Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Cohen & Steers Total Return Realty Fund, Inc. and its subsidiary (the “Fund”) as of December 31,
2022, the related statement of operations for the year ended December 31, 2022, the statement of changes in net assets for each of the two years in the period ended December 31, 2022, including the related notes, and the financial highlights
for each of the five years in the period ended December 31, 2022 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Fund as of December 31, 2022, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended December 31, 2022 and the financial highlights for each of the five years
in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These
financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2022 by correspondence with the
custodian, transfer agent, issuers of privately offered securities and brokers. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
New York, New York
February 27, 2023
We have served
as the auditor of one or more investment companies in the Cohen & Steers family of mutual funds since 1991.
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(The following pages are unaudited)
TAX INFORMATION—2022
For the calendar year ended December 31, 2022, for individual taxpayers, the Fund designates $1,632,440 as qualified dividend
income eligible for reduced tax rates, long-term capital gain distributions of $ 13,536,682 taxable at the maximum 20% rate, long-term capital gain distributions of $676,346 taxable at the 25% maximum rate, short-term capital gain distributions of
$10,188,640 and $6,305,830 as qualified business income eligible for the 20% deduction. In addition, for corporate taxpayers, 5.43% of the ordinary dividends paid qualified for the dividends received deduction (DRD).
REINVESTMENT PLAN
The Fund has a dividend reinvestment plan commonly referred to as an “opt-out” plan (the Reinvestment Plan). Each common shareholder who participates in the Reinvestment Plan will have all distributions of dividends and
capital gains (Dividends) automatically reinvested in additional common shares by Computershare as agent (the Plan Agent). Shareholders who elect not to participate in the Reinvestment Plan will receive all Dividends in cash paid by check mailed
directly to the shareholder of record (or if the shares are held in street or other nominee name, then to the nominee) by the Plan Agent, as dividend disbursing agent. Shareholders whose common shares are held in the name of a broker or nominee
should contact the broker or nominee to determine whether and how they may participate in the Reinvestment Plan.
The
Plan Agent serves as agent for the shareholders in administering the Reinvestment Plan. After the Fund declares a Dividend, the Plan Agent will, as agent for the shareholders, either: (i) receive the cash payment and use it to buy common shares in
the open market, on the NYSE or elsewhere, for the participants’ accounts or (ii) distribute newly issued common shares of the Fund on behalf of the participants.
The Plan Agent will receive cash from the Fund with which to buy common shares in the open market if, on the Dividend payment date,
the NAV per share exceeds the market price per share plus estimated brokerage commissions on that date. The Plan Agent will receive the Dividend in newly issued common shares of the Fund if, on the Dividend payment date, the market price per share
plus estimated brokerage commissions equals or exceeds the NAV per share of the Fund on that date. The number of shares to be issued will be computed at a per share rate equal to the greater of (i) the NAV or (ii) 95% of the closing market price per
share on the payment date.
If the market price per share is less than the NAV on a Dividend payment date, the Plan
Agent will have until the last business day before the next ex-dividend date for the common stock, but in no event more than 30 days after the Dividend payment date (as the case may be, the Purchase Period), to invest the Dividend amount in shares
acquired in open market purchases. If at the close of business on any day during the Purchase Period on which NAV is calculated the NAV equals or is less than the market price per share plus estimated brokerage commissions, the Plan Agent will cease
making open market purchases and the uninvested portion of such Dividends shall be filled through the issuance of new shares of common stock from the Fund at the price set forth in the immediately preceding paragraph.
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Participants in the Reinvestment Plan may withdraw from the
Reinvestment Plan upon notice to the Plan Agent. Such withdrawal will be effective immediately if received not less than ten days prior to a Dividend record date; otherwise, it will be effective for all subsequent Dividends. If any participant
elects to have the Plan Agent sell all or part of his or her shares and remit the proceeds, the Plan Agent is authorized to deduct a $15.00 fee plus $0.10 per share brokerage commissions.
The Plan Agent’s fees for the handling of reinvestment of Dividends will be paid by the Fund. However, each participant will
pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent’s open market purchases in connection with the reinvestment of Dividends. The automatic reinvestment of Dividends will not relieve participants of any income
tax that may be payable or required to be withheld on such Dividends.
The Fund reserves the right to amend or terminate
the Reinvestment Plan. All correspondence concerning the Reinvestment Plan should be directed to the Plan Agent at 800-432-8224.
OTHER INFORMATION
A description of the policies and procedures that the Fund uses to determine how to
vote proxies relating to portfolio securities is available (i) without charge, upon request, by calling 866-227-0757, (ii) on our website at cohenandsteers.com or (iii) on the U.S. Securities and Exchange Commission’s (SEC)
website at http://www.sec.gov. In addition, the Fund’s proxy voting record for the most recent 12-month period ended June 30 is available by August 31 of each year (i) without charge, upon
request, by calling 866-227-0757 or (ii) on the SEC’s website at http://www.sec.gov.
Disclosures of the
Fund’s complete holdings are required to be made monthly on Form N-PORT, with every third month made available to the public by the SEC 60 days after the end of the Fund’s fiscal quarter. The Fund’s Form N-PORT is available (i)
without charge, upon request, by calling 866-227-0757 or (ii) on the SEC’s website at http://www.sec.gov.
Please
note that distributions paid by the Fund to shareholders are subject to recharacterization for tax purposes and are taxable up to the amount of the Fund’s investment company taxable income and net realized gains. Distributions in excess of the
Fund’s investment company taxable income and net realized gains are a return of capital distributed from the Fund’s assets. The final tax treatment of all distributions is reported to shareholders on their 1099-DIV forms, which are mailed
after the close of each calendar year. Distributions of capital decrease the Fund’s total assets and, therefore, could have the effect of increasing the Fund’s expense ratio. In addition, in order to make these distributions, the Fund may
have to sell portfolio securities at a less than opportune time.
Notice is hereby given in accordance with
Rule 23c-1 under the 1940 Act that the Fund may purchase, from time to time, shares of its common stock in the open market.
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The following information in this annual shareholder report
is a summary of certain information about the Fund. This information may not reflect all of the changes that have occurred since you purchased the Fund.
CURRENT INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT POLICIES AND PRINCIPAL RISKS OF THE FUND
The information contained herein is provided for informational purposes only and does not constitute a solicitation of an offer to
buy or sell Fund shares.
Investment Objectives
Cohen & Steers Total Return Realty Fund, Inc. (the Fund) is a diversified,
closed-end management investment company registered under the Investment Company Act of 1940, as amended (the 1940 Act). The Fund’s investment objective is high total return through investment in real
estate securities. The Fund will seek both current income and capital appreciation (realized and unrealized) with approximately equal emphasis.
Investment Strategies
The Fund’s investment advisor intends to maintain broad diversification
among various property sectors and geographic regions and, within each property sector, to diversify the Fund’s holdings among a sufficient number of individual issues. In addition, the investment advisor will regularly monitor the liquidity
and volatility of its holdings and, whenever possible, seek to maintain a low level of portfolio volatility compared to the stock market in general.
In making investment decisions with respect to securities purchased by the Fund, the investment advisor relies on a fundamental
analysis of each company. Securities are evaluated for their potential to provide an attractive level of distributions. Their potential for capital appreciation is also evaluated. The investment advisor reviews each company’s potential for
success in light of general economic and industry trends, as well as the company’s quality of management, financial condition, business plan, industry and sector market position and distribution coverage ratio. The investment advisor utilizes a
value-oriented approach, and evaluates each company’s valuation on the basis of relative price to distributable cash flow multiples, distributable cash flow growth rate and distribution yield, among other metrics. The Fund will not seek to
achieve specific environmental social or governance (ESG) outcomes through its portfolio of investments, nor will it pursue an overall impact or sustainable investment strategy. However, the investment advisor will incorporate consideration of
relevant ESG factors into its investment decision-making. For example, although the investment advisor does not generally exclude investments based on ESG factors alone, when considering an investment opportunity with material exposure to carbon
emissions regulation, this risk may be considered as one factor in the investment advisor holistic review process.
