... $489,380,576 $484,846,816
------------ ------------
------------ ------------
</Table>
- -------------------
(a) Includes distributions in excess of net investment income of $4,394,809 at
June 30, 2004 and undistributed net investment income of $88,782 at
December 31, 2003.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
15
- --------------------------------------------------------------------------------
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 YEAR ENDED FOR THE PERIOD
FOR THE DECEMBER 31, MAY 31, 2001(a)
SIX MONTHS ENDED ---------------------------------- THROUGH
PER SHARE OPERATING PERFORMANCE: JUNE 30, 2004 2003 2002 DECEMBER 31, 2001
- -------------------------------- ---------------- --------------- ---------------- ------------------
Net asset value per common share, beginning of
period......................................... $18.78 $13.71 $14.03 $14.33
------ ------ ------ ------
Income from investment operations:
Net investment income........................ 0.58(b) 1.11(b) 1.02 0.64
Net realized and unrealized gain/(loss) on
investments................................ 0.35 5.56 0.07 (0.02)
------ ------ ------ ------
Total income from investment operations... 0.93 6.67 1.09 0.62
------ ------ ------ ------
Less dividends and distributions to preferred
shareholders from:
Net investment income........................ (0.05) (0.06) (0.09) (0.07)
Net realized gain on investments............. -- (0.03) -- --
------ ------ ------ ------
Total dividends and distributions to
preferred shareholders.................. (0.05) (0.09) (0.09) (0.07)
------ ------ ------ ------
Total from investment operations
applicable to common shares............. 0.88 6.58 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) (0.03) (0.07)
Preferred offering cost adjustment........... 0.01(c) -- -- --
Dilutive effect of common share offering..... -- -- -- (0.03)
------ ------ ------ ------
Total offering and organization costs..... 0.01 (0.03) (0.03) (0.13)
------ ------ ------ ------
Less dividends and distributions to common
shareholders from:
Net investment income........................ (0.71) (1.01) (1.29) (0.58)
Net realized gain on investments............. -- (0.45) -- --
Tax return of capital........................ -- (0.02) -- (0.14)
------ ------ ------ ------
Total dividends and distributions to
common shareholders..................... (0.71) (1.48) (1.29) (0.72)
------ ------ ------ ------
Net increase/(decrease) in net asset value per
common shares.................................. 0.18 5.07 (0.32) (0.30)
------ ------ ------ ------
Net asset value, per common share, end of
period......................................... $18.96 $18.78 $13.71 $14.03
------ ------ ------ ------
------ ------ ------ ------
Market value, per common share, end of period... $17.42 $18.26 $14.02 $14.70
------ ------ ------ ------
------ ------ ------ ------
Net asset value total return(d)................. 4.92%(e) 50.29% 6.72% 3.27%(c)
------ ------ ------ ------
------ ------ ------ ------
Market value return(d).......................... -0.86%(e) 42.83% 4.16% 3.15%(c)
------ ------ ------ ------
------ ------ ------ ------
</Table>
- -------------------
(a) Commencement of operations.
(b) Calculation based on average shares outstanding.
(c) See Note 5.
(d) Total market value return is computed based upon the New York Stock
Exchange market price of the fund's shares and excludes the effects of
brokerage commissions. Dividends and distributions, if any, are assumed for
purposes of this calculation, to be reinvested at prices obtained under the
fund's dividend reinvestment plan. Total net asset value return measures
the changes in value over the period indicated, taking into account
dividends as reinvested.
