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SECURITY CAPITAL
[PHOTO]
EUROPEAN REAL ESTATE SHARES
1998 ANNUAL REPORT
[LOGO APPEARS HERE]
SECURITY CAPITAL
<PAGE>
SECURITY CAPITAL
EUROPEAN REAL ESTATE SHARES
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Security Capital European Real Estate Shares is a highly-focused, no-load mutual
fund that seeks to provide shareholders with above-average returns, including
current income and capital appreciation, primarily through investments in
publicly traded real estate companies throughout Europe. The long-term objective
of the Fund is to achieve top-quartile results when compared to other European
real estate mutual funds by integrating in-depth proprietary real estate market
research with sophisticated capital markets research and modeling techniques.
1
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TO OUR SHAREHOLDERS
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Security Capital European Real Estate Shares commenced operations on June 30,
1998. For the six months ended December 31, 1998, the Fund generated a total
return of 3.25%, as compared to (8.40)% for its benchmark, the Salomon Smith
Barney-European Property Index, an outperformance of 11.65 percentage points.
The net asset value per share at year-end for Class I (Institutional) Shares was
$10.28; total dividends of $0.04 per share were paid to Class I shareholders of
record for the year.
During the second half of 1998, the European markets experienced healthy
economic growth despite investor concerns about the impact of the economic
crises in Russia and Southeast Asia. Although the concerns led to declines in
most equity markets during the third quarter, these markets, including real
estate securities, generally experienced meaningful recovery during the fourth
quarter.
Although publicly traded real estate companies have long existed in Europe, they
are just beginning to implement focused growth strategies. We believe that this
shift, along with the coming changes associated with the European Economic and
Monetary Union (EMU), will maximize long-term return prospects as real estate
companies strive to generate cash flow growth and shareholder value. In our
view, the EMU, which took effect January 1, 1999, will result in deeper, more
efficient European capital markets and will accelerate the trend toward real
estate securitization, broadening investor interest and benefiting from a
standard currency, the euro.
As we move into 1999, we believe that Europe will experience general economic
strength as well as increasing real estate industry strength. Economic
integration is creating demand for virtually all real estate classes--including
office, residential, warehousing and distribution, and retail--in European
markets with relatively high barriers to entry.
It is our belief that this overall environment presents excellent opportunity
for investment in select publicly traded real estate companies. SC-European Real
Estate Shares' management team utilizes a disciplined proprietary research-
driven investment process to identify and invest only in those real estate
companies with the highest potential for attractive returns. Our value-driven
approach is based on thorough fundamental analysis to identify attractively
priced businesses with the ability to generate superior long-term results.
Critical to the assessment of such growth potential is a comprehensive analysis
of the strength and quality of a company's cash flow potential--assessed by
evaluating its assets, management teams and operating strategies as well as the
underlying economic conditions within the countries in which it operates. Only
when our valuation models provide us with the conviction that a company offers
significant potential for growth do we make an investment.
We thank you for your support and look forward to serving your continued
investment needs.
/s/ Anthony R. Manno Jr.
- ----------------------------
Anthony R. Manno Jr.
President
2
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FUND PERFORMANCE
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The Fund's performance is shown in the table below.
Security Capital European Real Estate Shares
Comparative Return vs. Industry Benchmark
Total Return
Period from June 30, 1998/(1)/ to December 31, 1998
<TABLE>
<CAPTION>
Total Return
Since Inception (6/30/98)
<S> <C>
SC-European Real Estate Shares
Class R (Retail) Shares/(2)/ 3.25%
SC-European Real Estate Shares
Class I (Institutional) Shares 3.25%
Salomon Smith Barney-
European Property Index/(3)/ (8.40)%
</TABLE>
Not annualized. Past performance is no guarantee of future results. The
performance of the above-referenced index does not include any fees or expenses,
and the underlying portfolio of SC-European Real Estate Shares may differ from
that of the index. Calculation of total return assumes reinvestment of all
capital gains and income dividends. (1) The effective date of the Fund's
registration statement with the Securities and Exchange Commission. (2) The
table above reflects the performance of the Fund's Class I (Institutional)
Shares. There were no outstanding Class R (Retail) Shares for the period shown.
The maximum expenses chargeable against Class R Shares is 1.60%, and the maximum
expenses chargeable against Class I Shares is 1.45%, for the period ended
December 31, 1998. (3) The Salomon Smith Barney-European Property Index is a
float-weighted index that includes 15 countries in Europe and the listed shares
of all real estate companies with an available market capitalization (float) of
at least $100 million.
