Cohen & Steers Quality Income Realty Fund. edelivery NOW AVAILABLE 280 PARK AVENUE QUALITY INCOME REALTY FUND COHEN & STEERS

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1 COHEN & STEERS QUALITY INCOME REALTY FUND 280 PARK AVENUE NEW YORK, NY edelivery NOW AVAILABLE Stop traditional mail delivery; receive your shareholder reports and prospectus online. Sign up at cohenandsteers.com Annual Report December 31, 2016 Cohen & Steers Quality Income Realty Fund RQIAR

2 To Our Shareholders: We would like to share with you our report for the year ended December 31, The net asset value (NAV) at that date was $13.42 per common share. The Fund s common stock is traded on the New York Stock Exchange (NYSE) and its share price can differ from its NAV; at year end, the Fund s closing price on the NYSE was $ The total returns for the Fund and its comparative benchmarks were: Six Months Ended Year Ended December 31, 2016 December 31, 2016 Cohen & Steers Quality Income Realty Fund at NAV a % 7.41% Cohen & Steers Quality Income Realty Fund at Market Value a % 7.64% FTSE NAREIT Equity REIT Index b % 8.52% Blended Benchmark 80% FTSE NAREIT Equity REIT Index/20% BofA Merrill Lynch REIT Preferred Securities Index b % 6.58% S&P 500 Index b % 11.96% The performance data quoted represent past performance. Past performance is no guarantee of future results. The investment return and the principal value of an investment will fluctuate and shares, if sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Performance results reflect the effects of leverage, resulting from borrowings under a credit agreement. Current total returns of the Fund can be obtained by visiting our website at cohenandsteers.com. The Fund s returns assume the reinvestment of all dividends and distributions at prices obtained under the Fund s dividend reinvestment plan. Index performance does not reflect the deduction of any fees, taxes or expenses. An investor cannot invest directly in an index. Performance figures for periods shorter than one year are not annualized. Managed Distribution Policy Cohen & Steers Quality Income Realty Fund, Inc. (the Fund), acting in accordance with an exemptive order received from the Securities and Exchange Commission and with approval of its Board of Directors (the Board), adopted a managed distribution policy under which the Fund intends to include a As a closed-end investment company, the price of the Fund s NYSE-traded shares will be set by market forces and can deviate from the NAV per share of the Fund. b The FTSE NAREIT Equity REIT Index contains all tax-qualified REITs except timber and infrastructure REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. The BofA Merrill Lynch REIT Preferred Securities Index tracks the performance of fixed-rate U.S. dollar-denominated preferred securities issued in the U.S. domestic market including all real estate investment trusts. The S&P 500 Index is an unmanaged index of 500 large-capitalization stocks that is frequently used as a general measure of U.S. stock market performance. 1

3 long-term capital gains, where applicable, as part of the regular cash distributions to its shareholders (the Plan). On September 15, 2016, the Board of Directors of the Fund approved a change in the frequency of the Fund s cash distributions to shareholders from quarterly to monthly, effective October 1, The Plan gives the Fund greater flexibility to realize long-term capital gains and to distribute those gains on a regular monthly basis. In accordance with the Plan, the Fund currently distributes $0.08 per share on a monthly basis. The Fund may pay distributions in excess of the Fund s investment company taxable income and net realized gains. This excess would be a return of capital distributed from the Fund s assets. 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. Shareholders should not draw any conclusions about the Fund s investment performance from the amount of these distributions or from the terms of the Fund s Plan. The Fund s total return based on net asset value is presented in the table above as well as in the Financial Highlights table. The Plan provides that the Board may amend or terminate the Plan at any time without prior notice to Fund shareholders; however, at this time, there are no reasonably foreseeable circumstances that might cause the termination. The termination of the Plan could have the effect of creating a trading discount (if the Fund s stock is trading at or above net asset value) or widening an existing trading discount. Market Review The real estate securities market reached a major milestone in 2016 when, for the first time since the Global Industry Classification Standard (GICS) was created in 1999, a new sector classification was added to the major stock market indexes. The move elevated real estate to its own sector category, separate from the financials sector. The reclassification acknowledged that while property investment companies share certain similarities with other capital-intensive businesses, their cash-flow-oriented business models and ties to real estate market cycles have produced a distinctive risk-return profile. Investors had other reasons to cheer real estate as well, with the sector producing a favorable total return during the year. The broad stock market got off to a difficult start early in the year as global growth slowed and interest rates declined to record lows on renewed deflation concerns. Real estate investment trusts (REITs) outperformed during this period as investors favored the stocks predictable income generation and attractive yields. Global economic fears subsided as the year progressed, however, as data generally improved. The amended growth outlook resulted in a rebound in interest rates and an increase in investors risk appetite. REITs continued to advance as real estate market fundamentals strengthened, before surrendering some of their gains as expectations of a Federal Reserve interest rate hike grew. Donald Trump s surprise victory in the November U.S. presidential election further lifted growth and inflation expectations, due to the anticipated impact of changes in fiscal and tax policies. The sharp rise in yields weighed on the returns of many higher yielding equities. During this time, the more cyclical real estate sectors such as hotels and industrial REITs produced favorable returns, while those considered to be more defensive like health care and free standing landlords generally declined. 2

