-------------------------------------------------------------------------------- COHEN & STEERS QUALITY INCOME REALTY FUND, INC. April 22, 2002 To Our Shareholders: We are pleased to submit to you our first report for the period ended March 31, 2002. The net asset value per common share at that date was $15.00. The Fund commenced operations on February 28, 2002 and as of March 31, 2002 had net assets of $565.7 million and was 89% invested. Subsequent to quarter end, the underwriters' final over-allotment was exercised, and the Fund now has 38.4 million common shares outstanding. The Fund also declared $0.105 per share monthly dividends payable to common shareholders of record on April 15, 2002, May 15, 2002, and June 14, 2002. In addition, on April 4, 2002, the Fund issued $280 million in Taxable Auction Market Preferred Shares. The proceeds of this issue, which received a 'AAA/aaa' rating from Standard & Poor's and Moody's, will be used to make additional investments in real estate securities. In order to lock in the dividend rate on a significant portion of the Taxable Auction Market Preferred Shares financing, the Fund thereafter entered into interest rate swaps with a notional value of $210 million. INVESTMENT REVIEW REIT performance, in general, continued to excel in the first quarter, with the averages reaching new highs and substantially outdistancing all of the major stock market indexes. Every REIT property sector advanced in the first quarter, with the best performance being turned in by the Hotel sector, which was up 26.2%, as investors anticipated a strong rebound in this most economically sensitive sector. The Regional Mall sector (+11.9%) performed well for similar reasons, and because of its consistent earnings growth during the recent period of economic weakness. The weakest sectors in the quarter were Apartment (+4.4%), which began the year at a very high relative valuation, and Office (+5.2%), whose fundamentals are not generally expected to respond as quickly to renewed economic growth. More than ever, it appears that investors have begun to accept REITs as an asset class. Already this year, flows into real estate mutual funds have reached a five-year high. REIT equity issuance was about $2.5 billion in the first quarter, up from $356 million in first quarter 2001. REIT bond issuance, however, at $2.0 billion, was down 47% from last year's $3.8 billion. Some observers compare recent trends to those of the mid-1990's REIT bull market. We, however, believe today's environment is completely different. That previous bull market was the result of a unique cyclical growth opportunity: REITs were able to acquire property from distressed owners at attractive prices and to finance those acquisitions at favorable terms. Today, by contrast, despite ready access to debt and equity capital, REITs have found opportunities to grow via acquisitions scarce, as real estate, having been redistributed in the previous cycle, is generally held in very strong hands. In addition, because of the economic slowdown and the decline in the demand for space, there are very few new development opportunities that make economic sense. 1 -------------------------------------------------------------------------------- COHEN & STEERS QUALITY INCOME REALTY FUND, INC. In our opinion, the recent change in investor sentiment toward REITs is the result of the steady performance of property investments during the economic slowdown, and the ability of REITs to maintain earnings and dividend growth in more challenging times. The performance of REITs is in marked contrast to the decline in overall stock market values over the past two years and to the record decline in corporate profits registered in 2001. Indeed, the past several years have clearly demonstrated the portfolio diversification benefits of REITs. In addition, there appears to be a renewed focus on income as a primary source of investment return. As investors have reduced their long-term return expectations for many major asset classes, the attractiveness of REIT dividends has never been greater. At the beginning of the year, the current yield of REITs (7.4%) far exceeded that offered by all other equities and was higher than many fixed-income investments. Unlike fixed-income investments, however, REITs offer the possibility of growth-and, as the following table demonstrates, REIT dividend growth over the past three years has been substantial. Nearly every one of the 50 largest REITs (which in total represent about 75% of the market capitalization of the REIT universe) increased its dividend