Security Capital
U.S. Real Estate
Shares
1997 Annual Report
Security Capital U.S. Real Estate Shares Incorporated
Security Capital U.S. Real Estate Shares Incorporated (SC-US
Real Estate Shares) is a highly focused, no-load real estate
mutual fund that seeks to provide shareholders with above
average returns, including current income and capital
appreciation, through investments in real estate securities in
the United States. Long term, SC-US Real Estate Shares'
objective is to achieve top-quartile returns, as compared with
other U.S. real estate mutual funds, by integrating in-depth
proprietary real estate market research with sophisticated
capital markets research and modeling techniques.
2
To Our Shareholders
We are pleased to present the Security Capital U.S. Real Estate
Shares Incorporated (SC-US Real Estate Shares) 1997 annual
report. For the year ended December 31, 1997, SC-US Real Estate
Shares generated a total return of 25.19%-significantly
outperforming frequently used real estate investment performance
benchmark indices over the same period of time, as the chart
below illustrates. The net asset value per share at year-end was
$11.95; regular dividends of $0.46 per share were declared and
paid to shareholders throughout the year.
Security Capital U.S. Real Estate Shares - Class R (Retail)
Shares
Comparative Returns vs. Industry Benchmarks
Average Annual Total Return
Year Ended December 31, 1997
25.19% 21.20% 20.26% 19.66%
SC-US Bloomberg NAREIT Wilshire
Real Estate REIT Equity REIT
Shares Index (1) Index (2) Index (3)
Past performance is not indicative of future results. The
performance of the above-referenced indices does not include any
fees or expenses, and the underlying portfolio securities of
SC-US Real Estate Shares may differ from those of the indices.
(1) Bloomberg REIT Index is an unmanaged index of REITs that
have a market capitalization of $15 million or greater; (2)
NAREIT Equity Index is an unmanaged index of publicly traded
U.S. tax-qualified REITs which have 75% or more of their gross
invested book assets invested in the equity ownership of real
estate; and (3) Wilshire REIT Index is an unmanaged, market
capitalization-weighted index comprising publicly traded REITs
except for special purpose and health care REITs.
3
SC-US Real Estate Shares' investment management team utilizes a
disciplined proprietary research-driven investment process to
identify and invest in those companies with the highest
potential for attractive returns. Over the past four years, we
have committed significant resources to refine and enhance this
proprietary process, assembling an expert group of research,
industry, securities, and investment professionals. We believe
the combination of our deep, seasoned management team and
investment approach provides us with a competitive advantage
virtually unparalleled in the industry. Real estate is not a
homogeneous industry, and is heavily dependent upon regional
economic and supply and demand characteristics. In response, our
extensive research network continually tracks and assimilates
data from every major real estate market and property category.
Our investment management team draws upon this fundamental real
estate research to define how submarket trends will impact a
company's internal and external growth potential. Critical to
the underwriting of such growth potential is a thorough
assessment of a company's management strength-and its ability to
maximize such growth through the successful implementation of
operating strategies and the intelligent deployment of capital.
Only when our real estate market research, management
4
assessment and proprietary valuation models provide us with the
conviction that a company will deliver our investors with the
highest total return potential do we make an investment. We
thank you for your support and look forward to serving your
continued investment needs.
Sincerely,
/s/ Anthony R. Manno Jr. /s/ Kenneth D. Statz
Anthony R. Manno Jr. Kenneth D. Statz
Chairman and President Managing Director
5
Security Capital U.S. Real Estate Shares
Average Annual Total Return
Period Ended December 31, 1997
One Year Since Inception (12/20/96)
Class R (Retail) Shares
Total Return 25.19% 28.83%
Growth of a $10,000 Investment $12,519 $12,991
Class I (Institutional) Shares
Total Return 25.20% 28.84%
Growth of a $10,000 Investment $12,520 $12,992
On December 16, 1997, SC-US Real Estate Shares' existing
shareholders were split into Class R (Retail) and Class
I(Institutional) shares based on the amount then invested in the
Fund. The difference in the performance of each Class reflects
the difference in the expenses of each Class.