4 REIT Preferred Securities Underperformed REIT preferred securities delivered modestly negative total returns in They came under pressure early in the year from widening credit spreads and late in the year from rising bond yields. In response to a tightening U.S. labor market and signs of firming inflation, the Federal Reserve raised its target interest rate by 0.25% in December to a range of 0.50% to 0.75% the central bank s only rate hike in Overall, the preferred securities strong income generation over the course of the year was not enough to make up for price pressures. Fund Performance The Fund had a positive total return for the year and outperformed its blended benchmark on both a market price and NAV basis. Our security selection and underweight allocation to REIT preferreds was a large contributor to relative performance, as we chose not to own a number of issues, particularly in the self storage sector, that underperformed during the year. In addition, the Fund s performance benefited from several out-of-benchmark positions, including preferreds from specialty REIT EPR Properties and Alexandria Real Estate Equities. The latter benefited from strong office demand in prime coastal markets. Regarding common shares, the effect of the Fund s allocations to shopping centers contributed to relative performance. Most notably, performance benefited from an overweight in the first quarter as the sector outperformed the benchmark and we were underweight when it underperformed in the fourth quarter. The sector, with properties that are generally anchored by non-discretionary grocery stores and bargain-priced retailers, produced a positive total return but lagged the benchmark in the slowgrowth environment that prevailed throughout the year. The Fund s overweight in free standing REITs also contributed to relative performance, although this was partially offset by our stock selection in the sector. Additionally, the effect of our allocations to health care contributed to relative performance, although this was largely offset by our stock selection in the sector. Companies with the most stable cash flows, such as owners of medical office buildings, generally performed quite well during the year, while those with skilled nursing care tenants underperformed amid concerns that regulatory issues could threaten tenants profit margins. Our underweight in industrial landlords, the top-performing sector during the year, was a large detractor from relative performance. We were underweight the sector due to generally high valuations, but the shares displayed remarkable strength due to rising logistics demand related to burgeoning internet retailing and as supply absorption exceeded the market s expectations, which resulted in healthy pricing power for the property owners. The Fund s stock selection and overweight in the underperforming apartment sector also detracted from relative performance. Despite generally healthy demand for apartments, investors were concerned that the sector s cash-flow growth is peaking amid rising supply. Hotels rallied strongly, particularly in the second half of the year. Investors looked ahead to the end of the new supply cycle, anticipating that industry fundamentals would recover in 2017 along with the economy. Our security selection in the sector contributed to relative performance, but this was more than offset by our underweight allocation. Due to unattractive valuations we did not own several companies that produced impressive returns. 3

5 Impact of Leverage on Fund Performance The Fund employs leverage as part of a yield-enhancement strategy. Leverage, which can increase total return in rising markets (just as it can have the opposite effect in declining markets), significantly contributed to the Fund s performance for the 12-month period ended December 31, Impact of Derivatives on Fund Performance The Fund engaged in the buying and selling of single stock options with the intention of enhancing total returns and reducing overall volatility. These contracts did not have a material impact on the Fund s total return for the 12-month period ended December 31, Sincerely, WILLIAM F. SCAPELL Portfolio Manager THOMAS N. BOHJALIAN Portfolio Manager JASON YABLON Portfolio Manager The views and opinions in the preceding commentary are subject to change without notice and are as of the date of the report. There is no guarantee that any market forecast set forth in the commentary will be realized. This material represents an assessment of the market environment at a specific point in time, should not be relied upon as investment advice and is not intended to predict or depict performance of any investment. Visit Cohen & Steers online at cohenandsteers.com For more information about the Cohen & Steers family of mutual funds, visit cohenandsteers.com. Here you will find fund net asset values, fund fact sheets and portfolio highlights, as well as educational resources and timely market updates. Our website also provides comprehensive information about Cohen & Steers, including our most recent press releases, profiles of our senior investment professionals and their investment approach to each asset class. The Cohen & Steers family of mutual funds invests in major real asset categories including real estate securities, listed infrastructure, commodities and natural resource equities, as well as preferred securities and other income solutions. 4