per share over the past two years. Excluding Hotel REITs, which were the casualties of last year's unusual decline in travel, the REIT dividend record is nearly perfect, with only one company reducing its dividend in each of the past two years. Further, thus far in 2002, 20 companies, or 40% of this group, have already increased their dividend payouts. Considering that the past two years were weak for real estate fundamentals, one can only imagine the dividend growth potential of REITs in the economic and real estate upturns that we envision for late-2002 and beyond. Dividend Growth per Share ------------------------------------------------------------------------------------- 1999 2000 2001 ------------------------------------------------------------------------------------- 50 Largest REITs Weighted-Average Growth 6.3% 6.4% 7.0% # of Companies Increasing Dividends 46 44 44 # of Companies Reducing Dividends 0 1 3 50 Largest REITs - ex Hotels Weighted-Average Growth 6.6% 6.1% 10.9% # of Companies Increasing Dividends 48 46 46 # of Companies Reducing Dividends 0 1 1 ------------------------------------------------------------------------------------ In a partial reversal of last year's experience, the performance gap between the higher-yielding, smaller-cap companies and the lower-yielding, larger-cap companies has begun to close. While all sectors produced strong positive returns in the quarter, it appears that the faster-growing companies have begun to outperform the higher-yielding companies. This is logical, considering that interest rates, whose low levels caused investors to flock to the higher-yielding companies last year, have begun to rise in 2002. Further, it appears that the more recession-resistant sectors have begun to underperform, possibly the result of investors believing that the recession may be over. For example, community center owners returned 6.4% in the quarter, versus 11.4% for the mall owners. The 2 -------------------------------------------------------------------------------- COHEN & STEERS QUALITY INCOME REALTY FUND, INC. largest companies have yet to uniformly become market-performance leaders; however, we believe that as the economic and real estate recoveries progress, leadership by the larger companies should resume. INVESTMENT OUTLOOK It may seem ironic that the strong performance of REITs has coincided with evidence that real estate fundamentals continue to deteriorate. Vacancy rates for every property type are expected to rise for much of this year, as the delivery of new space is greater than the demand for space. Furthermore, some observers have suggested that in some regions the Office sector may not begin to recover until 2004. As a result, many analysts have reduced their earnings growth estimates for both 2002 and 2003. Rising interest rates might well reverse the trends of the past year, whereby REITs had access to low-cost debt capital and investors were attracted to the group's above-average dividend yields. Compounding this situation is the fact that, as a result of their outstanding performance, the share prices of many REITs are believed by some to now exceed their underlying asset values. In fact, some analysts' most optimistic return expectations for 2002 have been met in just the first quarter; as a result, these analysts are now recommending the sale of REIT stocks. It is also ironic that REITs, which have proven themselves to be star performers during and after economic slowdowns, are expected by many to underperform during economic recoveries. The argument is that in a rebounding economy better relative growth can be found in industrial and technology companies. In contrast, we believe that investors look further out. In our opinion, the market is looking for signs of renewed economic growth and improved property fundamentals beyond the immediate future. Indeed, there are some very substantial signs that the economy may be entering a phase of very strong growth. In addition, the economic slowdown has also led to a slowdown in construction. Thus, while it may take time for some property markets to return to a better supply/demand balance, the process of getting there is already underway. We fully expect that earnings growth will accelerate once absorption turns positive. Perhaps the most important issue to reconcile regards valuation. While many believe that REIT share prices are higher than their net asset values (NAVs) by about 5%-10%, there is no other measure that even suggests that REITs are overvalued. REIT stocks, trading on average at less than 10x this year's