Security Capital U.S. Real Estate Shares - Class R (Retail)
Shares
Growth of a $10,000 Investment
Period from January 1, 1997 to December 31, 1997
SC-US Real Bloomberg Wilshire NAREIT
Estate Shares REIT Index REIT Index Equity Index
12/31/ $10,000 $10,000 $10,000 $10,000
1/31/97 $10,082 $10,066 $10,061 $10,112
2/28/97 $10,158 $10,107 $10,036 $10,091
3/31/97 $10,129 $10,065 $10,099 $10,070
4/30/97 $9,714 $9,741 $9,741 $9,784
5/31/97 $9,956 $10,041 $10,033 $10,080
6/30/97 $10,599 $10,589 $10,576 $10,570
7/31/97 $11,043 $10,977 $10,839 $10,897
8/31/97 $11,053 $10,921 $10,781 $10,871
9/30/97 $12,357 $11,958 $11,806 $11,820
10/31/97 $11,949 $11,592 $11,435 $11,500
11/30/97 $12,179 $11,793 $11,669 $11,749
12/31/97 $12,520 $12,120 $11,966 $12,026
Past performance is not indicative of future performance. The
performance of SC-US Real Estate Shares Class I (Institutional)
shares is greater than that of the Class R (Retail) shares for
the time period indicated based upon the difference in the
expenses of each Class.
6
Security Capital U.S. Real Estate Shares Incorporated
Schedule of Investments - December 31, 1997
Shares Market Value
COMMON STOCK - REAL ESTATE
INVESTMENT TRUSTS (REITs) - 96.7%
Office Properties - 26.9%
589,240 Equity Office Properties Trust $ 18,597,878
140,000 Prentiss Properties Trust 3,911,250
67,900 Crescent Real Estate Equities Company 2,673,563
80,300 Boston Properties, Inc. 2,654,919
65,000 Cornerstone Properties, Inc. 1,247,187
52,500 Cadillac Fairview Corporation # 1,233,750
28,400 Mack-Cali Realty Corporation 1,164,400
31,482,947
Multifamily - 20.8%
187,700 Apartment Investment & Management Company 6,897,975
150,000 Essex Property Trust, Inc. 5,250,000
145,100 Charles E. Smith Residential Realty, Inc. 5,151,050
95,300 Equity Residential Properties Trust 4,818,606
57,000 Bay Apartment Communities, Inc. 2,223,000
24,340,631
Hotels - 14.9%
312,500 Innkeepers USA Trust 4,843,750
115,000 FelCor Suite Hotels, Inc. 4,082,500
40,000 ITT Corporation # 3,315,000
125,000 WHG Resorts & Casinos Inc. # 2,781,250
61,000 Capstar Hotel Company # 2,093,062
22,200 Homestead Village, Inc. # + 334,388
17,449,950
See notes to the financial statements.
7
Schedule of Investments (continued)
Shares Market Value
Storage - 10.9%
323,200 Public Storage, Inc. $ 9,494,000
100,500 Storage Trust Realty 2,644,406
23,200 Shurgard Storage Centers, Inc. 672,800
12,811,206
Regional Malls - 8.0%
136,000 Urban Shopping Centers, Inc. 4,743,000
164,100 The Macerich Company 4,676,850
9,419,850
Industrial - 7.4%
163,000 Pacific Gulf Properties, Inc. 3,871,250
91,500 Liberty Property Trust 2,613,469
110,000 Catellus Development Corporation # 2,200,000
8,684,719
Shopping Centers - 5.5%
125,000 Developers Diversified Realty Corporation 4,781,250
46,500 Kimco Realty Corporation 1,639,125
6,420,375
Factory Outlets - 2.3%
70,000 Chelsea GCA Realty, Inc. 2,673,125
Total Common Stock - Real Estate Investment
Trusts (REITs) (Cost $100,097,665) 113,282,803
See notes to the financial statements.
8
Schedule of Investments (continued)
Principal Amount
SHORT-TERM INVESTMENTS - 0.3%
Variable Rate Demand Notes* - 0.3%
$135,576 Warner-Lambert Co., 5.4890% $ 135,576
134,756 Johnson Controls, Inc., 5.3276% 134,756
120,436 General Mills, Inc., 5.3277% 120,436
5,138 Pitney Bowes, Inc., 5.3276% 5,138
Total Short-Term Investments
(Cost $395,906) 395,906
Total Investments - 97.0%
(Cost $100,493,571) 113,678,709
Other Assets in Excess of
Liabilities - 3.0% 3,553,475
NET ASSETS 100.0% $117,232,184
* 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
December 31, 1997.
# Non income producing security.
+ An affiliate of the Fund.