6 Our Leverage Strategy (Unaudited) Our current leverage strategy utilizes borrowings up to the maximum permitted by the Investment Company Act of 1940 to provide additional capital for the Fund, with an objective of increasing the net income available for shareholders. As of December 31, 2016, leverage represented 24% of the Fund s managed assets. Through a combination of variable and fixed rate financing, the Fund has locked in interest rates on a significant portion of this additional capital for periods expiring in 2017, 2018 and 2019 a (where we effectively reduce our variable rate obligation and lock in our fixed rate obligation over various terms). Locking in a significant portion of our leveraging costs is designed to protect the dividend-paying ability of the Fund. The use of leverage increases the volatility of the Fund s net asset value in both up and down markets. However, we believe that locking in portions of the Fund s leveraging costs for the various terms partially protects the Fund s expenses from an increase in short-term interest rates. Leverage Facts b,c Leverage (as a % of managed assets) % % Fixed Rate % % Variable Rate % Weighted Average Rate on Financing % a Weighted Average Term on Financing years a The Fund seeks to enhance its dividend yield through leverage. The use of leverage is a speculative technique and there are special risks and costs associated with leverage. The net asset value of the Fund s shares may be reduced by the issuance and ongoing costs of leverage. So long as the Fund is able to invest in securities that produce an investment yield that is greater than the total cost of leverage, the leverage strategy will produce higher current net investment income for shareholders. On the other hand, to the extent that the total cost of leverage exceeds the incremental income gained from employing such leverage, shareholders would realize lower net investment income. In addition to the impact on net income, the use of leverage will have an effect of magnifying capital appreciation or depreciation for shareholders. Specifically, in an up market, leverage will typically generate greater capital appreciation than if the Fund were not employing leverage. Conversely, in down markets, the use of leverage will generally result in greater capital depreciation than if the Fund had been unlevered. To the extent that the Fund is required or elects to reduce its leverage, the Fund may need to liquidate investments, including under adverse economic conditions which may result in capital losses potentially reducing returns to shareholders. There can be no assurance that a leveraging strategy will be successful during any period in which it is employed. a On February 24, 2015, the Fund amended its credit agreement to extend the fixed rate financing terms by three years expiring in 2020, 2021 and The weighted average rate on financing does not include the three year extension and will increase as the extended fixed-rate tranches become effective. The weighted average term on financing includes the three year extension. b Data as of December 31, Information is subject to change. c See Note 7 in Notes to Financial Statements. 5

7 December 31, 2016 Top Ten Holdings a (Unaudited) % of Managed Security Value Assets Simon Property Group $125,129, Prologis ,124, Vornado Realty Trust ,046, Equinix ,468, UDR ,061, Essex Property Trust ,252, Public Storage ,317, Kilroy Realty Corp ,506, Brixmor Property Group ,348, Equity Residential ,856, a Top ten holdings are determined on the basis of the value of individual securities held. The Fund may also hold positions in other types of securities issued by the companies listed above. See the Schedule of Investments for additional details on such other positions. Sector Breakdown (Based on Managed Assets) (Unaudited) Industrials (Common) 4.4% Diversified (Preferred) 4.8% Self Storage (Common) 5.4% Diversified (Common) 6.1% Other 26.2% Specialty (Common) 6.9% Health Care (Common) 7.4% Office (Common) 9.6% Residential (Common) 17.3% Shopping Centers (Common) 11.9% 6

8 SCHEDULE OF INVESTMENTS December 31, 2016 See accompanying notes to financial statements. Number of Shares Value COMMON STOCK REAL ESTATE 101.2% DIVERSIFIED 7.9% American Assets Trust a,b ,860 $ 14,555,009 BGP Holdings PLC (EUR) (Australia) c,d ,927, ,646 Gramercy Property Trust ,181,024 20,021,800 Vornado Realty Trust a,b ,392 67,046,453 Washington REIT ,188 14,553, ,393,104 HEALTH CARE 9.8% HCP a,b ,300,536 38,651,930 Healthcare Trust of America, Class A a ,246,447 36,284,072 Physicians Realty Trust a,b ,913,060 36,271,618 Quality Care Properties d ,701 4,877,865 Ventas ,300 26,902, ,987,841 HOTEL 4.8% Host Hotels & Resorts a,b ,997,973 37,641,811 Pebblebrook Hotel Trust ,497 10,278,536 Sunstone Hotel Investors a ,493,037 22,768,814 70,689,161 INDUSTRIALS 5.8% Prologis a,b ,612,517 85,124,772 NET LEASE 5.6% Four Corners Property Trust ,705 8,222,467 Gaming and Leisure Properties a ,634 18,850,713 Spirit Realty Capital ,574,515 38,819,233 STORE Capital Corp ,452 16,739,839 82,632,252 OFFICE 12.6% Alexandria Real Estate Equities a ,406 34,273,159 Boston Properties a,b ,744 24,243,340 Douglas Emmett a,b ,297 30,282,539 Highwoods Properties ,862 9,021,731 Hudson Pacific Properties a,b ,400 17,821,272 Kilroy Realty Corp. a,b ,215 40,506,402 7

9 SCHEDULE OF INVESTMENTS (Continued) December 31, 2016 Number of Shares SL Green Realty Corp ,275 $ 29,068, ,216,519 RESIDENTIAL 22.8% APARTMENT 20.3% American Campus Communities a ,447 39,639,167 Apartment Investment & Management Co. a ,711 39,028,415 Colony Starwood Homes a,b ,128,348 32,507,706 Equity Residential a,b ,281 39,856,925 Essex Property Trust a,b ,237 47,252,603 Mid-America Apartment Communities ,770 36,012,039 UDR a,b ,728,667 63,061, ,358,627 MANUFACTURED HOME 2.5% Value Sun Communities a,b ,661 36,363,779 TOTAL RESIDENTIAL ,722,406 SELF STORAGE 7.1% CubeSmart a,b ,443 19,928,739 Extra Space Storage a,b ,155 38,554,732 Public Storage a,b ,761 45,317, ,800,555 SHOPPING CENTERS 15.7% COMMUNITY CENTER 5.4% Brixmor Property Group a ,652,289 40,348,897 Kimco Realty Corp ,270 11,278,473 Regency Centers Corp. a,b ,284 27,599,582 79,226,952 REGIONAL MALL 10.3% General Growth Properties a,b ,016,719 25,397,641 Simon Property Group a,b , ,129, ,527,424 TOTAL SHOPPING CENTERS ,754,376 See accompanying notes to financial statements. 8