expected earnings, are near the bottom of their historical multiple range. Compared to other financial-market instruments, REITs continue to look extremely cheap. Indeed, the S&P 500 Index, trading at 23x earnings, is at the upper end of its historical range, while the NASDAQ multiple is simply stratospheric. Even with the recent rise in interest rates, the cost of borrowing remains near a record low. Furthermore, the gap in yields between REITs and Treasuries is still at the upper end of its historical range. And, although REIT dividend yields are in the middle of their long-term range, their payout ratios are at an all-time low. Additionally, the gap between interest rates and the widely accepted real estate capitalization rates (real estate income as a percentage of asset value) is the widest it has been in over 30 years, at about 4.5 percentage points. If cap rates were to decline by as little as 50 basis points, NAVs would rise by about 12%, turning today's perceived NAV premium into a discount. The only way we can reconcile the NAV measure with all of the other valuation measures is to conclude that many analysts' calculations of real estate values are not realistic. Most assets, particularly real estate, must be valued based on current and future income in relation to the cost of capital. Assuming that we are entering a 3 -------------------------------------------------------------------------------- COHEN & STEERS QUALITY INCOME REALTY FUND, INC. period of economic recovery that leads to rising occupancies, rental rates, and net income, property values should be expected to rise over the next several years. In addition, investors are likely to put a premium on the ability of REITs to generate income that grows consistently, with low volatility. Indeed, as venture capital, private equity, and technology investments have failed to produce adequate risk-adjusted returns, we believe core property investments are likely to become a mainstay in many diversified portfolios. As real estate returns to favor, we expect that REITs will be the investment choice for many. We believe that the modern REIT era is entering its second wave of growth, having come through the first by delivering superior returns, professional management, quality property portfolios, and a high degree of investor liquidity. While we cannot ignore the fact that REIT share prices have come a long way over the past two years, we believe that the long-term outlook for this sector remains extremely bright. Sincerely, MARTIN COHEN ROBERT H. STEERS MARTIN COHEN ROBERT H. STEERS President Chairman GREG E. BROOKS GREG E. BROOKS Portfolio Manager -------------------------------------------------------------------- Cohen & Steers is online at WWW.COHENANDSTEERS.COM We have recently enhanced both the look and features of our website to give you more information about our company, our funds and the REIT market in general. Check out our new interactive Asset Allocation Tool, which allows you to add REITs to any portfolio to see how they impact expected total returns and risk. Or try the Fund Performance Calculator and see how our funds have performed versus the S&P 500 Index or NASDAQ Composite. As always, you can also get daily net asset values, fund fact sheets, portfolio highlights, recent news articles and our overall insights on the REIT market. So visit us today at WWW.COHENANDSTEERS.COM -------------------------------------------------------------------- 4 -------------------------------------------------------------------------------- COHEN & STEERS QUALITY INCOME REALTY FUND, INC. SCHEDULE OF INVESTMENTS MARCH 31, 2002 (UNAUDITED) NUMBER DIVIDEND OF SHARES VALUE YIELD* ----------- ------------ -------- EQUITIES 89.23% COMMON STOCK 72.86% APARTMENT/RESIDENTIAL 8.71% Apartment Investment & Management Co. -- Class A....................................... 91,000 $ 4,401,670 6.78% Gables Residential Trust........................ 419,000 13,009,950 7.76 Home Properties of New York..................... 357,700 12,322,765 6.97 Summit Properties............................... 218,600 5,355,700 7.76 United Dominion Realty Trust.................... 896,700 14,203,728 7.01 ------------ 49,293,813 ------------ DIVERSIFIED 2.36% Colonial Properties Trust....................... 387,600 13,352,820 7.66 ------------ HEALTH CARE 11.51% Health Care Property Investors.................. 70,300 2,850,665 7.89 Health Care REIT................................ 906,125 25,299,010 8.38 Nationwide Health Properties.................... 1,360,300 27,410,045 9.13 Ventas.......................................... 