Under normal circumstances, the Fund will invest at least 75% of its total assets in the equity securities of real estate
companies. Such equity securities will consist of (i) common shares (including shares and units of beneficial interest of real estate investment trusts (REITs)), (ii) rights or warrants to purchase common shares, (iii) securities
convertible into common shares where the conversion feature represents, in the investment advisor’s view, a significant element of the securities’ value, and (iv) preferred shares. For purposes of the Fund’s investment policies,
a “real estate company” is one that derives at least 50% of its revenues from the ownership, construction, financing, management or
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sale of commercial, industrial, or residential real estate or that has at
least 50% of its assets in such real estate (such as REITs).
The Fund’s investments in securities of real estate
companies may also include private real estate investments. Private real estate investments include debt or equity investments in private real estate operating companies that own or manage real estate, privately offered REITs, mortgages secured by
commercial or residential real estate, securities issued by real estate companies prior to an IPO, private investments in public equity (PIPEs) and joint ventures which invest in residential and commercial real estate. The Fund expects to invest
directly or indirectly in certain real estate and real estate-related investments through one or more private, wholly owned REIT subsidiaries (each, a REIT Subsidiary). The Fund’s private real estate investments may consist of real estate joint
ventures where the Fund (generally through a REIT Subsidiary) partners with a real estate operator. These investments may include retail, office, hotel, healthcare, multifamily residential, industrial and other properties. The investment advisor
believes that a REIT Subsidiary will allow it to access more attractive investment opportunities than would otherwise be the case.
Private real estate investments are generally less liquid than public real estate investments and may involve complex investment structures. In addition, private real estate investments may have higher capital requirements, and
transactions involving this asset class may be more complex than those of public real estate investments. Making private real estate investments involves a high degree of sophistication, and returns are subject to the skill and decision-making
process of the investment advisor, as well as local, regional, and national market conditions. As is common in the real estate industry, many of the Fund’s investments in private real estate will be leveraged. For example, the Fund (through a
REIT Subsidiary) expects to make investments in private real estate investments which obtain debt financing consisting of property level debt. Property level debt will be secured by the real estate owned through private real estate investment.
Typically, these investments would solely own real estate assets and would borrow from a lender using the owned property as mortgage collateral. If one of the Fund’s investments were to default on a loan, the lender’s recourse would be to
the mortgaged property and the lender would typically not have a claim to other assets of the Fund or its subsidiaries. Such property level debt is generally not recourse to the Fund and the Fund will not treat these non-recourse borrowings as
senior securities (as defined in the 1940 Act) for purposes of complying with the 1940 Act’s limitations on leverage unless the financial statements of the entity holding such property-level debt are consolidated with the Fund’s financial
statements. See “Recourse Financings Risk.” The Fund intends to manage its investments to avoid treating such non-recourse borrowings as senior securities, although there is no guarantee that the Fund will be successful in doing so, and
failure to do so may impede the Fund’s ability to achieve its investment objective and decrease returns to shareholders. There is no guarantee that the Fund’s investments will be able to obtain mortgage loans on attractive terms or at all.
In certain limited cases, property level debt may be recourse to the Fund. The Fund’s private real estate investments may also include direct or indirect interests in companies or properties with highly leveraged capital structures. The
cumulative effect of the use of leverage by the Fund or the real estate investments in which the Fund invests could result in substantial losses, exceeding those that would have been incurred had leverage not been employed. Because of the leveraged
nature of the Fund’s private real estate investments, the Fund’s economic exposure to these investments may be greater than the percentage of the Fund’s total assets invested in such investments.
The Fund may invest up to 20% of its total assets in preferred and other fixed income or debt securities issued by any type of
company. The Fund may not invest more than 25% of it’s total assets in
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debt securities (which do not include for purposes of this investment policy
convertible debt securities which the investment advisor believes have attractive equity characteristics) issued or guaranteed by real estate companies. The Fund may invest in unrated debt securities or in debt securities rated lower than BBB- by S&P Global Ratings (S&P) or lower than Baa3 by Moody’s Investors Services, Inc. (Moody’s), which are speculative in nature and are commonly known as “high yield” or “junk
bonds.’’ The determination of whether a security is deemed investment grade or below investment grade will be determined at the time of investment. A security will be considered to be investment grade if it is rated as such by one
nationally recognized statistical rating organization (NRSRO) (for example minimum Baa3 or BBB- by Moody’s or S&P) or, if unrated, is judged to be investment grade by the investment advisor.
The Fund may invest up to 15% of its total assets in restricted and other investments that may be illiquid (i.e.
securities that are not readily marketable), including securities acquired in private placements, and securities issued by joint ventures and partnerships. Securities issued in private placements are “restricted securities’’ which are
subject to restrictions and, possibly, delays on resale. Restricted securities eligible for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 that are determined to be liquid by the Board of Directors,
or by the investment advisor under guidelines approved by the Directors, are not subject to this limitation.
Under
normal market conditions, up to 20% of the Funds’ total assets may be invested in foreign securities.
The Fund
may, but is not required to, use, without limit, various derivatives transactions to seek to generate return, facilitate portfolio management and mitigate risks. Although the Fund’s investment advisor may seek to use these kinds of transactions
to further the Fund’s investment objectives, no assurance can be given that they will achieve this result. The Fund may enter into (buy or sell) exchange-listed and
over-the-counter put and call options on securities (including securities of investment companies and baskets of securities), indices, and other financial instruments;
purchase and sell financial futures contracts and options thereon; enter into various interest rate transactions, such as swaps, caps, floors or collars or credit transactions; equity index, total return and credit default swaps; forward contracts;
and structured investments. In addition, the Fund may enter into various currency transactions, such as forward currency contracts, currency futures contracts, currency swaps or options on currency or currency futures. The Fund also may purchase and
sell derivative instruments that combine features of these instruments. The Fund may invest in other types of derivatives, structured and similar instruments which are not currently available but which may be developed in the future.
The Fund may also invest in mortgage- and asset-backed securities. Mortgage-backed securities are mortgage-related securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities, or issued by non-government entities. Mortgage related securities represent pools of mortgage loans assembled for sale to
investors by various government agencies, as well as by non-government issuers such as commercial banks, savings and loan institutions, mortgage bankers and private mortgage insurance companies. Although
certain mortgage-related securities are guaranteed by a third party or otherwise similarly secured, the market value of the security, which may fluctuate, is not guaranteed.
Although it has no present intention of doing so, the Fund has reserved the right to borrow for investment purposes in an amount of
up to 33 1/3% of its total assets, which constitutes a form of leverage.
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Temporary Defensive Positions. For temporary
defensive purposes or to keep cash on hand fully invested, and following the offering of additional common shares issued by the Fund pending investment in securities that meet the Fund’s investment objective, the Fund may invest up to 100% of
its total assets in high-grade debt securities, including corporate debt securities, U.S. government securities, and short-term money market instruments. The Fund may also, at any time, invest fund awaiting investment or to pay dividends and other
distributions to stockholders in short-term money market instruments. When and to the extent the Fund assumes a temporary defensive position, the Fund may not pursue or achieve its investment objective.
Real Property Valuation: The Fund intends to retain an independent valuation services firm (the Independent Valuation
Advisor) to assist the investment advisor in the determination of the Funds’ fair value of private real estate investments, including those held in a REIT Subsidiary. While the Independent Valuation Advisor will provide valuations of the real
property investments, it is not responsible for, and does not calculate, the Fund’s or a REIT Subsidiary’s daily NAV. The Fund’s valuation policies may change from time to time.
A REIT Subsidiary’s real property investments will primarily be through joint ventures with an operating partner. The
operating partner will be responsible (subject to oversight by the Investment Advisor) for maintaining the joint venture’s official books and records along with other pertinent information that will be the basis upon which the Independent
Valuation Advisor will prepare their appraisals as described below.
The Independent Valuation Advisor is expected to
administer the real property valuation process for investments held by a REIT Subsidiary and is expected to select (subject to the Investment Advisor’s approval) and manage the process associated with third-party appraisal firms with respect to
the valuation of the Fund’s real property investments.
Investments in newly acquired properties are expected to be
initially valued at cost. Each property is then expected to be valued by an independent third-party appraisal firm within approximately 90 to 120 days after it was acquired and no less than annually thereafter. Each third-party appraisal will be
reviewed by the Independent Valuation Advisor and the Valuation Committee for reasonableness.