See notes to the financial statements.
9
Security Capital U.S. Real Estate Shares Incorporated
Statement of Assets and Liabilities - December 31, 1997
ASSETS:
Investments, at market value
(cost $100,493,571) $113,678,709
Deferred organization costs 95,914
Receivable for investment securities sold 3,564,588
Dividends receivable 505,998
Interest receivable 18,954
Other assets 21,560
Total Assets 117,885,723
LIABILITIES:
Payable for investment securities purchased 479,854
Payable to investment adviser 64,882
Accrued expenses and other liabilities 108,803
Total Liabilities 653,539
NET ASSETS $117,232,184
NET ASSETS CONSIST OF:
Capital stock $101,731,755
Accumulated undistributed net realized
gain on investments 2,315,291
Net unrealized appreciation on investments 13,185,138
Total Net Assets $117,232,184
CLASS I:
Net assets $116,560,328
Shares outstanding (50,000,000 shares
of $0.01 par value authorized) 9,755,880
Net asset value and redemption price
per share $11.95
CLASS R:
Net assets $671,856
Shares outstanding (50,000,000 shares
of $0.01 par value authorized) 56,234
Net asset value and redemption
price per share $11.95
See notes to the financial statements.
10
Security Capital U.S. Real Estate Shares Incorporated
Statement of Operations - Year Ended December 31, 1997
INVESTMENT INCOME:
Dividend income $4,729,653
Interest income 141,838
Total investment income 4,871,491
EXPENSES:
Investment advisory fee 652,224
Administration fee 65,044
Shareholder servicing and accounting costs 43,220
Custody fees 19,550
Federal and state registration 39,320
Professional fees 47,419
Reports to shareholders 10,140
Directors' fees and expenses 17,940
Amortization of organization costs 22,185
Distribution Expense - Class I 12,396
Distribution Expense - Class R 67
Other 2,640
Total expenses before reimbursement 932,145
Less: Reimbursement from Adviser - Class I (30,276)
Less: Reimbursement from Adviser - Class R (167)
Net expenses 901,702
NET INVESTMENT INCOME 3,969,789
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 8,063,795
Change in unrealized appreciation on investments 12,889,384
Net realized and unrealized gain on investments 20,953,179
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $24,922,968
See notes to the financial statements.
11
Security Capital U.S. Real Estate Shares Incorporated
Statements of Changes in Net Assets - December 31, 1997
Year December 20, 1996(1)
ended through
December 31, 1997 December 31, 1996
OPERATIONS:
Net investment income $3,969,789 $24,188
Net realized gain on investments 8,063,795 0
Change in unrealized appreciation
on investments 12,889,384 295,754
Net increase in net assets resulting
from operations 24,922,968 319,942
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 92,737,305 9,926,736
Shares issued to holders in
reinvestment of dividends 2,632,946 -
Cost of shares redeemed (3,558,444) -
Net increase in net assets
from capital share transactions 91,811,807 9,926,736
DISTRIBUTIONS TO SHAREHOLDERS(2):
From net investment income (3,626,176) -
DISTRIBUTIONS TO CLASS R
SHAREHOLDERS(2):
From net investment income (2,006) -
From net realized gains (31,388) -
(33,394) -
DISTRIBUTIONS TO CLASS I
SHAREHOLDERS(2):
From net investment income (372,583) -
From net realized gains (5,717,116) -
Subtotal (6,089,699) -
TOTAL INCREASE IN NET ASSETS 106,985,506 10,246,678
NET ASSETS:
Beginning of period 10,246,678 -
End of period (including
undistributed net investment
income of $0 and $24,188,
respectively) $117,232,184 $10,246,678
(1) Inception date.
(2) On December 16, 1997, the Fund's existing shareholders were
split into Class R and Class I shares based on the amount then
invested in the Fund. Distributions to shareholders from net
investment income reflect activity for the Fund for the period
January 1, 1997 through December 16, 1997 and for each
respective class of shares for the period December 17, 1997
through December 31, 1997.
See notes to the financial statements.