(e) Not annualized.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
16
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
FOR THE YEAR ENDED FOR THE PERIOD
FOR THE DECEMBER 31, MAY 31, 2001(f)
SIX MONTHS ENDED ---------------------------------- THROUGH
RATIOS/SUPPLEMENTAL DATA: JUNE 30, 2004 2003 2002 DECEMBER 31, 2001
- ------------------------- ---------------- --------------- ---------------- ------------------
Net assets applicable to common shares, end
of period (in millions)..................... $ 489.4 $ 485.0 $ 349.9 $ 351.6
-------- -------- -------- --------
-------- -------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (before expense
reduction)(i)............................... 1.54%(g) 1.61% 1.41% 1.39%(g)
-------- -------- -------- --------
-------- -------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (net of expense
reduction)(i)............................... 0.93%(g) 0.99% 0.84% 0.86%(g)
-------- -------- -------- --------
-------- -------- -------- --------
Ratio of net investment income to average
daily net assets applicable to common shares
(before expense reduction)(i)............... 5.56%(g) 6.59% 6.98% 8.00%(g)
-------- -------- -------- --------
-------- -------- -------- --------
Ratio of net investment income to average
daily net assets applicable to common shares
(net of expense reduction)(i)............... 6.18%(g) 7.22% 7.55% 8.53%(g)
-------- -------- -------- --------
-------- -------- -------- --------
Ratio of expenses to average daily managed
assets (before expense reduction)(i),(j).... 1.05%(g) 1.09% 1.04% 1.10%(g)
-------- -------- -------- --------
-------- -------- -------- --------
Ratio of expenses to average daily managed
assets (net of expense reduction)(i),(j).... 0.63%(g) 0.67% 0.62% 0.68%(g)
-------- -------- -------- --------
-------- -------- -------- --------
Portfolio turnover rate...................... 1.77%(h) 20.19% 22.27% 23.95%(h)
-------- -------- -------- --------
-------- -------- -------- --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's).. $230,000 $230,000 $176,000 $125,000
-------- -------- -------- --------
-------- -------- -------- --------
Total shares outstanding (in 000's).......... 9 9 7 5
-------- -------- -------- --------
-------- -------- -------- --------
Asset coverage per share..................... $ 78,194 $ 77,701 $ 74,695 $ 95,322
-------- -------- -------- --------
-------- -------- -------- --------
Liquidation preference per share............. $ 25,000 $ 25,000 $ 25,000 $ 25,000
-------- -------- -------- --------
-------- -------- -------- --------
Average market value per share(k)............ $ 25,000 $ 25,000 $ 25,000 $ 25,000
-------- -------- -------- --------
-------- -------- -------- --------
</Table>
- -------------------
(f) Commencement of operations.
(g) Annualized.
(h) Not annualized.
(i) Ratios do not reflect dividend payments to preferred shareholders.
(j) Average daily managed assets represents net assets applicable to common
shares plus liquidation preference of preferred shares.
(k) Based on weekly prices.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------
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 last 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.
Interest Rate Swaps: The fund uses interest rate swaps in connection with
the sale of auction rate preferred shares. The interest rate swaps are intended
to reduce or eliminate the risk that an increase in short-term interest
- --------------------------------------------------------------------------------
18
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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. Unrealized gains are reported as an asset
and unrealized losses are reported as a liability on the Statement of Assets and
Liabilities. The change in value of swaps, including the periodic amounts of
interest to be paid or received on swaps is reported as unrealized gains or
losses in the Statement of Operations. A realized gain or loss is recorded upon
payment or receipt of a periodic payment or termination of swap agreements. Swap
agreements involve, to varying degrees, elements of market and counterparty
risk, and exposure to loss in excess of the related amounts reflected in the
Statement of Assets and Liabilities.
Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. The fund
records distributions received in excess of income from underlying investments
as a reduction of cost of investments and/or realized gain. Such amounts are
based on estimates if actual amounts are not available, and actual amounts of
income, realized gain and return of capital may differ from the estimated
amounts. The fund adjusts the estimated amounts of the components of
distributions (and consequently its net investment income) as an increase to
unrealized appreciation/ (depreciation) on investments as necessary once the
issuers provide information about the actual composition of the distributions.
Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid to common shareholders monthly. 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.
Series M, Series W, and Series TH preferred shares pay dividends based on a
variable interest rate set at auctions, normally held every seven days.
Dividends for Series M, Series W, and Series TH preferred shares are declared
and recorded for the subsequent seven day period on the auction date. In most
instances, dividends are payable every seven days, on the first business day
following the end of the dividend period.
- --------------------------------------------------------------------------------
19
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Series F28 preferred shares pay dividends based on a variable interest rate
set at auctions, normally held every 28 days. Dividends for Series F28 preferred
shares are declared and recorded for the subsequent 28 day period on the auction
date. In most instances, dividends are payable every 28 days, on the first
business day following the end of the dividend period.
Federal Income Taxes: It is the policy of the fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for federal income or excise tax is necessary.
NOTE 2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS
WITH AFFILIATES.
Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
investment manager) serves as the investment manager to the fund, pursuant to an
investment management agreement (the management agreement). The investment
manager furnishes a continuous investment program for the fund's portfolio,
makes the day-to-day investment decisions for the fund and generally manages the
fund's investments in accordance with the stated polices of the fund, subject to
the general supervision of the board of directors of the fund. The investment
manager also performs certain administrative services for the fund.
For the services under the management agreement, the fund pays the
investment manager a 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, 2004, the
fund incurred investment management fees of $3,044,938.
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 waiver continues, it may lower
the fund's expenses and increase its total return. For the six months ended June
30, 2004, the investment manager waived management fees of $1,504,558.