Each month, the
investment advisor, with the assistance of the Independent Valuation Advisor, will determine an accrual schedule for the daily value of each real property investment based on an estimated month-end income accrual for each real property. The Fund
expects that a REIT Subsidiary will use the daily values determined in such accrual schedule for purposes of calculating its NAV. Any material changes to the valuation of real property investments of such REIT Subsidiary, and related changes to the
daily accrual schedule for any real property investment, will be reflected in the NAV calculation beginning with the first NAV calculated after a revised valuation is determined and approved by the CNS Valuation Committee.
The investment advisor will monitor for material events that the investment advisor believes may be expected to have a material
impact on the most recent estimated fair values of such real property investment. Possible examples of such a material change include an unexpected termination or renewal of a material lease, a material change in vacancies, an unanticipated
structural or environmental event at a property, capital market events, tenant bankruptcy, recent financial results or changes in the capital structure of the property, terrorism events, natural disasters or other force majeure events, any
regulatory changes that affect the investment, or a significant industry event or adjustment to the industry outlook that may cause the value of real property to change materially. Upon the occurrence of
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such a material event that is likely to have a material impact on the most
recent estimated values of the impacted real property investments and provided that the investment advisor is aware that such event has occurred, the investment advisor will instruct the Independent Valuation Advisor to evaluate the impact of the
event on the fair value of such investment. However, rapidly changing market conditions or material events may not be immediately reflected in the Fund’s or a REIT Subsidiary’s daily NAV.
The investment advisor will value the real properties using the valuation methodology it deems most appropriate and consistent with
industry best practices and market conditions. The investment advisor expects the primary methodology used to value real property investments will be the income approach, whereby value is derived by determining the present value of an asset’s
stream of future cash flows (for example, discounted cash flow analysis). Consistent with industry practices, the income approach incorporates actual contractual lease income, professional judgments regarding comparable rental and operating expense
data, the capitalization or discount rate and projections of future rent and expenses based on appropriate market evidence, and other subjective factors. Other methodologies that may also be used to value properties include, among other approaches,
sales comparisons and cost approaches.
Real estate appraisals are reported on a free and clear basis (i.e. any
property-level indebtedness that may be in place is not incorporated into the valuation). Property level debt will be valued separately in accordance with GAAP. Real properties held through joint ventures generally will be valued in a manner that is
consistent with the methods described above. Once the value of a real property held by the joint venture and the fair value of any other assets and liabilities of the joint venture is determined, the value of a REIT Subsidiary’s interest in the
joint venture would then be determined by the investment advisor using a hypothetical liquidation calculation to value a REIT Subsidiary’s interest in the joint venture.
Principal Risks of the Fund
The Fund is a diversified, closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete
investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objectives.
General Risks
Risk of Market Price Discount from Net Asset Value. Shares of closed-end investment companies frequently trade at a discount from their NAV. This characteristic is a risk separate and distinct from the risk that NAV could decrease as a result of investment activities. Whether
investors will realize gains or losses upon the sale of the shares will depend not upon the Fund’s NAV but entirely upon whether the market price of the shares at the time of sale is above or below the investor’s purchase price for the
shares. Because the market price of the shares is determined by factors such as relative supply of and demand for shares in the market, general market and economic conditions, and other factors beyond the control of the Fund, Fund shares may trade
at, above or below NAV.
Investment Risk. An investment in the Fund is subject to investment risk, including the
possible loss of the entire principal amount that you invest.
Market Risk. Your investment in Fund shares
represents an indirect investment in the REIT shares and other real estate securities owned by the Fund. The value of these securities, like other investments,
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may move up or down, sometimes rapidly and unpredictably. Your Fund shares
at any point in time may be worth less than what you invested, even after taking into account the reinvestment of Fund dividends and distributions.
Real Estate Market Risk. The Fund will not invest in real estate directly, but will invest in securities issued by real
estate companies. However, because of its policy of concentration in the securities of companies in the real estate industry, the Fund is also subject to the risks associated with the direct ownership of real estate. These risks include:
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declines in the value of real estate; |
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risks related to general and local economic conditions; |
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possible lack of availability of mortgage funds; |
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extended vacancies of properties; |
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increases in property taxes and operating expenses; |
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changes in zoning laws; |
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losses due to costs resulting from the clean-up of
environmental problems; |
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liability to third parties for damages resulting from environmental problems;
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casualty or condemnation losses; |
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changes in neighborhood values and the appeal of properties to tenants; |
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changes in interest rates; |
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failure of borrowers to pay their loans; |
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early payment or restructuring of mortgage loans; |
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slower mortgage origination; and |
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rising construction costs. |
Thus, the value of the Fund’s shares may change at different rates compared to the value of shares of a fund with investments
in a mix of different industries.
REIT Risk. In addition to the risks of securities linked to the real
estate industry, REITs are subject to certain other risks related to their structure and focus. REITs generally are dependent upon management skills and may not be diversified. REITs are also subject to heavy cash flow dependency, defaults by
borrowers and self-liquidation. In addition, REITs could possibly fail to (i) qualify for favorable tax treatment under applicable tax law, or (ii) maintain their exemptions from registration under the 1940 Act. Various factors may also
adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
Real Estate Cycle Risks. Real estate
values have been historically cyclical. As the general economy grows, demand for real estate increases and occupancies and rents increase. As
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occupancies and rents increase, property values increase, and new
development occurs. As development occurs, occupancies, rents and property values may decline. Because leases are usually entered into for long periods and development activities often require extended times to complete, the real estate value cycle
often lags the general business cycle. Because of this cycle, real estate companies have historically often incurred large swings in their profits and the prices of their securities.
Mortgage REIT Risks. Mortgage REITs are pooled investment vehicles that invest the majority of their assets in real property
mortgages and which generally derive income primarily from interest payments thereon. Investing in mortgage REITs involves certain risks related to investing in real property mortgages. In addition, mortgage REITs must satisfy highly technical and
complex requirements in order to qualify for the favorable tax treatment accorded to REITs under the Code. No assurances can be given that a mortgage REIT in which the Fund may invest will be able to continue to qualify as a REIT or that complying
with the REIT requirements under the Code will not adversely affect such REIT’s ability to execute its business plan.
REIT Tax and Regulatory Risks. REITs are subject to a highly technical and complex set of provisions in the Code. It is possible that the Fund may invest in a real estate company which purports to be a REIT and that the
company could fail to qualify as a REIT. In the event of any such unexpected failure to qualify as a REIT, the company would be subject to corporate-level taxation, significantly reducing the return to the Fund on its investment in such company.
Alternatively, a REIT’s attempted compliance with the REIT requirements under the Code could adversely affect such REIT’s ability to execute its business plan. REITs could also possibly fail to maintain their exemptions from registration
under the 1940 Act. The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the event of a default by a borrower or lessee, the REIT may experience delays in enforcing its
rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments.
Small- and Medium-Sized Companies Risk. Real estate companies in the industry tend to be small- to medium-sized companies in relation to the equity
markets as a whole. There may be less trading in a smaller company’s stock, which means that buy and sell transactions in that stock could have a larger impact on the stock’s price than is the case with larger company stocks. Smaller
companies also may have fewer lines of business so that changes in any one line of business may have a greater impact on a smaller company’s stock price than is the case for a larger company. Further, smaller company stocks may perform
differently in different cycles than larger company stocks. Accordingly, real estate company shares can, and at times will, perform differently than large company stocks.
Common Stock Risk. The Fund may invest in common stocks. Common stocks are subject to special risks. Although common
stocks have historically generated higher average returns than fixed-income securities over the long-term, common stocks also have experienced significantly more volatility in returns. Common stocks may be more susceptible to adverse changes in
market value due to issuer specific events or general movements in the equities markets. A drop in the stock market may depress the price of common stocks held by the Fund. Common stock prices fluctuate for many reasons, including changes to
investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, or the occurrence of political or economic events affecting issuers. For example, an adverse event, such as an unfavorable
earnings report, may depress the value of common stock in which the Fund has invested; the price of common stock of an issuer may be particularly sensitive to general movements in the stock market; or a drop in the stock market may
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depress the price of most or all of the common stocks held by the Fund.