10 SCHEDULE OF INVESTMENTS (Continued) December 31, 2016 Number of Shares Value SPECIALTY 9.1% CyrusOne a,b ,706 $ 17,163,169 DuPont Fabros Technology ,664 20,808,060 Equinix a,b ,378 64,468,901 QTS Realty Trust, Class A a ,136 30,491, ,931,982 TOTAL COMMON STOCK (Identified cost $1,019,870,076) ,483,252,968 PREFERRED SECURITIES $25 PAR VALUE 16.0% BANKS 0.2% Huntington Bancshares, 6.25%, Series D ,600 2,874,080 BANKS FOREIGN 0.6% Barclays Bank PLC, 8.125%, Series 5 (United Kingdom) a ,000 9,194,400 FINANCIAL DIVERSIFIED FINANCIAL SERVICES 0.2% KKR & Co. LP, 6.75%, Series A ,000 3,033,600 INDUSTRIALS 0.2% CHS, 6.75% ,931 2,836,427 REAL ESTATE 14.4% DIVERSIFIED 5.9% Colony Financial, 8.50%, Series A a ,975 9,219,269 DuPont Fabros Technology, 6.625%, Series C ,000 2,536,000 EPR Properties, 9.00%, Series E (Convertible) a ,000 9,005,880 Lexington Realty Trust, 6.50%, Series C ($50 Par Value) a ,395 3,812,111 National Retail Properties, 6.625%, Series D ,000 2,511,000 National Retail Properties, 5.70%, Series E ,615 4,058,463 National Retail Properties, 5.20%, Series F , ,925 NorthStar Realty Finance Corp., 8.25%, Series B ,261 1,329,927 NorthStar Realty Finance Corp., 8.50%, Series D ,097 4,867,241 NorthStar Realty Finance Corp., 8.75%, Series E ,107 4,423,150 PS Business Parks, 5.75%, Series U a ,050 2,748,204 PS Business Parks, 5.70%, Series V ,000 2,794,800 See accompanying notes to financial statements. 9

11 SCHEDULE OF INVESTMENTS (Continued) December 31, 2016 Number of Shares Value Urstadt Biddle Properties, 7.125%, Series F ,600 $ 2,718,300 VEREIT, 6.70%, Series F ,997 17,804,084 Vornado Realty Trust, 6.625%, Series G ,000 4,528,800 Vornado Realty Trust, 6.625%, Series I ,420 4,320,845 Vornado Realty Trust, 5.70%, Series K ,024 3,204,725 Wells Fargo Real Estate Investment Corp., 6.375%, Series A ,537 5,223,706 85,924,430 HEALTH CARE 0.2% Welltower, 6.50%, Series J ,700 2,958,978 HOTEL 2.2% Ashford Hospitality Trust, 7.375%, Series F ,000 5,093,280 Chesapeake Lodging Trust, 7.75%, Series A a ,000 5,088,000 Hospitality Properties Trust, 7.125%, Series D ,725 3,876,944 LaSalle Hotel Properties, 6.30%, Series J ,000 3,118,180 Pebblebrook Hotel Trust, 6.50%, Series C ,000 3,889,600 Summit Hotel Properties, 6.45%, Series D ,000 2,896,650 Sunstone Hotel Investors, 6.95%, Series E ,000 4,563,000 Sunstone Hotel Investors, 6.45%, Series F ,100 3,159,706 31,685,360 INDUSTRIALS 0.3% Monmouth Real Estate Investment Corp., 7.875%, Series B a ,000 2,050,320 STAG Industrial, 6.875%, Series C ,000 3,079,200 5,129,520 OFFICE 0.6% Corporate Office Properties Trust, 7.375%, Series L a ,000 4,032,000 Government Properties Income Trust, 5.875%, due 5/1/ ,000 4,478,300 8,510,300 See accompanying notes to financial statements. 10