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, 2004, the fund incurred $71,646 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
- --------------------------------------------------------------------------------
20
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
services. For the six months ended June 30, 2004, fees and related expenses
accrued for nonaffiliated directors totaled $20,507.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments, for the
six months ended June 30, 2004, totaled $16,506,826 and $12,750,565,
respectively.
NOTE 4. INCOME TAXES
At June 30, 2004, the cost of investments and net unrealized appreciation
for federal income tax purposes were as follows:
<Table>
Aggregate cost.................................... $571,251,109
------------
------------
Gross unrealized appreciation..................... $153,246,273
Gross unrealized depreciation..................... (2,521,681)
------------
Net unrealized appreciation on investments........ 150,724,592
Net unrealized depreciation on interest rate swap
transactions.................................... (4,986,480)
------------
Net unrealized appreciation....................... $145,738,112
------------
------------
</Table>
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, 2004 the fund issued no shares of
common stock for the reinvestment of dividends. An adjustment of $148,454
related to preferred offering costs was credited to common stock during the six
months ended June 30, 2004.
The fund's articles of incorporation authorize the issuance of fund
preferred shares, par value $0.001 per share, in one or more classes or series,
with rights as determined by the board of directors, by action of the board of
directors without the approval of the common shareholders.
On September 15, 2003, the fund issued 2,160 auction market preferred
shares, Series F28 (par value $0.001). Proceeds paid to the fund amounted to
$53,124,713 after deduction of underwriting commissions and offering expenses of
$875,287. This issue has received a 'AAA/Aaa' rating from Standard & Poor's and
Moody's.
Preferred shares are senior to the fund's common shares and will rank on a
parity with shares of any other series of preferred shares, and with shares of
any other series of preferred stock of the fund, as to the payment of dividends
and the distribution of assets upon liquidation. If the fund does not timely
cure a failure to (1) maintain a discounted value of its portfolio equal to the
preferred shares basic maintenance amount, as required
- --------------------------------------------------------------------------------
21
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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, 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) approve any matter that materially and adversely affects the
rights, preferences, or powers of that series.
NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS
The fund has entered into interest rate swap agreements with Salomon Swapco
Inc., Royal Bank of Canada, and Merrill Lynch Derivative Products AG. 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, 2004 are as follows:
<Table>
<Caption>
FLOATING RATE(a) UNREALIZED
NOTIONAL (RATE RESET APPRECIATION/
COUNTERPARTY AMOUNT FIXED RATE MONTHLY) TERMINATION DATE (DEPRECIATION)
- ---------------------- ----------- ---------- -------------- ----------------- --------------
Salomon Swapco Inc. $31,250,000 5.3025% 1.3400% July 30, 2006 $(1,417,019)
Salomon Swapco Inc. $19,125,000 3.4065% 1.2638% June 18, 2007 74,336
Salomon Swapco Inc. $31,250,000 5.5920% 1.3400% July 30, 2008 (2,014,832)
Salomon Swapco Inc. $19,125,000 4.0800% 1.2638% December 18, 2009 237,142
Salomon Swapco Inc. $31,250,000 5.8240% 1.3400% July 30, 2011 (2,401,227)
Royal Bank of Canada $14,500,000 2.7950% 1.1138% October 2, 2007 359,010
Merrill Lynch
Derivative
Products AG $14,500,000 3.9950% 1.2800% October 22, 2009 176,110
-----------
$(4,986,480)
-----------
-----------
</Table>
- -------------------
(a) Based on LIBOR (London Interbank Offered Rate). Represents rates in effect
at June 30, 2004.
- --------------------------------------------------------------------------------
22
- --------------------------------------------------------------------------------
COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
AVERAGE ANNUAL TOTAL RETURNS (a)
(PERIODS ENDED JUNE 30, 2004) (UNAUDITED)
<Table>
<Caption>
SINCE INCEPTION
ONE YEAR (5/31/01)
-------- ---------
32.32% 19.60%
</Table>
The performance data quoted represents past performance. Past performance is no
guarantee of future results. The rate of return will vary and the principal
value of an investment will fluctuate and shares, if sold, may be worth more or
less than their original cost. Current performance may be lower or higher than
the performance data quoted.
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 description of the policies and procedures that the fund
uses to determine how to vote proxies relating to portfolio
securities is available (i) without charge, upon request, by
calling 1-800-330-7348, (ii) on our Web site at
cohenandsteers.com or (iii) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
- -------------------
(a) Based on net asset value.
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23
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COHEN & STEERS ADVANTAGE INCOME REALTY FUND, INC.