Also, common stock of an issuer in the Fund’s portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer of the security experiences a decline in its financial condition.
The common stocks in which the Fund will invest are typically subordinated to preferred securities, bonds and other debt instruments in a company’s capital structure in terms of priority to corporate income and assets, and, therefore, will be
subject to greater risk than the preferred securities or debt instruments of such issuers. In addition, common stock prices may be sensitive to rising interest rates as the costs of capital rise and borrowing costs increase.
Preferred Securities Risk. There are various risks associated with investing in preferred securities, including those
described below. In addition, the on-going COVID-19 outbreak has increased certain risks associated with investing in preferred securities. The impact of the COVID-19
outbreak could persist for years to come and the full impact to financial markets is not yet known. See “Geopolitical Risk” below for additional information regarding the COVID-19 outbreak.
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Deferral and Omission Risk. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer or omit distributions for a stated period without any adverse consequences to the issuer. In certain cases, deferring or omitting distributions may be mandatory. If the Fund owns a preferred security that is
deferring its distributions, the Fund may be required to report income for tax purposes although it has not yet received such income. In addition, recent changes in bank regulations may increase the likelihood for issuers to defer or omit
distributions. |
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Credit and Subordination Risk. Credit risk is the risk that a preferred security in the
Fund’s portfolio will decline in price or the issuer of the security will fail to make dividend, interest or principal payments when due because the issuer experiences a decline in its financial status. Preferred securities are generally
subordinated to bonds and other debt instruments in a company’s capital structure in terms of having priority to corporate income, claims to corporate assets and liquidation payments, and therefore will be subject to greater credit risk than
more senior debt instruments. |
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Interest Rate Risk. Interest rate risk is the risk that preferred securities will decline in
value because of changes in market interest rates. When market interest rates rise, the market value of such securities generally will fall, and therefore the Fund may underperform during periods of rising interest rates. The Fund may be subject to
a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and the effect of government monetary policy initiatives and resulting market reaction to those initiatives. Preferred
securities with longer periods before maturity may be more sensitive to interest rate changes. |
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Prepayment and Extension Risk. Prepayment risk is the risk that changes in interest rates,
credit spreads or other factors will result in the call (repayment) of a preferred security more quickly than expected, such that the Fund may have to invest the proceeds in lower yielding securities, or that expectations of such early call will
negatively impact the market price of the security. Extension risk is the risk that changes in the interest rates or credit spreads may result in diminishing call expectations, which can cause prices to fall. |
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Call, Reinvestment and Income Risk. During periods of declining interest rates, an issuer may
be able to exercise an option to redeem its issue at par earlier than scheduled which is generally known as call risk. Recent regulatory changes may increase call risk with respect to certain types of preferred securities. If this occurs, the Fund
may be forced to reinvest in lower yielding securities. This is known as reinvestment risk. Preferred securities frequently have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem
preferred securities if the issuer can refinance the preferred securities at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer, or in the event of regulatory changes affecting the capital treatment
of a security. Another risk associated with a declining interest rate environment is that the income from the Fund’s portfolio may decline over time when the Fund invests the proceeds from new share sales at market rates that are below the
portfolio’s current earnings rate. |
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Liquidity Risk. Certain preferred securities may be substantially less liquid than many other
securities, such as common stocks or U.S. Government securities. Illiquid securities involve the risk that the securities will not be able to be sold at the time desired by the Fund or at prices approximating the value at which the Fund is carrying
the securities on its books. |
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Limited Voting Rights Risk. Generally, traditional preferred securities offer no voting rights
with respect to the issuer unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may elect a number of directors to the issuer’s board of directors. Generally, once all
the arrearages have been paid, the preferred security holders no longer have voting rights. Hybrid-preferred security holders generally have no voting rights. |
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Special Redemption Rights. In certain varying circumstances, an issuer of preferred securities
may redeem the securities prior to a specified date. For instance, for certain types of preferred securities, a redemption may be triggered by a change in U.S. federal income tax or securities laws. As with call provisions, a redemption by the
issuer may have a negative impact on the return of the security held by the Fund. |
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New Types of Securities. From time to time, preferred securities, including hybrid-preferred
securities, have been, and may in the future be, offered having features other than those described herein. The Fund reserves the right to invest in these securities if the investment advisor believes that doing so would be consistent with the
Fund’s investment objectives and policies. Since the market for these instruments would be new, the Fund may have difficulty disposing of them at a suitable price and time. In addition to limited liquidity, these instruments may present other
risks, such as high price volatility. |
Foreign (Non-U.S.) Securities Risk. Investing in
foreign securities involves certain risks not involved in domestic investments, including, but not limited to:
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future foreign economic, financial, political and social developments; |
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different legal systems; |
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the possible imposition of exchange controls or other foreign governmental laws or restrictions;
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less governmental supervision; |
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less publicly available information about foreign companies due to less rigorous disclosure and
accounting standards or regulatory practices; |
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high and volatile rates of inflation; |
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foreign currency devaluation; |
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fluctuating interest rates; and |
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different accounting, auditing and financial record-keeping standards and requirements.
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Investments in foreign securities, especially in emerging market countries, will expose the Fund to
the direct or indirect consequences of political, social or economic changes in the countries that issue the securities or in which the issuers are located. Political developments in foreign countries or the United States may at times subject such
countries to sanctions from the U.S. government, foreign governments and/or international institutions that could negatively affect the Fund’s investments in issuers located in, doing business in or with assets in such countries. Certain
countries in which the Fund may invest, especially emerging market countries, have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt,
balance of payments and trade difficulties and extreme poverty and unemployment. Many of these countries are also characterized by political uncertainty and instability. The cost of servicing external debt will generally be adversely affected by
rising international interest rates because many external debt obligations bear interest at rates which are adjusted based upon international interest rates. In addition, with respect to certain foreign countries, there is a risk of:
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the possibility of expropriation of assets; |
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difficulty in obtaining or enforcing a court judgment; |
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economic, political or social instability; and |
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diplomatic developments that could affect investments in those countries.
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In addition, individual foreign economies may differ favorably or unfavorably from the U.S. economy
in such respects as:
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growth of gross domestic product; |
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balance of payments position. |
To the extent the Fund’s investments are focused in a geographic region or country, the Fund will be subject, to a greater
extent than if the Fund’s assets were less geographically focused, to the risks of adverse changes in that region or country. In addition, certain investments in foreign securities also may be subject to foreign withholding or other taxes,
which would reduce the Fund’s return on those securities.
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Certain non-U.S. real estate companies in which the Fund invests may constitute
“passive foreign investment companies.” This may subject the Fund to U.S. federal tax and interest charges, or may cause the Fund to recognize taxable income without a corresponding receipt of cash. The Fund may be required to liquidate
other investments (including when it is not advantageous to do so) to meet its distribution requirements or otherwise qualify for treatment as a “regulated investment company” (RIC).
Debt Securities Risk. Debt securities generally present two primary types of risk—credit risk, which refers to the
possibility that the issuer of a security will not be able to make payments of interest and principal when due, and interest rate risk, which is the risk that debt securities will decline in value because of changes in market interest rates. Debt
securities also are subject to other similar risks as preferred securities, including call risk, extension risk and liquidity risk.
Below Investment Grade Securities Risk. The Fund may invest in below investment grade securities or securities that are unrated but judged to be below investment grade by the investment advisor. Below investment grade
securities, or equivalent unrated securities, generally involve greater volatility of price and risk of loss of income and principal, and may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher
grade securities. It is reasonable to expect that any adverse economic condition could disrupt the market for below investment grade securities, have an adverse impact on the value of those securities and adversely affect the ability of the issuers
of those securities to repay principal and interest on those securities.