12 SCHEDULE OF INVESTMENTS (Continued) December 31, 2016 Number of Shares Value RESIDENTIAL 1.3% APARTMENT 0.6% Apartment Investment & Management Co., 6.875% a,b.. 204,000 $ 5,263,200 Blue Rock Residential Growth REIT, 8.25%, Series A ,100 4,092,455 9,355,655 MANUFACTURED HOME 0.2% Equity Lifestyle Properties, 6.75%, Series C ,994 2,913,769 SINGLE FAMILY 0.5% American Homes 4 Rent, 6.50%, Series D ,340 3,158,500 American Homes 4 Rent, 6.35%, Series E ,000 4,191,210 7,349,710 TOTAL RESIDENTIAL ,619,134 SELF STORAGE 0.3% Public Storage, 5.125%, Series C ,000 2,617,200 Public Storage, 4.90%, Series E ,000 1,688,000 4,305,200 SHOPPING CENTERS 2.6% COMMUNITY CENTER 1.4% Cedar Realty Trust, 7.25%, Series B a ,000 4,626,500 DDR Corp., 6.50%, Series J a ,200 9,290,400 Regency Centers Corp., 6.625%, Series ,601 4,558,185 Saul Centers, 6.875%, Series C ,725 2,506,089 20,981,174 REGIONAL MALL 1.2% CBL & Associates Properties, 7.375%, Series D ,850 5,888,782 General Growth Properties, 6.375%, Series A ,644 2,993,178 Pennsylvania REIT, 8.25%, Series A ,000 4,021,110 Taubman Centers, 6.25%, Series K ,582 4,642,655 17,545,725 TOTAL SHOPPING CENTERS ,526,899 See accompanying notes to financial statements. 11

13 SCHEDULE OF INVESTMENTS (Continued) December 31, 2016 Number of Shares Value SPECIALTY 1.0% Digital Realty Trust, 6.625%, Series F ,000 $ 2,888,800 Digital Realty Trust, 7.375%, Series H ,000 5,430,000 Digital Realty Trust, 6.35%, Series I ,000 5,864,040 14,182,840 TOTAL REAL ESTATE ,842,661 TECHNOLOGY SOFTWARE 0.4% ebay, 6.00%, due 2/1/ ,000 5,188,000 TOTAL PREFERRED SECURITIES $25 PAR VALUE (Identified cost $225,579,404) ,969,168 Principal Amount/Shares PREFERRED SECURITIES CAPITAL SECURITIES 7.0% BANKS 1.6% Bank of America Corp., 6.30%, Series DD ,500,000 12,046,250 Farm Credit Bank of Texas, 10.00%, Series I a ,000 7,185,000 Huntington Bancshares, 8.50%, Series A (Convertible). 1,077 1,561,650 JPMorgan Chase & Co., 6.75%, Series S ,000,000 3,236,250 24,029,150 BANKS FOREIGN 2.5% Banco Bilbao Vizcaya Argentaria SA, 9.00% (Spain)... 4,400,000 4,599,091 Barclays PLC, 8.25% (United Kingdom) ,001,000 4,177,540 BNP Paribas SA, 7.625%, 144A (France) e ,000,000 2,115,200 Credit Suisse Group AG, 7.50%, 144A (Switzerland) e.. 2,291,000 2,405,378 Dresdner Funding Trust I, 8.151%, due 6/30/31, 144A (Germany) e ,000,000 4,645,000 HBOS Capital Funding LP, 6.85% (United Kingdom)... 2,600,000 2,643,446 Lloyds Banking Group PLC, 7.50% (United Kingdom).. 4,000,000 4,130,000 Royal Bank of Scotland Group PLC, 7.648% (United Kingdom) ,000,000 4,590,000 Royal Bank of Scotland Group PLC, 8.625% (United Kingdom) ,300,000 2,351,750 UBS Group AG, 7.125% (Switzerland) ,200,000 4,327,836 35,985,241 See accompanying notes to financial statements. 12

14 SCHEDULE OF INVESTMENTS (Continued) December 31, 2016 Principal Amount/Shares INDUSTRIALS DIVERSIFIED MANUFACTURING 0.3% General Electric Co., 5.00%, Series D ,938,000 $ 5,130,335 INSURANCE 0.9% LIFE/HEALTH INSURANCE FOREIGN 0.3% La Mondiale Vie, 7.625% (France) ,750,000 5,029,062 PROPERTY CASUALTY 0.3% Liberty Mutual Group, 7.80%, due 3/7/37, 144A a,e ,525,000 3,974,438 PROPERTY CASUALTY FOREIGN 0.3% QBE Insurance Group Ltd., 6.75%, due 12/2/44 (Australia) ,052,000 4,272,834 TOTAL INSURANCE ,276,334 REAL ESTATE 0.8% DIVERSIFIED 0.4% QCP SNF West/Central/East/AL REIT LLC, 8.125%, due 11/1/23, 144A e ,000,000 6,045,000 FINANCE 0.4% VEREIT Operating Partnership LP, 4.60%, due 2/6/ ,250,000 5,302,500 TOTAL REAL ESTATE ,347,500 TELECOMMUNICATION 0.5% Qualitytech LP/QTS Finance Corp., 5.875%, due 8/1/ ,074,000 7,224,322 UTILITIES 0.4% Enel SpA, 8.75%, due 9/24/73, 144A (Italy) e ,250,000 5,985,000 TOTAL PREFERRED SECURITIES Value CAPITAL SECURITIES (Identified cost $97,081,577) ,977,882 See accompanying notes to financial statements. 13

