Security Capital Employee REIT Fund Incorporated
Semi-Annual Report
June 30, 1997
Security Capital Employee REIT Fund
Incorporated
August 27, 1997
To Our Shareholders:
We are pleased to present to you the Security Capital Employee REIT Fund
Incorporated ("SC-ERF") semi-annual report for the period ended June 30, 1997.
SC-ERF's total return for the six month period ending June 30, 1997 was 6.0%.
In comparison, the Wilshire REIT Index, a frequently used performance index,
gained 5.8% over the same time period. SC-ERF's net asset value per share on
June 30, 1997 was $10.74 in comparison to the January 1, 1997 per share price
of $10.38. In addition, a dividend of $0.26 was declared for shareholders of
record on June 27 and paid June 30.
Although SC-ERF is a relatively new entity, the disciplined, research-
focused process that drives our investment activity is based upon the same
fundamental principles that have been applied successfully by Security Capital
Group entities since 1991. We believe that our research-driven investment
process provides us a strong competitive advantage and we look forward to
communicating our performance results to you in the future.
We are pleased that you have invested in the newly created SC-ERF and we
welcome you as a new shareholder.
Sincerely,
SECURITY CAPITAL EMPLOYEE
REIT FUND INCORPORATED
/s/ Anthony R. Manno Jr.
Anthony R. Manno Jr.
President
I
Schedule of Investments
June 30, 1997
(Unaudited)
Number of Shares COMMON STOCK - REAL ESTATE Market Value
INVESTMENT TRUSTS (REITs) - 91.3%
Office Properties - 23.8%
360,000 Beacon Properties Corporation $12,015,000
76,000 Boston Properties, Inc. 2,090,000
125,000 Koger Equity, Inc. 2,281,250
209,500 Prentiss Properties Trust 5,368,438
108,400 Spieker Properties, Inc. 3,814,325
25,569,013
Multifamily - 22.7%
255,500 Apartment Investment & Management Company 7,217,875
67,800 Associated Estates Realty Corporation 1,593,300
140,000 Equity Residential Properties Trust 6,650,000
142,200 Essex Property Trust, Inc. 4,568,175
124,800 Charles E. Smith Residential Realty, Inc. 3,603,600
35,000 Summit Properties, Inc. 721,875
24,354,825
Hotels - 14.5%
60,400 FelCor Suite Hotels, Inc. 2,249,900
240,000 Innkeepers USA Trust 3,600,000
150,000 Patriot American Hospitality, Inc. 3,825,000
95,500 RFS Hotel Investors, Inc. 1,719,000
97,500 Starwood Lodging Trust 4,162,031
15,555,931
Storage - 9.7%
290,000 Public Storage, Inc. 8,482,500
75,500 Storage Trust Realty 2,000,750
10,483,250
Regional Malls - 7.5%
133,000 The Macerich Company 3,690,750
136,000 Urban Shopping Centers, Inc. 4,335,000
8,025,750
Shopping Centers - 6.9%
47,500 Developers Diversified Realty Corporation 1,900,000
88,300 Kimco Realty Corporation 2,803,525
198,400 Western Investment Real Estate Trust 2,752,800
7,456,325
Industrial - 4.8%
125,000 Liberty Property Trust 3,109,375
93,100 Pacific Gulf Properties, Inc. 2,048,200
5,157,575
See notes to the financial statements.
II
Schedule of Investments (continued)
June 30, 1997
(Unaudited)
Number of Shares Market Value
Factory Outlets - 1.4%
40,000 Chelsea GCA Realty, Inc. $1,520,000
Total Common Stock - Real Estate Investment
Trusts (REITs) (Cost $94,980,507) 98,122,669
LIMITED PARTNERSHIPS - 3.0%
Diversified - 3.0%
150,000 Newhall Land & Farming Company 3,243,750
Total Limited Partnerships (Cost $2,842,124) 3,243,750
Principal Amount SHORT-TERM INVESTMENTS - 5.4%
Variable Rate Demand Notes* - 5.4%
$2,633,300 American Family Financial Services Inc.,
5.2562% 2,633,300
182,014 General Mills, Inc., 5.245% 182,014
1,292,875 Johnson Controls, Inc., 5.276% 1,292,875
685,188 Pitney Bowes, Inc., 5.2551% 685,188
566,337 Warner-Lambert Co., 5.226% 566,337
401,000 Wisconsin Electric Power Company, 5.2962% 401,000
Total Short-Term Investments
(Cost $5,760,714) 5,760,714
Total Investments - 99.7%
(Cost $103,583,345) 107,127,133
Other Assets
Less Liabilities - 0.3% 283,986
NET ASSETS - 100.0% $107,411,119
* Variable rate demand notes are considered short-term obligations
and are payable on demand. Interest rates change periodically on
specified dates. The rates listed are as of June 30, 1997.
See notes to the financial statements.