755,100 9,552,015 7.51 ------------ 65,111,735 ------------ INDUSTRIAL 0.96% First Industrial Realty Trust................... 51,300 1,757,025 7.94 ProLogis Trust.................................. 158,100 3,691,635 6.08 ------------ 5,448,660 ------------ OFFICE 25.24% Arden Realty.................................... 230,200 6,537,680 7.11 Brandywine Realty Trust......................... 504,000 12,045,600 7.36 Crescent Real Estate Equities Co. .............. 100,000 1,940,000 7.73 Equity Office Properties Trust.................. 689,100 20,666,109 6.67 Highwoods Properties............................ 844,300 23,716,387 8.33 Mack-Cali Realty Corp. ......................... 489,200 16,965,456 7.15 Prentiss Properties Trust....................... 740,700 21,865,464 7.25 Vornado Realty Trust............................ 884,543 39,061,419 5.98 ------------ 142,798,115 ------------ OFFICE/INDUSTRIAL 1.67% Kilroy Realty Corp. ............................ 46,000 1,297,660 7.02 Liberty Property Trust.......................... 58,200 1,876,950 7.32 Reckson Associates Realty Corp. -- Class B...... 243,200 6,264,832 10.09 ------------ 9,439,442 ------------ 5 -------------------------------------------------------------------------------- COHEN & STEERS QUALITY INCOME REALTY FUND, INC. SCHEDULE OF INVESTMENTS -- (CONTINUED) MARCH 31, 2002 (UNAUDITED) NUMBER DIVIDEND OF SHARES VALUE YIELD* ----------- ------------ -------- SHOPPING CENTER 22.41% COMMUNITY CENTER 8.83% Developers Diversified Realty Corp. ............ 1,747,378 $ 36,694,938 7.24% Federal Realty Investment Trust................. 23,400 600,678 7.48 New Plan Excel Realty........................... 122,000 2,446,100 8.23 Weingarten Realty............................... 198,098 10,182,237 6.48 ------------ 49,923,953 ------------ REGIONAL MALL 13.58% Macerich Co. ................................... 1,180,257 35,584,749 7.30 Mills Corp. .................................... 1,090,909 30,501,816 7.83 Taubman Centers................................. 713,800 10,749,828 6.77 ------------ 76,836,393 ------------ TOTAL SHOPPING CENTER........................... 126,760,346 ------------ TOTAL COMMON STOCK (Identified cost -- $397,281,145).................... 412,204,931 ------------ PREFERRED STOCK 16.37% Apartment Investment & Management Co., 10.10%, Series R...................................... 950,000 24,462,500 9.71 #Developers Diversified Realty Corp., 9.44%, Series F...................................... 1,000,000 24,350,000 8.83 FelCor Lodging Trust, 9.00%, Series B........... 3,100 76,508 9.12 #Highwoods Properties, 8.625%, Series A......... 10,000 9,455,000 9.12 Home Properties of New York, 9.00%, Series F.... 200,000 4,925,000 9.14 LaSalle Hotel Properties, 10.25%, Series A...... 1,000,000 26,100,000 9.81 Mid-America Apartment Communities, 8.875%, Series B...................................... 16,800 416,640 8.95 PS Business Parks, 8.75%, Series F.............. 5,200 127,972 8.90 #ProLogis Trust, 8.54%, Series C................ 4,000 191,500 8.92 Taubman Centers, 8.30%, Series A................ 108,900 2,504,700 9.04 ------------ TOTAL PREFERRED STOCK (Identified cost -- $92,336,904)..................... 92,609,820 ------------ TOTAL EQUITIES (Identified cost -- $489,618,049).................... 504,814,751 ------------ 6 -------------------------------------------------------------------------------- COHEN & STEERS QUALITY INCOME REALTY FUND, INC. SCHEDULE OF INVESTMENTS -- (CONTINUED) MARCH 31, 2002 (UNAUDITED) PRINCIPAL AMOUNT VALUE ----------- ------------ COMMERCIAL PAPER 14.86% American General, 1.60%, due 4/01/02............ $22,000,000 $ 22,000,000 Citicorp, 1.60%, due 4/01/02.................... 22,000,000 22,000,000 Household Finance, 1.60%, due 4/01/02........... 22,000,000 22,000,000 Union Bank of Switzerland Finance, 1.60%, due 4/01/02....................................... 18,038,000 18,038,000 ------------ TOTAL COMMERCIAL PAPER (Identified cost -- $84,038,000)..................... 84,038,000 ------------ TOTAL INVESTMENTS (Identified cost -- $573,656,049) ......................... 104.09% 588,852,751 LIABILITIES IN EXCESS OF OTHER ASSETS ........... (4.09)% (23,132,943) ------ ------------ NET ASSETS -- COMMON STOCK (Equivalent to $15.00 per share based on 37,707,000 shares of capital stock outstanding) ................................. 100.00% $565,719,808 ------ ------------ ------ ------------ ------------------- * Dividend yield is computed by dividing the security's current annual dividend rate by the last sale price on the principal exchange, or market, which such security trades. # Security trades infrequently. The Fund prices this security at fair value using procedures approved by the Fund's Board of Directors. 