PROXY RESULTS
During the six months ended June 30, 2004, Cohen & Steers Advantage Income
Realty Fund, Inc. shareholders voted on the following proposals at the annual
meeting held on April 29, 2004. The description of each proposal and number of
shares voted are as follows:
Common Shares
<Table>
- --------------------------------------------------------------------------------------------
SHARES VOTED AUTHORITY
FOR WITHHELD
- --------------------------------------------------------------------------------------------
1. To elect Directors
Richard J. Norman........................................ 24,959,676 273,366
Frank K. Ross............................................ 24,951,700 281,342
</Table>
<Table>
- -----------------------------------------------------------------------------------------------
SHARES VOTED SHARES VOTED SHARES VOTED
FOR AGAINST ABSTAIN
- -----------------------------------------------------------------------------------------------
2. To ratify PricewaterhouseCoopers LLP as the
fund's independent registered public
accountants.................................. 24,973,599 94,694 164,748
</Table>
Preferred Shares
<Table>
- --------------------------------------------------------------------------------------------
SHARES VOTED AUTHORITY
FOR WITHHELD
- --------------------------------------------------------------------------------------------
1. To elect Directors
Martin Cohen............................................. 5,271 2
Richard J. Norman........................................ 5,271 2
Frank K. Ross............................................ 5,271 2
</Table>
<Table>
SHARES VOTED SHARES VOTED SHARES VOTED
FOR AGAINST ABSTAIN
2. To ratify PricewaterhouseCoopers LLP as the
fund's independent registered public
accountants.................................. 5,273 0 0
</Table>
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24
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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 adviser who have a legitimate business
need for the information.
- --------------------------------------------------------------------------------
25
- --------------------------------------------------------------------------------
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
ALSO AVAILABLE: COHEN & STEERS INSTITUTIONAL
REALTY SHARES (CSRIX) REQUIRES A HIGHER
MINIMUM PURCHASE, BUT OFFERS A LOWER TOTAL
EXPENSE RATIO
FOR TOTAL RETURN: FOR CAPITAL APPRECIATION:
COHEN & STEERS COHEN & STEERS
UTILITY FUND SPECIAL EQUITY FUND
IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL IDEAL FOR INVESTORS SEEKING MAXIMUM CAPITAL
RETURN THROUGH BOTH CURRENT INCOME AND APPRECIATION, INVESTING IN A LIMITED NUMBER
CAPITAL APPRECIATION, INVESTING PRIMARILY IN OF REITS AND OTHER REAL ESTATE COMPANIES
UTILITIES CONCENTRATED, HIGHLY FOCUSED PORTFOLIO
SYMBOLS: CSUAX, CSUBX, CSUCX, CSUIX SYMBOL: CSSPX
FOR MORE INFORMATION ABOUT ANY COHEN & STEERS FUND
OR TO OBTAIN A PROSPECTUS PLEASE CONTACT US AT:
1-800-330-7348, OR VISIT OUR WEB SITE AT COHENANDSTEERS.COM
PLEASE CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES OF THE FUND CAREFULLY BEFORE
INVESTING. A PROSPECTUS CONTAINING THIS AND OTHER INFORMATION ABOUT THE FUND MAY BE OBTAINED BY
FOLLOWING THE INSTRUCTIONS ABOVE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
</Table>
COHEN & STEERS SECURITIES, LLC, DISTRIBUTOR
- --------------------------------------------------------------------------------
26
- --------------------------------------------------------------------------------
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
Bonnie Cohen FUND SUBADMINISTRATOR AND CUSTODIAN
Director State Street Bank and Trust Company
225 Franklin Street
George Grossman Boston, MA 02110
Director
TRANSFER AGENT -- COMMON SHARES
Richard J. Norman Equiserve Trust Company
Director 250 Royall Street
Canton, MA 02021
Frank K. Ross (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
Greg E. Brooks
Vice president LEGAL COUNSEL
Simpson Thacher & Bartlett LLP
Adam Derechin 425 Lexington Avenue
Vice president and assistant New York, NY 10017
treasurer
New York Stock Exchange Symbol: RLF
Joseph M. Harvey
Vice president Web site: cohenandsteers.com
Lawrence B. Stoller This report is for shareholder
Assistant secretary information. This is not a
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>
- --------------------------------------------------------------------------------
27
COHEN & STEERS
ADVANTAGE INCOME REALTY FUND
----------------------------
SEMIANNUAL REPORT
JUNE 30, 2004
COHEN & STEERS
ADVANTAGE INCOME REALTY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
STATEMENT OF DIFFERENCE
The division sign shall be expressed as.................................. [div]
The section symbol shall be expressed as................................. 'SS'