III
Statement of Assets and Liabilities
June 30, 1997
(Unaudited)
ASSETS:
Investments, at value
(cost $103,583,345) $107,127,133
Deferred organization costs 95,915
Receivable for investment securities sold 1,896,579
Dividends receivable 516,197
Interest receivable 12,668
Other assets 38,264
Total Assets 109,686,756
LIABILITIES:
Payable for investment securities purchased 1,951,903
Payable to investment adviser 146,396
Accrued expenses and other liabilities 177,338
Total Liabilities 2,275,637
NET ASSETS $107,411,119
NET ASSETS CONSIST OF :
Capital Stock $103,864,006
Accumulated undistributed net
investment income 23,638
Accumulated undistributed net
realized loss on investments (20,313)
Net unrealized appreciation on investments 3,543,788
Total Net Assets $107,411,119
Shares outstanding (500,000,000 shares
of $0.01 par value authorized) 10,002,170
Net Asset Value, Redemption Price and Offering
Price Per Share $10.74
See notes to the financial statements.
IV
Statement of Operations
Six Months Ended June 30, 1997
(Unaudited)
INVESTMENT INCOME:
Dividend income $2,735,460
Interest income 14,983
Total investment income 2,750,443
EXPENSES:
Investment advisory fee 168,580
Administration fee 15,866
Shareholder servicing and accounting costs 11,726
Custody fees 4,958
Federal and state registration 10,586
Professional fees 8,588
Reports to shareholders 2,964
Director's fees and expenses 5,244
Amortization of organizational expenses 10,284
Other 760
Total expenses before reimbursement 239,556
Less: Reimbursement from Adviser (10,284)
Total expenses 229,272
NET INVESTMENT INCOME 2,521,171
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized loss on investments (20,313)
Change in unrealized
appreciation on investments 3,248,034
Net realized and unrealized gain
on investments 3,227,721
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $5,748,892
See notes to the financial statements.
V
Statements of Changes in Net Assets
June 30, 1997
(Unaudited)
Six months December 20, 1996 (1)
ended through
June 30, 1997 December 31, 1996
OPERATIONS:
Net investment income $2,521,171 $24,188
Net realized gain on investments (20,313) 0
Change in unrealized appreciation
on investments 3,248,034 295,754
Net increase in net assets
from operations 5,748,892 319,942
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 91,416,805 9,926,736
Shares issued to holders in
reinvestment of dividends 2,520,465 0
Net increase in net assets from
capital share transactions 93,937,270 9,926,736
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME (2,521,721) 0
TOTAL INCREASE IN NET ASSETS 97,164,441 10,246,678
NET ASSETS:
Beginning of period 10,246,678 0
End of period (including undistributed
net investment income of $24,188 and
$23,638, as of December 31, 1996 and
June 30, 1997, respectively) $107,411,119 $10,246,678
(1) Inception date.
See notes to the financial statements.
VI
Financial Highlights
June 30, 1997
(Unaudited)
Six months December 20, 1996 (1)
ended through
June 30, 1997 December 31, 1996
Per Share Data:
Net asset value, beginning of period $10.38 $10.00
Income from investment operations:
Net investment income 0.37 (2) 0.02
Net realized and unrealized gain
on investments 0.25 0.36
Total income from investment operations 0.62 0.38
Less distributions from net investment
income (0.26) -
Net asset value, end of period $10.74 $10.38
Total return (3) 5.98% 3.77%
Supplemental data:
Net assets, end of period $107,411,119 $10,246,678
Ratio of expenses to average net
assets (4) (5) 0.61% 0.00%
Ratio of net investment income to
average net assets (4) (5) 6.72% 19.71%
Portfolio turnover rate 30.16% 0.00%
Average commission rate paid per
share $0.0558 $0.0601
(1) Inception date.
(2) Net investment income per share represents net investment income divided
by the average shares outstanding throughout the period.
(3) Not annualized.
(4) Annualized.
(5) Without expense reimbursements of $10,284 for the six months ended June
30, 1997, the ratio of expenses to average net assets would have been
0.64% and the ratio of net investment income to average net assets would
have been 6.69%.
See notes to the financial statements.
VII
Notes to the Financial Statements
June 30, 1997 (Unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Capital Employee REIT Fund Incorporated (the "Fund") is a Maryland
corporation, originally formed on December 20, 1996, as SCERF Incorporated
(SCERF), a Maryland corporation. On January 23, 1997, all of the assets and
liabilities of SCERF were transferred to the Fund in a reorganization (the
"Reorganization") accounted for as a pooling of interests. The Reorganization
was a taxable event to SCERF and a capital gain of $1,002,746 was realized for
tax purposes. This capital gain will be included in the consolidated income tax
return of the sole shareholder of SCERF and will not affect the Fund's tax
status for 1997. This will result in a lower required capital gain distribution
for the Fund for calendar year 1997. As of June 30, 1997, $311,541 of the
capital gain was realized for book purposes. As a result, at June 30, 1997, the
tax basis of securities held was $691,205 higher than their basis for financial
reporting purposes.
The Fund is registered as a non-diversified, no-load, open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act").
The investment objective of the Fund is to provide shareholders with above-
average total returns, including current income and capital appreciation,
primarily through investments in real estate securities in the United States.
The costs incurred in connection with the organization, initial registration and
public offering of shares, aggregating $118,099, have been paid by the Fund.