Options Risk. Gains on
options transactions depend on the investment advisor’s ability to predict correctly the direction of stock prices, indexes, interest rates, and other economic factors, and unanticipated changes may cause poorer overall performance for the Fund
than if it had not engaged in such transactions. A rise in the value of the security or index underlying a call option written by the Fund exposes the Fund to possible loss or loss of opportunity to realize appreciation in the value of any portfolio
securities underlying or otherwise related to the call option. By writing a put option, the Fund assumes the risk of a decline in the underlying security or index. There can be no assurance that a liquid market will exist when the Fund seeks to
close out an option position, and for certain options not traded on an exchange no market usually exists. Trading could be interrupted, for example, because of supply and demand imbalances arising from a lack of either buyers or sellers, or an
options exchange could suspend trading after the price has risen or fallen more than the maximum specified by the exchange. Although the Fund may be able to offset to some extent any adverse effects of being unable to liquidate an option position,
that Fund may experience losses in some cases as a result of such inability, may not be able to close its position and, in such an event would be unable to control its losses.
Convertible Securities Risk. Convertible securities generally offer lower interest or dividend yields than non-convertible securities of similar quality. The market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. In the
absence of adequate anti-dilution provisions in a convertible security, dilution in the value of the Fund’s holding may occur in the event the underlying stock is subdivided, additional equity securities are issued for below market value, a
stock dividend is declared or the issuer enters into another type of corporate transaction that has a similar effect.
U.S. Government Securities Risk. The Fund may invest in direct obligations of the government of the United States or
its agencies. Obligations issued or guaranteed by the U.S. government, its agencies, authorities and instrumentalities and backed by the full faith and credit of the U.S. guarantee
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only that principal and interest will be timely paid to holders of the
securities. These entities do not guarantee that the value of such obligations will increase, and, in fact, the market values of such obligations may fluctuate. In addition, not all obligations of the U.S. Government, its agencies and
instrumentalities are backed by the full faith and credit of the U.S. Treasury. Some obligations are backed only by the credit of the issuing agency or instrumentality, and in some cases there may be some risk of default by the issuer. Any guarantee
by the U.S. Government or its agencies or instrumentalities of a security held by the Fund does not apply to the market value of such security or to Fund shares. In addition, a security backed by the U.S. Treasury or the full faith and credit of the
United States is guaranteed only as to the timely payment of interest and principal when held to maturity, but the market prices of such securities are not guaranteed and will fluctuate. In addition, because many types of U.S. Government securities
trade actively outside the United States, their prices may rise and fall as changes in global economic conditions affect the demand for these securities.
Restricted and Illiquid Securities Risk. The Fund may invest in investments that may be illiquid (i.e., securities that
may be difficult to sell at a desirable time or price). Illiquid securities are securities that are not readily marketable and may include some restricted securities, which are securities that may not be resold to the public without an effective
registration statement under the Securities Act or, if they are unregistered, may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. Illiquid investments involve the risk that the securities will not be
able to be sold at the time desired by the Fund or at prices approximating the value at which the Fund is carrying the securities on its books. Restricted securities and illiquid securities are often more difficult to value and the sale of such
securities often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of liquid securities trading on national securities exchanges or in the OTC markets. Contractual
restrictions on the resale of securities result from negotiations between the issuer and purchaser of such securities and therefore vary substantially in length and scope. To dispose of a restricted security that the Fund has a contractual right to
sell, the Fund may first be required to cause the security to be registered. A considerable period may elapse between a decision to sell the securities and the time when the Fund would be permitted to sell, during which time the Fund would bear
market risks.
Derivatives and Hedging Transactions Risk. The Fund’s use of derivatives, including for the
purpose of hedging interest rate or foreign currency risks, presents risks different from, and possibly greater than, the risks associated with investing directly in traditional securities. In certain types of derivatives transactions the Fund could
lose the entire amount of its investment; in other types of derivatives transactions the potential loss is theoretically unlimited. Although both OTC and exchange-traded derivatives markets may experience lack of liquidity, OTC non-standardized derivatives transactions are generally less liquid than exchange-traded instruments. In addition, the liquidity of a secondary market in an exchange-traded derivative contract may be adversely
affected by “daily price fluctuation limits” established by the exchanges which once reached, would prevent the liquidation of open positions. If it is not possible to close an open derivative position entered into by the Fund, the Fund
may be required to make cash payments of variation (or mark-to-market) margin and, if the Fund has insufficient cash, it may have to sell portfolio securities to meet
variation margin requirements at a time when it may be disadvantageous to do so. The inability to close derivatives transactions positions also could have an adverse impact on the Fund’s ability to effectively hedge its portfolio. Derivatives
transactions entered into to seek to manage the risks of the Fund’s portfolio of securities may have the effect of limiting gains from otherwise favorable market movements. The use of derivatives transactions
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may result in losses greater than if they had not been used. The Fund may
enter into swap, cap or other transactions to attempt to protect itself from increasing interest or dividend expenses resulting from increasing short-term interest rates on any leverage it incurs or increasing interest rates on securities held in
its portfolio. A decline in interest rates may result in a decline in the value of the transaction, which may result in a decline in the NAV of the Fund. In the event the Fund enters into forward currency contracts for hedging purposes, the Fund
will be subject to currency exchange rates risk. Currency exchange rates may fluctuate significantly over short periods of time and also can be affected unpredictably by intervention of U.S. or foreign governments or central banks, or the failure to
intervene, or by currency controls or political developments in the United States or abroad. Furthermore, the ability to successfully use derivative instruments depends on the ability of the investment advisor to predict pertinent market movements,
which cannot be assured. Structured notes and other related instruments carry risks similar to those of more traditional derivatives such as futures, forward and option contracts. However, structured instruments may entail a greater degree of market
risk and volatility than other types of debt obligations. The Fund will be subject to credit risk with respect to the counterparties to certain derivatives transactions entered into by the Fund and may experience losses in the event a counterparty
fails to perform its obligations under a derivative contract.
The investment advisor is registered with the Commodity
Futures Trading Commission as a commodity pool operator (“CPO”). However, with respect to the Fund, the investment advisor has claimed an exclusion from the definition of the CPO under the Commodity Exchange Act, as amended (the
“CEA”). Accordingly, the investment advisor, with respect to the Fund, is not subject to registration or regulation as a CPO under the CEA.
Private Real Estate Risk. The Fund’s investments in private real estate include additional risks. For example, lease
defaults, terminations by one or more tenants or landlord-tenant disputes may reduce the Fund’s revenues and net income. Any of these situations may result in extended periods during which there is a significant decline in revenues or no
revenues generated by a property. If this occurred, it could adversely affect the Fund’s results of operations.
The Fund’s financial position and its ability to make distributions may also be adversely affected by financial difficulties
experienced by any major tenants, including bankruptcy, insolvency or a general downturn in the business, or in the event any major tenants do not renew or extend their relationship as their lease terms expire. A tenant in bankruptcy may be able to
restrict the ability to collect unpaid rents or interest during the bankruptcy proceeding. Furthermore, dealing with a tenants’ bankruptcy or other default may divert management’s attention and cause the Fund to incur substantial legal and
other costs.
The Fund’s investments in real estate will be pressured in challenging economic and rental market
conditions. If the private real estate investment is unable to re-let or renew leases for all or substantially all of the space at these properties, if the rental rates upon such renewal or re-letting are significantly lower than expected, or if the
investment’s reserves for these purposes prove inadequate, the Fund will experience a reduction in net income and may be required to reduce or eliminate cash distributions.
The Fund may obtain only limited warranties when it purchases an equity investment in private commercial real estate. The purchase
of properties with limited warranties increases the risk that the Fund may lose some or all of its invested capital in the property, as well as the loss of rental income from that property if an issue should arise that decreases the value of that
property and is not covered by the limited warranties. If any of these results occur, it may have a material adverse effect on the Fund’s business, financial condition and results of operations and the Fund’s ability to make distributions.
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The Fund’s investments in private real estate are
expected to be substantially less liquid than many other securities, such as common stocks or U.S. government securities.
REIT Subsidiary Risk: Investments in a REIT Subsidiary are subject to risks associated with the direct ownership of real estate. A REIT Subsidiary, and therefore the Fund, may be affected by changes in the real estate markets
generally as well as changes in the values of any properties owned by a REIT Subsidiary or securing any mortgages owned by a REIT Subsidiary (which changes in value could be influenced by market conditions for real estate in general or issues
related to the particular property). If a REIT Subsidiary’s underlying assets are concentrated in properties used by a particular industry, it will be subject to risks associated with such industry. Each REIT Subsidiary will be wholly-owned
(except for its preferred shareholders) by the Fund.