7 -------------------------------------------------------------------------------- COHEN & STEERS QUALITY INCOME REALTY FUND, INC. FINANCIAL HIGHLIGHTS MARCH 31, 2002 (UNAUDITED) NET ASSET VALUE TOTAL NET ASSETS PER SHARE --------------------------- --------------- NET ASSET VALUE: Beginning of period: 2/28/02**............. $ 101,976## $14.57 Net investment income.................. $ 2,265,933 $ 0.06 Net realized and unrealized gain on investments......................... 15,269,299 0.40 Offering costs charged to paid-in capital............................. (1,131,000) (0.03) ------ Capital stock transactions: Sold.............................. 549,213,600 ------------ Net increase in net asset value............ 565,617,832 0.43 ------------ ------ End of period: 3/31/2002................... $565,719,808 $15.00 ------------ ------ ------------ ------ ------------------- * Financial information included in this report has been taken from the records of the Fund without examination by independent accountants. ** Commencement of operations. ## Amount of seed capital includes an additional contribution of $1,701 from Cohen & Steers Capital Management, Inc. ------------------------------------------------------------------- REINVESTMENT PLAN We urge shareholders who want to take advantage of this plan and whose shares are held in 'Street Name' to consult your broker as soon as possible to determine if you must change registration into your own name to participate. ------------------------------------------------------------------- 8 -------------------------------------------------------------------------------- COHEN & STEERS QUALITY INCOME REALTY FUND, INC. MEET THE COHEN & STEERS FAMILY OF OPEN-END FUNDS: FOR HIGH CURRENT INCOME: FOR TOTAL RETURN: COHEN & STEERS COHEN & STEERS EQUITY INCOME FUND REALTY SHARES IDEAL FOR INVESTORS SEEKING A HIGH DIVIDEND IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL YIELD AND CAPITAL APPRECIATION, INVESTING RETURN THROUGH BOTH CURRENT INCOME AND PRIMARILY IN REITS CAPITAL APPRECIATION, INVESTING PRIMARILY IN A, B, C AND I SHARES AVAILABLE REITS SYMBOLS: CSEIX, CSBIX, CSCIX, CSDIX SYMBOL: CSRSX FOR CAPITAL APPRECIATION: FOR TOTAL RETURN: COHEN & STEERS COHEN & STEERS SPECIAL EQUITY FUND INSTITUTIONAL REALTY SHARES IDEAL FOR INVESTORS SEEKING MAXIMUM CAPITAL IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL APPRECIATION, INVESTING IN A LIMITED NUMBER RETURN THROUGH BOTH CURRENT INCOME AND OF COMPANIES ENGAGED IN THE REAL ESTATE OR CAPITAL APPRECIATION, INVESTING PRIMARILY IN RELATED INDUSTRIES REITS CONCENTRATED, HIGHLY FOCUSED PORTFOLIO OFFERS LOW TOTAL EXPENSE RATIO SYMBOL: CSSPX HIGHER MINIMUM PURCHASE REQUIRED SYMBOL: CSRIX FOR MORE INFORMATION ABOUT ANY COHEN & STEERS FUND OR TO OBTAIN A PROSPECTUS PLEASE CONTACT US AT: 1-800-330-REIT, OR VISIT OUR WEBSITE AT WWW.COHENANDSTEERS.COM THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT EACH FUND INCLUDING ALL CHARGES AND EXPENSES, AND SHOULD BE READ CAREFULLY BEFORE YOU INVEST. 9 -------------------------------------------------------------------------------- COHEN & STEERS QUALITY INCOME REALTY FUND, INC. OFFICERS AND DIRECTORS KEY INFORMATION Robert H. Steers INVESTMENT MANAGER Director and Chairman Cohen & Steers Capital Management, Inc. 757 Third Avenue Martin Cohen New York, NY 10017 Director and President (212) 832-3232 Gregory C. Clark FUND SUB-ADMINISTRATOR AND CUSTODIAN Director State Street Bank and Trust Company 225 Franklin Street Bonnie Cohen Boston, MA 02110 Director TRANSFER AGENT George Grossman Equiserve Trust Company Director 150 Royall Street Canton, MA 02021 Richard J. Norman (800) 426-5523 Director LEGAL COUNSEL Willard H. Smith Jr. Simpson Thacher & Bartlett Director 425 Lexington Avenue New York, NY 10017 Greg E. Brooks Vice President New York Stock Exchange Symbol: RQI Adam Derechin Website: www.cohenandsteers.com Vice President and Assistant Treasurer This report is for shareholder information. This is not a prospectus Lawrence B. Stoller intended for use in the purchase or sale Assistant Secretary of Fund shares. Past performance is of course no guarantee of future results and your investment may be worth more or less at the time you sell. 10 COHEN & STEERS QUALITY INCOME REALTY FUND 757 THIRD AVENUE NEW YORK, NY 10017 COHEN & STEERS -------------------------- QUALITY INCOME REALTY FUND QUARTERLY REPORT MARCH 31, 2002