These costs are being amortized over the period of benefit, but not to exceed
sixty months from the Fund's commencement of operations. The Adviser has
voluntarily agreed to absorb the amortization expenses in the Fund's first year.
The amortization as of June 30, 1997 of $10,284 will be reimbursed to the Fund.
The following is a summary of significant accounting policies consistently
followed by the Fund.
a) Investment Valuation - Each day, securities are valued at the last sales
price from the principal exchange on which they are traded. Securities that
have not traded on the valuation date, or securities for which sales prices
are not generally reported, are valued at the mean between the last bid and
asked prices. Securities for which market quotations are not readily available
are valued at their fair values determined by, or under the direction of, the
Board of Directors (the "Directors"). Temporary cash investments (those with
remaining maturities of 60 days or less) are valued at amortized cost, which
approximates market value.
Because the Fund may invest a substantial portion of its assets in Real Estate
Investment Trusts ("REITs"), the Fund may be subject to certain risks associated
with direct investments in REITs. REITs may be affected by changes in the value
of their underlying properties and by defaults by borrowers and tenants. REITs
depend generally on their ability to generate cash flow to make distributions to
shareholders, and certain REITs have self-liquidation provisions by which
mortgages held may be paid in full and distributions of capital returns may be
made at any time.
VIII
b) Federal Income Taxes - No provision for federal income taxes has been made
since the Fund has complied to date with the provisions of the Internal Revenue
Code available to regulated investment companies and intends to continue to so
comply in future years and to distribute investment company net taxable income
and net capital gains to shareholders.
c) Distributions to Shareholders - Dividends from net investment income are
declared and paid quarterly. The Fund intends to distribute net realized
capital gains, if any, at least annually, although the Fund's Board of Directors
may in the future determine to retain realized capital gains and not distribute
them to shareholders.
Distributions will automatically be paid in full and fractional shares of the
Fund based on the net asset value per share at the close of business on the
payable date unless the shareholder has elected to have distributions paid in
cash.
The characterization of shareholder distributions for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of the Fund's distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from paid-in-capital, depending on the type
of book/tax differences that may exist.
A portion of the dividend income recorded by the Fund is from distributions by
publicly traded REITs and such distributions for tax purposes may consist of
capital gains and return of capital. The actual return of capital and capital
gains portions of such distributions will be determined by formal notifications
from the REITs subsequent to the calendar year-end. Distributions received from
the REITs that are determined to be a return of capital are recorded by the Fund
as reduction of the cost basis of the securities held. The character of such
distributions, for tax purposes, is determined by the Fund based on estimates
and information received by the Fund from the REITs.
d) Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
e) Other - Investment and shareholder transactions are recorded on trade date.
The Fund determines the gain or loss realized from the investment transactions,
using the specific identification method for both financial reporting and
federal income tax purposes, by comparing the original cost of the security lot
sold with the net sales proceeds. It is the Fund's practice to first select for
sale those securities that have the highest cost and also qualify for long-term
capital gain or loss treatment for tax purposes. Dividend income is recognized
on the ex-dividend date or as soon as information is available to the Fund, and
interest income is recognized on an accrual basis. Generally accepted
accounting principles require that permanent financial reporting and tax
differences be reclassified to capital stock.
IX
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
Six Months 12/20/96
Ended Through
6/30/97 12/31/96
Shares sold 8,780,066 987,423
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments by the Fund for the six months
ended June 30, 1997, were $195,917,108 and $21,947,035, respectively.
At June 30, 1997, gross unrealized appreciation and depreciation of investments
for tax purposes were as follows:
Appreciation $3,800,079
(Depreciation) (1,023,758)
Net appreciation on investments $2,776,321
At June 30, 1997, the cost of investments for federal income tax purposes was
$104,350,812.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Fund has entered into an Investment Advisory Agreement with Security Capital
Investment Research Group Incorporated ("SC-IRG"). Pursuant to its advisory
agreement with the Fund, the Investment Adviser is entitled to receive a fee,
calculated daily and payable monthly, at the annual rate of 0.85% as applied to
the Fund's daily net assets.
SC-IRG voluntarily agrees to reimburse its management fee and other expenses to
the extent that total operating expenses (exclusive of interest, taxes,
brokerage commissions and other costs incurred in connection with the purchase
or sale of portfolio securities, and extraordinary items) exceed the annual rate
of 1.20% of the net assets of the Fund, computed on a daily basis, for the year
ending December 31, 1997.
SC-IRG also serves as the Fund's administrator. SC-IRG intends to charge the
Fund an administrative fee calculated daily at the annual rate of 0.02% of the
Fund's average daily net assets.
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held bank
holding company, serves as custodian, transfer agent, sub-administrator and
accounting services agent for the Fund. Sub-administration fees will be
calculated daily at an annual rate of 0.06% of the first $200 million of the
Fund's average daily net assets. Custodian, transfer agent fees and accounting
services will be charged by Firstar according to contractual fee schedules
agreed to by the Fund. All such expenses incurred through April 15, 1997 have
been paid by SC-IRG, which does not intend to seek reimbursement from the Fund.
X