12
Security Capital U.S. Real Estate Shares Incorporated
Financial Highlights
Year ended December 20, 1996(1)
December 31, 1997(2) through
Class I Class R December 31, 1996
Per Share Data:
Net asset value, beginning of period $10.38 $10.38 $10.00
Income from investment operations:
Net investment income 0.46 (3) 0.46 (3) 0.02
Net realized and unrealized gain
on investments 2.11 2.11 0.36
Total from investment operations 2.57 2.57 0.38
Less distributions:
Dividends from net investment income (0.46) (0.46) -
Distributions from net realized gains (0.54) (0.54) -
Total distributions (1.00) (1.00) -
Net asset value, end of period $11.95 $11.95 $10.38
Total return(4) 25.20% 25.19% 3.77%
Supplemental data and ratios:
Net assets, end of period $116,560,328 $671,856 $10,246,678
Ratio of expenses to average
net assets(6) 0.94% 0.95% 0.00%
Ratio of net investment income to
average net assets(5)(6) 4.08% 4.07% 19.71%
Portfolio turnover rate(7) 104.17% 104.17% 0.00%
Average commission rate paid per
share(7) $0.0574 $0.0574 $0.0601
(1) Inception date.
(2) On December 16, 1997, the Fund's existing shareholders were
split into Class R and Class I shares based on the amount then
invested in the Fund. For the year ended December 31, 1997,
the Financial Highlights ratios of net expenses to average net
assets, ratios of net investment income to average net assets
and the per share income from investment operations are
presented on a basis whereby the Fund's net investment income
and net expenses for the period January 1, 1997 through December
16, 1997, were allocated to each class of shares based upon
the relative outstanding shares of each class as of the close
of business on December 16, 1997, and the results thereof
combined with the results of operations for each applicable
class for the period December 17, 1997 through December 31,
1997.
(3) Net investment income per share represents net investment
income divided by the average shares outstanding throughout
the period.
(4) Not annualized for the period December 20, 1996 through
December 31, 1996.
(5) Annualized for the period December 20, 1996 through December
31, 1996.
(6) Without expense reimbursements of $30,443 for the year ended
December 31, 1997, the ratio of expenses to average net assets
would have been 0.97% and 0.98% for Class I and Class R,
respectively, and the ratio of net investment income to average
net assets would have been 4.05% and 4.04% for Class I and
Class R, respectively.
(7) Portfolio turnover and average commission rate paid are
calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
See notes to the financial statements.
13
Security Capital U.S. Real Estate Shares Incorporated
Notes to the Financial Statements - December 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Capital U.S. Real Estate Shares Incorporated (the
"Fund") is a Maryland corporation, originally formed on
December 20, 1996. 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. Long-term, the Fund's
objective is to achieve top-quartile total returns as compared
with other mutual funds that invest primarily in real estate
securities in the United States, by integrating in-depth
proprietary real estate market research with sophisticated
capital markets research and modeling techniques.
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. 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.
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.
14
Notes to Financial Statements (continued)
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 a 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.
15
Notes to Financial Statements (continued)
2. CAPITAL SHARE TRANSACTIONS
On December 16, 1997, the Fund's existing shareholders were
split into Class R and Class I shares based on the amount then
invested in the Fund. Transactions in shares of the Fund were as
follows:
Period from 12/17/97 through 12/31/97:
Amount Shares
Class I Shares:
Reclassification of previous class $121,005,617 9,836,172
Shares sold - -
Shares issued to holders in
reinvestment of dividends 65,206 5,443
Shares redeemed (1,069,973) (85,735)
Net increase $120,000,850 9,755,880
Class R Shares:
Reclassification of previous class $ 658,057 53,492
Shares sold 2,500 208
Shares issued to holders in reinvestment
of dividends 30,360 2,534
Shares redeemed - -
Net increase $ 690,917 56,234
Period from 01/01/97 through 12/16/97:
Previous Class:
Amount Shares
Reclassification to Class I shares $(121,005,617) (9,836,172)
Reclassification to Class R shares (658,057) (53,492)
Shares sold 92,734,805 8,890,183
Shares issued to holders in reinvestment of
dividends 2,537,380 236,042
Shares redeemed (2,488,471) (223,984)
Net (decrease) $(28,879,960) (987,423)
Period from 12/20/96 through 12/31/96:
Shares sold $9,926,736 987,423
Shares issued to holders in
reinvestment of dividends - -
Shares redeemed - -
Net increase $9,926,736 987,423
16
Notes to Financial Statements (continued)
3. INVESTMENT TRANSACTIONS The aggregate purchases and sales of
investments by the Fund for the year ended December 31, 1997,
were $177,958,403 and $95,319,551, respectively. At December 31,
1997, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation $ 13,065,970
(Depreciation) (482,022)
Net appreciation on investments $ 12,583,948
At December 31, 1997, the cost of investments for federal income
tax purposes was $101,094,761.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Fund has entered into an Investment Advisory Agreement with
Security Capital (US) Management Group Incorporated ("SC (US)
Management"), formerly Security Capital Investment Research
Group Incorporated. 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
0.60% as applied to the Fund's daily net assets.