Restrictions under the Internal Revenue Code applicable to
regulated investment companies such as the Fund can limit investments in private real estate, or cause such investments to be structured in a less tax-advantaged manner. Each REIT Subsidiary will not be diversified and will be subject to heavy cash
flow dependency, possible lack of availability of financing, changes in interest rates, prepayment and defaults by borrowers, self-liquidation, adverse economic conditions, adverse changes in tax laws, and the possibility of failing to maintain an
exemption under the 1940 Act. Any rental income or income from the disposition of real estate could adversely affect a REIT Subsidiary’s ability to retain its tax status, which would have adverse tax consequences. Each REIT Subsidiary is
subject to the risk that it will need to liquidate a holding at an economically inopportune time.
By investing through
a REIT Subsidiary, the Fund bears the fees and expenses of the REIT Subsidiary (including, among other things operating costs, transaction expenses, administrative and custody fees, legal expenses and custody expenses). Thus, investing through a
REIT Subsidiary may cause the Fund to be subject to higher operating expenses than if it invested directly.
To the
extent a REIT Subsidiary holds mortgages, it will be subject to the following risks: (1) during periods of declining interest rates, mortgagors may be inclined to prepay their mortgages, which prepayment may diminish the yield on securities issued
by the REIT Subsidiary; and (2) when interest rates rise, the value of the REIT Subsidiary’s investment in fixed rate obligations can be expected to decline.
A REIT Subsidiary may have limited diversification because it may invest in a limited number of properties, a narrow geographic
area, or a single type of property. The private real estate investments owned by a REIT Subsidiary will not be traded on a national securities exchange and an investment therein is, therefore, illiquid. These investments are also more difficult to
value than publicly traded real estate investments.
A REIT Subsidiary, and therefore the Fund, will be affected by
changes in the value of the underlying real property, fluctuations in the demand for real estate, defaults by tenants, and decreases in market rates for rent. To the extent it invests in mortgages or otherwise derives income from the collection of
interest payments, a REIT Subsidiary may be affected by the quality of credit extended, prepayments and defaults by borrowers, and changes in market interest rates, and may be more susceptible to interest rate risk.
Each REIT Subsidiary likely will depend on its ability to generate cash flow to make distributions to the Fund. The Fund’s
investments in a REIT Subsidiary could cause the Fund to recognize income in excess of cash received from those investments and, as a result, the Fund may be required to sell
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portfolio investments, including when it is not advantageous to do so, in
order to make distributions. By investing in a REIT Subsidiary, the Fund is indirectly exposed to risks associated with the REIT Subsidiary’s investments. A REIT Subsidiary may invest in real estate and real estate-related investments through
wholly-owned special purpose companies. Because each REIT Subsidiary will not be registered under the 1940 Act, the Fund, as an investor in the REIT Subsidiary, will not have the protections afforded to investors in registered investment companies.
Changes in the laws of the United States, under which the Fund and a REIT Subsidiary are organized, including the regulations under the Code, could result in the inability of the Fund and/or a REIT Subsidiary to operate as intended and could
negatively affect the Fund and its shareholders. Ownership of and investment through a REIT Subsidiary by a closed-end management investment company is relatively novel investment strategy. Differences between the statutory and regulatory regimes
applicable to a management investment company and a REIT present additional challenges and risks with regard to a REIT Subsidiary’s qualification as a REIT under the Code, which could result in the REIT Subsidiary and the Fund having additional
tax liability, and reduce the Fund’s current income.
A REIT Subsidiary could default on its obligations or go
bankrupt. Each REIT Subsidiary will be operated as a separate company and will observe its own corporate formalities (i.e., it will maintain its own separate books & records, and execute agreements in its own name and on its own behalf).
Accordingly, creditors and other claimants should only be able to look to the REIT Subsidiary and its assets for settlement of their claims against the REIT Subsidiary. Creditors and other claimants against the REIT Subsidiary will not have general
recourse against the Fund unless the Fund guarantees the debt or obligations of the REIT Subsidiary. See “Recourse Financings Risk.” Each REIT Subsidiary is responsible for its own legal costs in defending against any such claims, but
those legal costs may diminish its returns, and thus ultimately diminish returns to Fund shareholders. Although each REIT Subsidiary will be organized so that it is generally responsible for its own debts and obligations, there is no guarantee that
creditors and other claimants against the REIT Subsidiary will not try to reach the assets of the Fund, even where there is no legal basis for recourse to the Fund’s assets. The Fund intends to dispute any such claims, but to the extent it does
so it may incur legal costs that will diminish its returns to shareholders.
The REIT Subsidiary may use derivatives for
speculative or hedging purposes and non-hedging purposes (that is, to seek to increase total return). The REIT Subsidiary may incur leverage for investment or other purposes, which may increase its volatility. The REIT Subsidiary may invest without
limitation in restricted and illiquid investments and equity securities without limitation as to market capitalization, including micro-cap companies, the prices of which may be subject to erratic market movements.
Potential Conflicts of Interest Risk. The investment advisor and its affiliates are involved worldwide with a broad spectrum
of financial services and asset management activities and may engage in the ordinary course of business in activities in which their interests or the interests of their other clients may conflict with those of the Fund. The investment advisor and
its affiliates provide investment management services to other funds and discretionary managed accounts that follow an investment program similar to that of the Fund. Subject to the requirements of the 1940 Act, the investment advisor and its
affiliates intend to engage in such activities and receive compensation from third parties for their services. Neither the investment advisor nor its affiliates are under any obligation to share any investment opportunity, idea or strategy with the
Fund. As a result, other accounts of the investment advisor and its
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affiliates may compete with the Fund for appropriate investment
opportunities. The results of the Fund’s investment activities, therefore, may differ from those of other accounts managed by the investment advisor or its affiliates, and it is possible that the Fund could sustain losses during periods in
which one or more of the proprietary or other accounts managed by the investment advisor or its affiliates achieve profits. The investment professionals associated with the investment advisor are actively involved in other investment activities not
concerning the Fund and will not be able to devote all of their time to the Fund’s business and affairs. The investment advisor and its affiliates have adopted policies and procedures designed to address potential conflicts of interests and to
allocate investments among the accounts managed by the investment advisor and its affiliates in a fair and equitable manner. The Fund depends to a significant extent on the investment advisor’s access to the investment professionals and senior
management of the investment advisor and the information and deal flow generated by the investment advisor’s investment professionals and senior management during the normal course of their investment and portfolio management activities. The
senior management and the investment professionals of the investment advisor source, evaluate, analyze and monitor the Fund’s investments. The Fund’s future success will depend on the continued service of the senior management team and
investment professionals of the investment advisor.
The investment advisor will not cause the Fund to engage in certain
negotiated investments alongside affiliates unless the Fund has received an order granting an exemption from Section 17 of the 1940 Act or unless such investments are not prohibited by Section 17(d) of the Investment Company Act or interpretations
of Section 17(d) as expressed in SEC no-action letters or other available guidance. A private real estate investment may be owned by multiple Cohen & Steers funds, including the Fund. The investment advisor believes that having multiple funds
invest in a single private real estate investment may result in economies of scale for shareholders as expenses will be shared across a larger asset base. However, investing alongside other Cohen & Steers funds involves certain risks. Although
any funds investing in the same private real estate investment will have similar investment strategies with respect to private real estate investments and therefore are likely to be aligned with respect to their acquisition, holding and disposition
of the investment, it is possible that the strategies of one fund might change to the extent that it no longer wishes to invest in the investment. In such a case, its ability to dispose of its interest in the private real estate investment will be
limited. Similarly, it is possible that the other fund owners of the investment may wish to dispose of their interest in the investment, potentially necessitating a sale of the investment at a time or price that the Fund believes is disadvantageous.