Security Capital European Real Estate Shares - Class I (Institutional) Shares
Growth of a $10,000 Investment
Period from June 30, 1998 to December 31, 1998
[CHART APPEARS HERE]
$10,500 $10,325
$10,000
$ 9,500
$ 9,160
$ 9,000
$ 8,500
Jun-30 Jul Aug Sep Oct Nov Dec
1998 1998
- --SC-European Real Estate Shares -- Salomon Smith Barney-European Property Index
Past performance is not a guarantee of future performance. The graph above
reflects the performance of the Fund's Class I (Institutional) Shares. There
were no outstanding Class R (Retail) Shares for the period shown. The maximum
expenses chargeable against Class R Shares is 1.60%, and the maximum expenses
chargeable against Class I Shares is 1.45%, for the period ended December 31,
1998.
3
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Security Capital European Real Estate Shares
Schedule of Investments--December 31, 1998
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<TABLE>
<CAPTION>
Shares Market Value
<C> <S> <C>
COMMON STOCKS--52.6%
United Kingdom--27.8%
216,163 Chelsfield, PLC $ 881,147
200,000 Development Securities, PLC 670,511
25,000 Capital Shopping Centre, PLC 140,175
----------
1,691,833
Sweden--11.6%
40,000 Castellum, AB 434,271
93,000 Hufvudstaden, AB 269,630
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703,901
France--7.2%
3,000 Unibail 437,701
Spain--6.0%
40,000 Prima Inmobiliaria, SA/(1)/ 362,760
Total Common Stocks/(2)/ ----------
(Cost $3,114,254) 3,196,195
Principal Amount
SHORT TERM INVESTMENTS--46.6%
$2,836,000 United States Treasury Bills, 4.150%, 01/28/1999 2,827,173
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Total Short Term Investments
(Cost $2,827,173) 2,827,173
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Total Investments--99.2%
(Cost $5,941,427) 6,023,368
Other Assets in Excess of
Liabilities--0.8% 47,947
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NET ASSETS 100.0% $6,071,315
==========
</TABLE>
/(1)/ Non income producing security.
/(2)/ Percentages of long term investments are presented in this schedule by
country. Percentages of long term investments by industry are as follows:
Diversified Real Estate 18.8% and Real Estate Development 33.8%.
See notes to the financial statements 4
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SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES--DECEMBER 31, 1998
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<TABLE>
ASSETS:
<S> <C>
Investments, at market value
(Cost $5,941,427) $6,023,368
Cash 24,386
Deferred organization costs 55,836
Receivable from investment adviser 11,280
Other assets 500
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Total Assets 6,115,370
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LIABILITIES:
Accrued expenses and other liabilities 44,055
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Total Liabilities 44,055
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NET ASSETS $6,071,315
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NET ASSETS CONSIST OF:
Capital stock $5,993,705
Undistributed net investment loss (2,239)
Accumulated undistributed net realized loss on investments (2,092)
Net unrealized appreciation on investments 81,941
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Total Net Assets $6,071,315
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CLASS I:
Net assets $6,071,315
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 590,698
Net asset value and redemption price per share $10.28
==========
</TABLE>
See notes to the financial statements. 5
<PAGE>
<TABLE>
<CAPTION>
SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF OPERATIONS--PERIOD ENDED DECEMBER 31, 1998/(1)/
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<S> <C>
INVESTMENT INCOME:
Dividend income $ 5,069
Interest income 47,331
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Total investment income 52,400
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EXPENSES:
Investment advisory fee 16,076
Distribution expense 4,729
Administration fee 378
Sub-administration fee 38,333
Transfer agent, custody and accounting costs 44,359
Federal and state registration 34,224
Professional fees 25,096
Shareholder reports and notices 604
Director's fees and expenses 12,075
Insurance expense 600
Amortization of organization costs 6,295
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Total expenses before reimbursement 182,769
Less: Reimbursement from Adviser (155,345)
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Net expenses 27,424
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NET INVESTMENT INCOME 24,976
==========
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (2,092)
Net realized loss on foreign currency transactions (12,273)
Change in unrealized appreciation on investments 81,941
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Net realized and unrealized gain on investments 67,576
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 92,552
==========
</TABLE>
/(1)/ Fund commenced operations on June 30, 1998.