SC (US) Management 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 1.00% and 1.15% of the net
assets of the Class I and Class R Shares, respectively, computed
on a daily basis, for the period December 17, 1997 through
December 31, 1997. SC (US) Management had voluntarily agreed to
reimburse its management fee and other expenses to the extent
the above mentioned total operating expenses exceeded the annual
rate of 1.20% of the net assets of the Fund for the period April
15, 1997 through December 16, 1997.
SC (US) Management also serves as the Fund's administrator. SC
(US) Management intends to charge the Fund an administrative fee
calculated daily and payable monthly, 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
and payable monthly, 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 (US) Management, which does not intend to seek
reimbursement from the Fund.
17
Notes to Financial Statements (continued)
5. DISTRIBUTION AND SERVICING PLANS
The Fund has adopted plans with respect to the Class I and Class
R shares pursuant to Rule 12b-1 under the 1940 Act ("Plans").
Under the Plans, the Fund pays to Security Capital Markets Group
Incorporated in its capacity as principal distributor of the
Fund's shares (the "Distributor"), a monthly fee equal to, on
an annual basis, 0.25% of the value of each Class+ average daily
net assets.
The Distributor may use the fee for services performed and
expenses incurred by the Distributor in connection with the
distribution of each Class' respective shares and for providing
certain services to each Class' respective shareholders. The
Distributor may pay third parties in respect of these services
such amount as it may determine. The Fund has made no payments
pursuant to the Plans for the year ended December 31, 1997.
6. FORMATION AND RE-ORGANIZATION
The Fund, formerly Security Capital Employee REIT Fund
Incorporated, 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
December 31, 1997, $443,485 of the capital gain was realized for
book purposes. As a result, at December 31, 1997, the tax basis
of securities held was $559,261 higher than their basis for
financial reporting purposes.
The costs incurred in connection with the organization, initial
registration and public offering of shares, aggregating
$118,099, have been paid by the Adviser. The Fund will reimburse
the Adviser. 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 December 31, 1997 of $22,185 will be
reimbursed to the Fund.
18
Report of Independent Public Accountants
To the board of directors and shareholders of Security Capital
U.S. Real Estate Shares Incorporated:
We have audited the accompanying statement of assets and
liabilities of Security Capital U.S. Real Estate Shares
Incorporated (a Maryland corporation), including the schedule of
investments, as of December 31, 1997, and the related statement
of operations for the year then ended and the statement of
changes in net assets and financial highlights for the year then
ended and the period from December 20, 1996 (date of inception)
to December 31, 1996. These financial statements and financial
highlights are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with
the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of Security Capital U.S. Real
Estate Shares Incorporated as of December 31, 1997, the results
of its operations for the year then ended and the changes in its
net assets and financial highlights for the year then ended and
the period from December 20, 1996 (date of inception) to
December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 2, 1998
19
Report on Special Meeting of Shareholders
A Special Meeting of Shareholders ("Special Meeting") was held
on December 12, 1997. The matters voted on by the Fund's
shareholders at the Special Meeting are discussed below.
Class I shareholders and Class R shareholders, voting
separately, approved a Distribution and Service Plan for Class I
Shares and a Distribution and Service Plan for Class R Shares
("Plans") pursuant to Rule 12b-1 of the Investment Company Act
of 1940, as amended. Under the Plans, Security Capital Markets
Group Incorporated ("Capital Markets"), as principal underwriter
of the Class I and Class R Shares, provides distribution
services primarily intended to result in the sale of Class I
Shares and Class R Shares. Capital Markets also provides
services to Class I and Class R shareholders, including the
provision of information and explanations concerning Class I and
Class R shareholder investments and the status of shareholder
accounts. The aggregate distribution fee and service fee under
each Plan is .25% on an annual basis, of the average daily net
assets of the Class I or Class R Shares, respectively. The Plan
for Class I Shares was approved with 9,750,437 votes for, 0
votes against and 0 votes abstaining. The Plan for Class R
Shares was approved with 44,123,705 votes for, 2,303 votes
against and 0 votes abstaining.