Real Estate Joint Venture Risk. The Fund through a REIT Subsidiary may enter into real estate joint ventures
with third parties to make investments. The Fund may also make investments in partnerships or other co-ownership arrangements or participations. Such investments may involve risks not otherwise present with other methods of investment, including,
for instance, the following risks and conflicts of interest:
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the real estate joint venture partner in an investment could become insolvent or bankrupt;
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fraud or other misconduct by the real estate joint venture partner; |
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the joint venture partner will typically have day-to-day control over the investment, and the
Fund’s rights regarding certain major decisions affecting the ownership of the real estate joint venture and the joint venture property, such as the sale of the property or the making of additional capital contributions for the benefit of the
property, will typically be limited. These |
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factors may prevent the Fund from taking actions that are opposed by its real estate joint venture partner; |
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under certain real estate joint venture arrangements, neither party may have the power to
unilaterally direct certain activities of the venture and, under certain circumstances, an impasse could result regarding cash distributions, reserves, or a proposed sale or refinancing of the investment, and this impasse could have an adverse
impact on the real estate joint venture, which could adversely impact the operations and profitability of the real estate joint venture and/or the amount and timing of distributions the Fund receives from the real estate joint venture;
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the real estate joint venture partner may at any time have economic or business interests or goals
that are or that become in conflict with the Fund’s business interests or goals, including, for instance, the operation of the properties; |
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the real estate joint venture partner may be structured differently than the Fund for tax purposes
and this could create conflicts of interest; |
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the Fund will typically rely upon its real estate joint venture partner to manage the day-to day
operations of the real estate joint venture and underlying assets, as well as to prepare financial information for the real estate joint venture and any failure to perform these obligations appropriately may have a negative impact on the Fund’s
performance and results of operations; |
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the real estate joint venture partner may experience a change of control, which could result in new
management of the real estate joint venture partner with less experience or conflicting interests to the Fund and be disruptive to the Fund’s business; |
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the real estate joint venture partner may be in a position to take action contrary to the Fund’s
instructions or requests or contrary to the Fund’s policies or objectives; |
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the terms of the real estate joint ventures could restrict the Fund’s ability to sell or
transfer its interest to a third party when it desires on advantageous terms, which could result in reduced liquidity; |
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the Fund or its real estate joint venture partner may have the right to cause the Fund to sell its
interest, or acquire its partner’s interest, at a time when the Fund otherwise would not have initiated such a transaction; and |
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the real estate joint venture partner may not have sufficient personnel or appropriate levels of
expertise to adequately support the Fund’s initiatives. |
In addition, disputes between the Fund
and its real estate joint venture partners may result in litigation or arbitration that would increase the Fund’s expenses and prevent the Fund’s officers and trustees from focusing their time and efforts on the Fund’s business. Any
of the above might subject the Fund to liabilities and thus reduce its returns on the investment with that real estate joint venture partner.
Recourse Financings Risk: In certain cases, financings for the Fund’s commercial real estate properties may be recourse
to the Fund. Generally, commercial real estate financings are structured as non-recourse to the borrower, which limits a lender’s recourse to the property pledged as collateral for the loan, and not the other assets of the borrower or to any
parent of borrower, in the event of a loan default. However, lenders customarily will require that a creditworthy parent entity enter into so-called “recourse carveout” guarantees to protect the lender against certain bad-faith or other
intentional acts of the borrower in violation of the loan documents.
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Valuation Risk: The Fund is subject to valuation
risk, which is the risk that one or more of the assets in which the Fund invests are priced incorrectly, due to factors such as incomplete data, market instability or human error. If the Fund ascribes a higher value to assets and their value
subsequently drops or fails to rise because of market factors, returns on the Fund’s investment may be lower than expected and could experience losses. Within the parameters of the Fund’s valuation guidelines, the valuation methodologies
used to value the Fund’s assets, in particular the Fund’s private real estate investments, will involve subjective judgments and projections and that ultimately may not materialize. Ultimate realization of the value of an asset depends to
a great extent on economic, market and other conditions beyond the Fund’s control and the control of the investment advisor and the Fund’s independent valuation firms. Rapidly changing market conditions or material events may not be
immediately reflected in the Fund’s daily NAV.
Mortgage- and Asset-Backed Securities Risk The risks
associated with mortgage-related securities include: (1) credit risk associated with the performance of the underlying mortgage properties and of the borrowers owning these properties; (2) adverse changes in economic conditions and
circumstances, which are more likely to have an adverse impact on mortgage-related securities secured by loans on certain types of commercial properties than on those secured by loans on residential properties; (3) prepayment risk, which can
lead to significant fluctuations in value of the mortgage-related security; (4) loss of all or part of the premium, if any, paid; and (5) decline in the market value of the security, whether resulting from changes in interest rates or
prepayments on the underlying mortgage collateral.
Asset-backed securities involve certain risks in addition to those
presented by mortgage-related securities: (1) primarily, these securities do not have the benefit of the same security interest in the underlying collateral as mortgage-related securities and are more dependent on the borrower’s ability to
pay; (2) credit card receivables are generally unsecured, and the debtors are entitled to the protection of a number of state and Federal consumer credit laws, many of which give debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due; and (3) most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If these obligations are sold to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the
holders of the automobile receivables may not have an effective security interest in all of the obligations backing such receivables. There is a possibility that recoveries on repossessed collateral may not, in some cases, be able to support
payments on these securities.
Active Management Risk. As an actively managed portfolio, the value
of the Fund’s investments could decline because the financial condition of an issuer may change (due to such factors as management performance, reduced demand or overall market changes), financial markets may fluctuate or overall prices may
decline, or the investment advisor’s investment techniques could fail to achieve the Fund’s investment objectives or negatively affect the Fund’s investment performance.
Cyber Security Risk. With the increased use of technologies such as the Internet and the dependence on computer systems
to perform necessary business functions, the Fund and its service providers (including the investment advisor) may be susceptible to operational and information security risks resulting from cyber-attacks and/or other technological malfunctions. In
general, cyber-attacks are deliberate, but unintentional events may have similar effects. Cyber-attacks include, among others,
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stealing or corrupting data maintained online or digitally, preventing
legitimate users from accessing information or services on a website, releasing confidential information without authorization, gaining unauthorized access to digital systems for purposes of misappropriating assets and causing operational
disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service. Successful
cyber-attacks against, or security breakdowns of, the Fund, the investment advisor, or a custodian, transfer agent, or other affiliated or third-party service provider may adversely affect the Fund or its shareholders. For instance, cyber-attacks
may interfere with the processing of shareholder transactions, affect the Fund’s ability to calculate its NAV, cause the release of private shareholder information or confidential Fund information, impede trading, cause reputational damage, and
subject the Fund to regulatory fines, penalties or financial losses, reimbursement or other compensation costs, and additional compliance costs. Furthermore, as a result of breaches in cyber security or other operational and technology disruptions
or failures, an exchange or market may close or issue trading halts on specific securities or an entire market, which may result in the Fund being, among other things, unable to buy or sell certain securities or financial instruments or unable to
accurately price its investments. While the Fund has established business continuity plans and systems designed to prevent cyber-attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not
been identified. Similar types of cyber security risks also are present for issuers of securities in which the Fund invests, which could result in material adverse consequences for such issuers, and may cause the Fund’s investment in such
securities to lose value.
Each of the Fund and the investment advisor may have limited ability to prevent or mitigate
cyber-attacks or security or technology breakdowns affecting the Fund’s third-party service providers. While the Fund has established business continuity plans and systems designed to prevent or reduce the impact of cyber-attacks, such plans
and systems are subject to inherent limitations.
Geopolitical Risk. Occurrence of global events similar
to those in recent years, such as war (including Russia’s military invasion of Ukraine), terrorist attacks, natural or environmental disasters, country instability, infectious disease epidemics or pandemics, such as that caused by the COVID-19
virus and its variants (“COVID-19”), market instability, debt crises and downgrades, embargoes, tariffs, sanctions and other trade barriers and other governmental trade or market control programs, the potential exit of a country from its
respective union and related geopolitical events, may result in market volatility and may have long-lasting impacts on U.S. and global economies and financial markets. Supply chain disruptions or significant changes in the supply or prices of
commodities or other economic inputs may have material and unexpected effects on both global securities markets and individual countries, regions, sectors, companies or industries. Events occurring in one region of the world may negatively impact
industries and regions that are not otherwise directly impacted by the events. Additionally, those events, as well as other changes in foreign and domestic political and economic conditions, could adversely affect individual issuers or related
groups of issuers, securities markets, interest rates, secondary trading, credit ratings, inflation, investor sentiment and other factors affecting the value of the Fund’s investments.