15 SCHEDULE OF INVESTMENTS (Continued) December 31, 2016 Number of Shares SHORT-TERM INVESTMENTS 3.0% Value MONEY MARKET FUNDS State Street Institutional Treasury Money Market Fund, Premier Class, 0.40% f ,800,000 $ 43,800,000 TOTAL SHORT-TERM INVESTMENTS (Identified cost $43,800,000) ,800,000 TOTAL INVESTMENTS (Identified cost $1,386,331,057) % 1,864,000,018 LIABILITIES IN EXCESS OF OTHER ASSETS (27.2) (398,719,046) NET ASSETS (Equivalent to $13.42 per share based on 109,161,402 shares of common stock outstanding) % $1,465,280,972 EUR REIT Glossary of Portfolio Abbreviations Euro Currency Real Estate Investment Trust Note: Percentages indicated are based on the net assets of the Fund. a All or a portion of the security is pledged as collateral in connection with the Fund s credit agreement. $950,165,128 in aggregate has been pledged as collateral. b A portion of the security has been rehypothecated in connection with the Fund s credit agreement. $424,767,378 in aggregate has been rehypothecated. c Illiquid security. Aggregate holdings equal 0.0% of the net assets of the Fund. d Non-income producing security. e Resale is restricted to qualified institutional investors. Aggregate holdings amounting to $25,170,016 or 1.7% of the net assets of the Fund, of which 0.0% are illiquid. f Rate quoted represents the annualized seven-day yield of the fund. See accompanying notes to financial statements. 14

16 STATEMENT OF ASSETS AND LIABILITIES December 31, 2016 ASSETS: Investments in securities, at value a (Identified cost $1,386,331,057) $1,864,000,018 Cash ,994,873 Receivable for: Dividends and interest ,129,670 Investment securities sold ,843,196 Other assets ,635 Total Assets ,928,974,392 LIABILITIES: Payable for: Credit agreement ,000,000 Investment securities purchased ,372,505 Investment management fees ,361,387 Dividends declared ,431 Interest expense ,356 Administration fees ,033 Directors fees ,618 Other liabilities ,090 Total Liabilities ,693,420 NET ASSETS $1,465,280,972 NET ASSETS consist of: Paid-in capital $ 927,598,268 Accumulated undistributed net investment income ,147,493 Accumulated undistributed net realized gain ,866,250 Net unrealized appreciation ,668,961 $1,465,280,972 NET ASSET VALUE PER SHARE: ($1,465,280, ,161,402 shares outstanding) $ MARKET PRICE PER SHARE $ MARKET PRICE DISCOUNT TO NET ASSET VALUE PER SHARE (9.02)% a Includes $424,767,378 which has been rehypothecated in connection with the Fund s credit agreement, as described in Note 7. See accompanying notes to financial statements. 15

17 STATEMENT OF OPERATIONS For the Year Ended December 31, 2016 Investment Income: Dividend income $ 60,288,207 Interest income ,888,670 Rehypothecation income ,806 Total Investment Income ,272,683 Expenses: Investment management fees ,684,707 Interest expense ,878,780 Administration fees ,401 Shareholder reporting expenses ,613 Custodian fees and expenses ,350 Directors fees and expenses ,610 Stock exchange listing fees ,294 Professional fees ,926 Line of credit fees ,530 Transfer agent fees and expenses ,867 Miscellaneous ,124 Total Expenses ,146,202 Net Investment Income (Loss) ,126,481 Net Realized and Unrealized Gain (Loss): Net realized gain (loss) on: Investments ,077,140 Written option contracts ,489 Foreign currency transactions ,343 Net realized gain (loss) ,113,972 Net change in unrealized appreciation (depreciation) on: Investments (32,226,795) Written option contracts (23,825) Foreign currency translations Net change in unrealized appreciation (depreciation) (32,250,587) Net realized and unrealized gain (loss) ,863,385 Net Increase (Decrease) in Net Assets Resulting from Operations $100,989,866 See accompanying notes to financial statements. 16

18 STATEMENT OF CHANGES IN NET ASSETS For the For the Year Ended Year Ended December 31, 2016 December 31, 2015 Change in Net Assets: From Operations: Net investment income (loss) $ 39,126,481 $ 32,027,162 Net realized gain (loss) ,113, ,234,658 Net change in unrealized appreciation (depreciation) (32,250,587) (45,098,928) Net increase (decrease) in net assets resulting from operations ,989,866 95,162,892 Dividends and Distributions to Shareholders from: Net investment income (38,341,402) (30,312,583) Net realized gain (66,453,544) (74,598,744) Total dividends and distributions to shareholders (104,794,946) (104,911,327) Capital Stock Transactions: Increase (decrease) in net assets from Fund share transactions (5,946,294) Total increase (decrease) in net assets.... (3,805,080) (15,694,729) Net Assets: Beginning of year ,469,086,052 1,484,780,781 End of year a $1,465,280,972 $1,469,086,052 a Includes accumulated undistributed net investment income of $5,147,493 and $5,029,397, respectively. See accompanying notes to financial statements. 17