The shareholders approved an amended investment advisory
agreement ("Amended Advisory Agreement") with Security Capital
(US) Management Group Incorporated ("SC(US)MG"). The terms and
conditions of the Amended Advisory Agreement are identical to
the terms and conditions of the advisory agreement with SC(US)MG
then in effect ("Advisory Agreement"), except as to the
effective and termination dates, the reduced advisory fee and
the expense waiver and/or reimbursement provisions. Under the
Amended Advisory Agreement SC(US)MG receives a monthly fee in an
amount equal to 1/12 of .60% of the Fund's average daily net
assets (approximately .60% on an annual basis), as compared to
the monthly fee under the Advisory Agreement of 1/12 of .85% of
the Fund's average daily net asset (approximately .85% on an
annual basis). Under the Advisory Agreement SC(US)MG also agreed
to waive fees and/or reimburse expenses to maintain the Fund's
total operating expenses, other than brokerage fees and
commissions, interest taxes and other extraordinary expenses at
no more than 1.20% of the Fund+s average daily net assets for
the year ending December 31, 1997. The Amended Advisory
Agreement does not include an expense waiver or reimbursement
provisions. However, under a separate sponsorship agreement,
SC(US)MG has committed to waive fees and/or reimburse expenses
to maintain the total operating expenses of the Class I Shares
at no more than 1.00% of the Class I average daily net assets
and the Class R Shares at no more than 1.15% of the Class R
average daily net assets for the year ending December 31, 1998.
The Amended Advisory Agreement was approved with 9,796,864 votes
for, 0 votes against and 0 votes abstaining.
The shareholders elected two of the Fund's four directors.
George F. Keane and Robert H. Abrams each were elected with
9,796,864 votes for, 0 votes against and 0 votes abstaining. The
terms of the Fund+s other directors, Anthony R. Manno Jr. and
Stephen F. Kasbeer, who were previously elected by the
shareholders, continued after the Special Meeting.
20
Report on Special Meeting of Shareholders (continued)
The shareholders approved the amendment of the Fund's long-term
investment objective to clarify that the Fund shall invest
primarily in real estate securities. The Fund's investment
objective is to provide above-average total returns, including
current income and capital appreciation, primarily through
investments in real estate securities in the United States.
Prior to shareholder approval of the proposed amendment, the
Fund's long-term objective was to achieve top-quartile total
returns as compared with other mutual funds that invest
primarily in the securities of publicly traded REITs in the
United States by integrating in-depth proprietary real estate
market research with sophisticated capital markets research and
modeling techniques. As amended, the Fund's long-term investment
objective is to achieve top quartile total returns as compared
with other mutual funds that invest primarily in real estate
securities in the United States, by integrating in-depth
proprietary real estate market research with sophisticated
capital markets research and modeling techniques. The amendment
provides the Fund with the flexibility to continue both to
invest in publicly traded REITs and to take advantage of
investment opportunities in other real estate securities. The
amendment of the Fund's long term investment objective was
approved with 9,796,864 votes for, 0 votes against and 0 votes
abstaining.
21
Directors and Officers
Anthony R. Manno Jr. - Director, Chairman and President
Robert H. Abrams - Director
Stephen F. Kasbeer - Director
George F. Keane - Director
John H. Gardner - Managing Director
Kenneth D. Statz - Managing Director
Kevin W. Bedell - Senior Vice President
Jeffrey C. Nellessen - Vice President, Secretary and Treasurer
Michael J. Heller - Assistant Secretary and Assistant Treasurer
Investment Advisor Security Capital (US)
Management Group Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
Legal Counsel
Mayer, Brown & Platt
2000 Pennsylvania Avenue, N.W.
Washington D.C. 20006
Auditors
Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
Investment Management Team
Anthony R. Manno Jr. - Director, Chairman and President
Kenneth D. Statz - Managing Director
Kevin W. Bedell - Senior Vice President
Albert D. Adriani - Vice President
John Montaquila III - Vice President
Michael C. Montelibano - Vice President
Michelle H. Lord - Vice President
Anne Darnley - Analyst
James D. Foster - Analyst
Yung R. Ho - Analyst
Pauline H. Sohn - Analyst
Merritt H. Paulson - Analyst