Although the long-term economic fallout of COVID-19 is difficult to predict, it has contributed to, and may continue to contribute
to, market volatility, inflation and systemic economic weakness. COVID-19 and efforts to contain its spread may also exacerbate other pre-existing political, social, economic, market and financial risks. In addition, the U.S. government and other
central banks across Europe, Asia, and elsewhere announced and/or adopted economic relief packages in response to COVID-19.
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The end of any such program could cause market downturns, disruptions and
volatility, particularly if markets view the ending as premature. The COVID-19 pandemic and its effects are expected to continue, and therefore the economic outlook, particularly for certain industries and businesses, remains inherently uncertain.
On January 31, 2020, the United Kingdom (“UK”) withdrew from the European Union (“EU”) (referred to
as Brexit), commencing a transition period that ended on December 31, 2020. The EU-UK Trade and Cooperation Agreement, a bilateral trade and cooperation deal governing the future relationship between the UK and the EU (“TCA”),
provisionally went into effect on January 1, 2021, and entered into force officially on May 1, 2021, but critical aspects of the relationship remain unresolved and subject to further negotiation and agreement. Brexit has resulted in volatility in
European and global markets and could have negative long-term impacts on financial markets in the UK and throughout Europe. There is still considerable uncertainty relating to the potential consequences of the exit, how the negotiations for new
trade agreements will be conducted, and whether the UK’s exit will increase the likelihood of other countries also departing the EU. During this period of uncertainty, the negative impact on the UK, European and broader global economies, could
be significant, potentially resulting in increased market volatility and illiquidity, political, economic, and legal uncertainty, and lower economic growth for companies that rely significantly on Europe for their business activities and revenues.
On February 24, 2022, Russia launched a large-scale invasion of Ukraine significantly amplifying already existing
geopolitical tensions. The United States and many other countries have instituted various economic sanctions against Russia, Russian individuals and entities and Belarus. The extent and duration of the military action, sanctions imposed and other
punitive actions taken (including any Russian retaliatory responses to such sanctions and actions), and resulting disruptions in Europe and globally cannot be predicted, but could be significant and have a severe adverse effect on the global
economy, securities markets and commodities markets globally, including through global supply chain disruptions, increased inflationary pressures and reduced economic activity. To the extent the Fund has exposure to the energy sector, the Fund may
be especially susceptible to these risks. These disruptions may also make it difficult to value the Fund’s portfolio investments and cause certain of the Fund’s investments to become illiquid. The strengthening or weakening of the U.S.
dollar relative to other currencies may, among other things, adversely affect the Fund’s investments denominated in non-U.S. dollar currencies. It is difficult to predict when similar events affecting the U.S. or global financial markets may
occur, the effects that such events may have, and the duration of those effects.
Regulatory Risk: The U.S.
government has proposed and adopted multiple regulations that could have a long-lasting impact on the Fund and on the mutual fund industry in general. The SEC’s final rules, related requirements and amendments to modernize reporting and
disclosure, along with other potential upcoming regulations, could, among other things, restrict the Fund’s ability to engage in transactions, impact flows into the Fund and/or increase overall expenses of the Fund. In addition to Rule 18f-4,
which governs the way derivatives are used by registered investment companies, the SEC, Congress, various exchanges and regulatory and self-regulatory authorities, both domestic and foreign, have undertaken reviews of the use of derivatives by
registered investment companies, which could affect the nature and extent of instruments used by the Fund. The Fund and the instruments in which it invests may be subject to new or additional regulatory constraints in the future. While the full
extent of all of these regulations is unclear, these regulations and actions may adversely affect both the Fund and the instruments in which the Fund invests and its ability to execute its investment strategy. For example, climate change
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regulation (such as decarbonization legislation, other mandatory controls to
reduce emissions of greenhouse gases, or related disclosure requirements) could significantly affect the Fund or its investments by, among other things, increasing compliance costs or underlying companies’ operating costs and capital
expenditures. Similarly, regulatory developments in other countries may have an unpredictable and adverse impact on the Fund.
Deflation Risk. Deflation risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market valuation of companies, their assets and their revenues. In addition,
deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more likely, which may result in a decline in the value of the Fund’s portfolio.
Inflation Risk. Inflation risk is the risk that the value of assets or income from investments will be worth less in
the future as inflation decreases the value of money. As inflation increases, the real value of the Fund’s shares and distributions thereon can decline. In addition, during any periods of rising inflation, dividend rates of any debt securities
issued by the Fund would likely increase, which would tend to further reduce returns to common shareholders.
Tax
Risk. The Fund may invest in preferred securities or other securities the Federal income tax treatment of which may not be clear or may be subject to recharacterization by the Internal Revenue Service. It could be more difficult for
the Fund to comply with the tax requirements applicable to regulated investment companies if the tax characterization of the Fund’s investments or the tax treatment of the income from such investments were successfully challenged by the
Internal Revenue Service.
LIBOR Risk. Many financial instruments are tied to the London Interbank Offered Rate,
or “LIBOR,” to determine payment obligations, financing terms, hedging strategies, or investment value. LIBOR is the offered rate for short-term Eurodollar deposits between major international banks. The Head of the UK Financial Conduct
Authority the (FCA) and LIBOR’s administrator, ICE Benchmark Administration (IBA) ceased publication of most LIBOR settings at the end of 2021 and the IBA is expected to cease publication of a majority of U.S. dollar LIBOR settings after June
30, 2023. In addition, global regulators have announced that, with limited exceptions, no new LIBOR-based contracts should be entered into after 2021. Actions by regulators have resulted in the establishment of alternative reference rates to LIBOR
in most major currencies (e.g., the Secured Overnight Financing Rate (SOFR) for U.S. dollar LIBOR and the Sterling Overnight Interbank Average Rate for GBP LIBOR). Other countries are introducing their own local-currency-denominated alternative
reference rates for short-term lending and global consensus on alternative rates is lacking.
In March 2022, the U.S.
federal government enacted the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) to establish a process for replacing LIBOR in certain existing contracts that do not already provide for the use of a clearly defined or practicable
replacement benchmark rate as described in the LIBOR Act. Generally, for contracts that do not contain a fallback provision as described in the LIBOR Act, a benchmark replacement recommended by the Federal Reserve Board will effectively replace the
U.S. dollar LIBOR benchmark in the contract after June 30, 2023. The recommended benchmark replacement will be based on SOFR published by the Federal Reserve Bank of New York, including certain spread adjustments and benchmark replacement conforming
changes. On December 16, 2022, the Federal Reserve Board adopted a final rule that implements the LIBOR Act. The final rule restates safe harbor protections contained in the LIBOR Act for selection or use of the replacement benchmark rate selected
by the Federal Reserve Board. Consistent with the LIBOR Act, the final rule is also
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intended to ensure that LIBOR contracts adopting a benchmark rate selected
by the Federal Reserve Board will not be interrupted or terminated following LIBOR’s replacement.
There remains
uncertainty and risk regarding the willingness and ability of issuers and lenders to include enhanced provisions in new and existing contracts or instruments, the suitability of the proposed replacement rates, and the process for amending existing
contracts and instruments remains unclear. As such, the transition away from LIBOR may lead to increased volatility and illiquidity in markets that are tied to LIBOR, reduced values of, inaccurate valuations of, and miscalculations of payment
amounts for LIBOR-related investments or investments in issuers that utilize LIBOR, increased difficulty in borrowing or refinancing and reduced effectiveness of hedging strategies, adversely affecting the Fund’s performance or NAV. In
addition, any alternative reference rate may be a less effective substitute resulting in prolonged adverse market conditions for the Fund. Since the usefulness of LIBOR as a benchmark could deteriorate during the transition period, these effects
could occur prior to the cessation of LIBOR publications.
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MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the Board of Directors. The Board of Directors approves all
significant agreements between the Fund and persons or companies furnishing services to it, including the Fund’s agreements with its investment advisor, administrator, co-administrator, custodian and
transfer agent. The management of the Fund’s day-to-day operations is delegated to its officers, the investment advisor, administrator and co-administrator, subject always to the investment objective and policies of the Fund and to the general supervision of the Board of Directors.
The Board of Directors and officers of the Fund and their principal occupations during at least the past five years are set forth
below.