19 STATEMENT OF CASH FLOWS For the Year Ended December 31, 2016 Increase (Decrease) in Cash: Cash Flows from Operating Activities: Net increase (decrease) in net assets resulting from operations $ 100,989,866 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Purchases of long-term investments (638,290,147) Proceeds from sales and maturities of long-term investments ,878,627 Net purchases, sales and maturities of short-term investments (30,400,000) Net amortization of premium on investments ,261 Net non-cash dividends received (1,828,115) Net decrease in dividends and interest receivable and other assets ,159,059 Net increase in interest expense payable, accrued expenses and other liabilities ,904 Decrease in premiums received from written option contracts (32,489) Net change in unrealized depreciation on written option contracts ,825 Net change in unrealized depreciation on investments ,226,795 Net realized gain on investments (94,077,140) Cash provided by operating activities ,921,446 Cash Flows from Financing Activities: Dividends paid (105,668,971) Increase (decrease) in cash ,252,475 Cash at beginning of year ,742,398 Cash at end of year $ 43,994,873 Supplemental Disclosure of Cash Flow Information and Non-Cash Activities: During the year ended December 31, 2016, interest paid was $8,852,680. During the year ended December 31, 2016, as part of an exchange offer from one of the Fund s investments, the Fund received shares of a new security valued at $4,340,219 resulting in a realized gain of $49,380. See accompanying notes to financial statements. 18

20 FINANCIAL HIGHLIGHTS The following table includes selected data for a share outstanding throughout each year and other performance information derived from the financial statements. It should be read in conjunction with the financial statements and notes thereto. For the Year Ended December 31, Per Share Operating Performance: Net asset value, beginning of year $13.46 $13.54 $10.53 $10.91 $ 9.47 Income (loss) from investment operations: Net investment income (loss) a Net realized and unrealized gain (loss) b c 1.88 Total from investment operations Less dividends and distributions to shareholders from: Net investment income (0.35) (0.28) (0.30) (0.26) (0.21) Net realized gain (0.61) (0.68) (0.46) (0.46) (0.51) Total dividends and distributions to shareholders (0.96) (0.96) (0.76) (0.72) (0.72) Anti-dilutive effect from the issuance of reinvested shares d 0.00 d Anti-dilutive effect from the repurchase of shares Net increase (decrease) in net asset value.... (0.04) (0.08) 3.01 (0.38) 1.44 Net asset value, end of year $13.42 $13.46 $13.54 $10.53 $10.91 Market value, end of year $12.21 $12.22 $12.19 $ 9.48 $10.16 Total net asset value return e % 7.88% 37.57% 3.31% 23.32% Total market value return e % 8.79% 37.57% 0.13% 28.40% See accompanying notes to financial statements. 19

21 FINANCIAL HIGHLIGHTS (Continued) For the Year Ended December 31, Ratios/Supplemental Data: Net assets, end of year (in millions) $1,465.3 $1,469.1 $1,484.8 $1,154.1 $1,200.8 Ratio of expenses to average daily net assets. 1.81% 1.83% 1.89% 2.00% 1.80% Ratio of expenses to average daily net assets (excluding interest expense) % 1.24% 1.25% 1.31% 1.30% Ratio of net investment income (loss) to average daily net assets % 2.18% 2.50% 2.18% 2.65% Ratio of expenses to average daily managed assets f % 1.39% 1.41% 1.46% 1.29% Portfolio turnover rate % 35% 48% 56% 55% Credit Agreement Asset coverage ratio for credit agreement % 419% 423% 351% 361% Asset coverage per $1,000 for credit agreement $ 4,185 $ 4,194 $ 4,228 $ 3,509 $ 3,610 a Calculation based on average shares outstanding. b Includes gains resulting from class action litigation payments on securities owned in prior years. Without these gains, the net realized and unrealized gains (losses) on investments per share would have been $0.55 and the total return on an NAV basis would have been 7.33%. c Includes gains resulting from class action litigation payments on securities owned in prior years. Without these gains, the net realized and unrealized gains (losses) on investments per share would have been $0.07 and the total return on an NAV basis would have been 3.25%. d Amount is less than $ e Total net asset value return measures the change in net asset value per share over the period indicated. Total market value return is computed based upon the Fund s NYSE market price per share and excludes the effects of brokerage commissions. Dividends and distributions are assumed, for purposes of these calculations, to be reinvested at prices obtained under the Fund s dividend reinvestment plan. f Average daily managed assets represent net assets plus the outstanding balance of the credit agreement. See accompanying notes to financial statements. 20

22 NOTES TO FINANCIAL STATEMENTS Note 1. Organization and Significant Accounting Policies Cohen & Steers Quality Income Realty Fund, Inc. (the Fund) was incorporated under the laws of the State of Maryland on August 22, 2001 and is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, closed-end management investment company. The Fund s investment objective is high current income. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The Fund is an investment company and, accordingly, follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 946 Investment Companies. The accounting policies of the Fund are in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Portfolio Valuation: Investments in securities that are listed on the NYSE are valued, except as indicated below, at the last sale price reflected at the close of the NYSE on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the closing bid and ask prices on such day or, if no ask price is available, at the bid price. Exchange-traded options are valued at their last sale price as of the close of options trading on applicable exchanges on the valuation date. In the absence of a last sale price on such day, options are valued at the average of the quoted bid and ask prices as of the close of business. Over-the-counter options are valued based upon prices provided by the respective counterparty. Securities not listed on the NYSE but listed on other domestic or foreign securities exchanges (including NASDAQ) are valued in a similar manner. Securities traded on more than one securities exchange are valued at the last sale price reflected at the close of the exchange representing the principal market for such securities on the business day as of which such value is being determined. If after the close of a foreign market, but prior to the close of business on the day the securities are being valued, market conditions change significantly, certain non-u.s. equity holdings may be fair valued pursuant to procedures established by the Board of Directors. Readily marketable securities traded in the over-the-counter market, including listed securities whose primary market is believed by Cohen & Steers Capital Management, Inc. (the investment manager) to be over-the-counter, are valued on the basis of prices provided by a third-party pricing service or third-party broker-dealers when such prices are believed by the investment manager, pursuant to delegation by the Board of Directors, to reflect the fair value of such securities. Fixed-income securities are valued on the basis of prices provided by a third-party pricing service or third-party broker-dealers when such prices are believed by the investment manager, pursuant to delegation by the Board of Directors, to reflect the fair value of such securities. The pricing services or broker-dealers use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services or broker-dealers may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services or broker-dealers also utilize proprietary 21

23 NOTES TO FINANCIAL STATEMENTS (Continued) valuation models which may consider market transactions in comparable securities and the various relationships between securities in determining fair value and/or characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features which are then used to calculate the fair values. Short-term debt securities with a maturity date of 60 days or less are valued at amortized cost, which approximates fair value. Investments in open-end mutual funds are valued at their closing net asset value. The policies and procedures approved by the Fund s Board of Directors delegate authority to make fair value determinations to the investment manager, subject to the oversight of the Board of Directors. The investment manager has established a valuation committee (Valuation Committee) to administer, implement and oversee the fair valuation process according to the policies and procedures approved annually by the Board of Directors. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value. Securities for which market prices are unavailable, or securities for which the investment manager determines that the bid and/or ask price or a counterparty valuation does not reflect market value, will be valued at fair value, as determined in good faith by the Valuation Committee, pursuant to procedures approved by the Fund s Board of Directors. Circumstances in which market prices may be unavailable include, but are not limited to, when trading in a security is suspended, the exchange on which the security is traded is subject to an unscheduled close or disruption or material events occur after the close of the exchange on which the security is principally traded. In these circumstances, the Fund determines fair value in a manner that fairly reflects the market value of the security on the valuation date based on consideration of any information or factors it deems appropriate. These may include, but are not limited to, recent transactions in comparable securities, information relating to the specific security and developments in the markets. The Fund s use of fair value pricing may cause the net asset value of Fund shares to differ from the net asset value that would be calculated using market quotations. Fair value pricing involves subjective judgments and it is possible that the fair value determined for a security may be materially different than the value that could be realized upon the sale of that security. Fair value is defined as the price that the Fund would expect to receive upon the sale of an investment or expect to pay to transfer a liability in an orderly transaction with an independent buyer in the principal market or, in the absence of a principal market, the most advantageous market for the investment or liability. The hierarchy of inputs that are used in determining the fair value of the Fund s investments is summarized below. Level 1 quoted prices in active markets for identical investments Level 2 other significant observable inputs (including quoted prices for similar investments, interest rates, credit risk, etc.) Level 3 significant unobservable inputs (including the Fund s own assumptions in determining the fair value of investments) 22

24 NOTES TO FINANCIAL STATEMENTS (Continued) The inputs or methodology used for valuing securities may or may not be an indication of the risk associated with investing in those securities. For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfer at the end of the period in which the underlying event causing the movement occurred. Changes in valuation techniques may result in transfers into or out of an assigned level within the disclosure hierarchy. There were no transfers between Level 1 and Level 2 securities as of December 31, The following is a summary of the inputs used as of December 31, 2016 in valuing the Fund s investments carried at value: Quoted Prices in Active Other Markets for Significant Significant Identical Observable Unobservable Investments Inputs Inputs Total (Level 1) (Level 2) (Level 3) Common Stock: Real Estate Diversified. $ 116,393,104 $ 116,176,458 $ $216,646 a Real Estate Other Industries ,366,859,864 1,366,859,864 Preferred Securities $25 Par Value ,969, ,969,168 Preferred Securities Capital Securities: Banks ,029,150 1,561,650 22,467,500 Other Industries ,948,732 78,948,732 Short-Term Investments ,800,000 43,800,000 Total Investments b $1,864,000,018 $1,718,567,140 $145,216,232 $216,646 a BGP Holdings PLC was acquired via a spinoff and has been fair valued, by the Valuation Committee, pursuant to the Fund s fair value procedures and classified as a Level 3 security. b Portfolio holdings are disclosed individually on the Schedule of Investments. Following is a reconciliation of investments for which significant unobservable inputs (Level 3) were used in determining fair value: Common Stock Real Estate Diversified Balance as of December 31, $ Change in unrealized appreciation (depreciation) ,646 Balance as of December 31, $216,646 23