See notes to the financial statements. 6
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Security Capital European Real Estate Shares
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
Period ended
December 31, 1998/(1)/
----------------------
<S> <C>
OPERATIONS:
Net investment income $ 24,976
Net realized loss on investments (2,092)
Net realized loss on foreign currency transactions (12,273)
Change in unrealized appreciation on investments 81,941
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Net increase in net assets resulting from operations 92,552
CAPITAL SHARE TRANSACTIONS:
Proceed from shares sold 6,007,500
Shares issued to holders in reinvestment of dividends 22
Cost of shares redeemed (2,552)
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Net increase in net assets from capital share transactions 6,004,970
DISTRIBUTIONS TO CLASS I SHAREHOLDERS:
From net investment income (15,690)
In excess of net investment income (10,517)
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Total distributions Class I (26,207)
TOTAL INCREASE IN NET ASSETS 6,071,315
NET ASSETS:
Beginning of period --
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End of period (including undistributed net investment loss of $2,239) $6,071,315
==========
</TABLE>
/(1)/ Fund commenced operations on June 30, 1998.
7
<PAGE>
Security Capital European Real Estate Shares
Financial Highlights
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<TABLE>
<CAPTION>
Period ended
December 31, 1998/(1)/
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Class I
----------------------
<S> <C>
For a share outstanding for the period:
Net Asset Value, beginning of period $ 10.00
Income from investment operations:
Net investment income 0.04
Net realized and unrealized gain on investments 0.28
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Total from investment operations 0.32
----------
Less distributions:
Dividends from net investment income (0.02)
Dividends in excess of net investment income (0.02)
----------
Total distributions (0.04)
----------
Net asset value, end of period $ 10.28
==========
Total return/(2)/ 3.25%
Supplemental data and ratios:
Net assets, end of period $6,071,315
Ratio of expenses to average net assets/(3)(4)/ 1.45%
Ratio of net investment income to
average net assets/(3)(4)/ 1.32%
Portfolio turnover rate --%
</TABLE>
/(1)/ Fund commenced operations June 30, 1998.
/(2)/ Not annualized.
/(3)/ Annualized.
/(4)/ Without voluntary expense reimbursements of $155,345 for the period ended
December 31, 1998, the ratio of expenses to average net assets would have
been 9.66% for Class I and the ratio of net investment income to average
net assets would have been (6.89)% for Class I.
8
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Security Capital European Real Estate Shares
Notes to the Financial Statements--December 31, 1998
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Capital European Real Estate Shares (the "Fund") is a non-diversified
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), which is an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act"), and is a Maryland corporation.
SC-REMFs was comprised of four investment portfolios on June 30, 1998, and is
comprised of two investment portfolios on December 31, 1998, the Fund and
Security Capital U.S. Real Estate Shares. The Fund consists of Class I and Class
R Shares, which differ in services provided to shareholders and expenses. The
Fund commenced operations on June 30, 1998. For the period ended December 31,
1998, there were no capital stock transactions for Class R Shares.
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 Director's Valuation Committee. Temporary cash investments (those with
remaining maturities of 60 days or less) are valued at amortized cost, which
approximates market value.
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. As of December 31, 1998, the Fund has a
realized capital loss carry forward, for federal income tax purposes, of $2,092
(expires December 31, 2006), available to be used to offset future realized
capital gains. As of December 31, 1998, the Fund has elected for Federal income
tax purposes to defer a $2,239 current year post October 31 currency loss as
though the loss was incurred on the first day of the next fiscal year.
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 decide 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
9
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NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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net realized gain on investment transactions, or from paid-in-capital, depending
on the type of book/tax differences that may exist. Generally accepted
accounting principles require that permanent financial reporting and tax
differences be reclassified to capital stock.
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 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.
2. CAPITAL SHARE TRANSACTIONS
On June 30, 1998, the Fund commenced investment operations. Transactions in
shares of the Fund were as follows:
<TABLE>
<CAPTION>
Period from 06/30/98 through 12/31/98:
- -------------------------------------------------------------------------------------------
Amount Shares
-------------------------
<S> <C> <C>
Class I Shares:
Shares sold $6,007,500 590,946
Shares issued to holders in reinvestment of dividends 22 2
Shares redeemed (2,552) (250)
-------------------------
Net increase $6,004,970 590,698
=========================
</TABLE>
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long term investments by the Fund for the
period ended December 31, 1998, were $3,114,254 and $0, respectively.
At December 31, 1998, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
<TABLE>
<CAPTION>
<S> <C>
Appreciation $170,575
(Depreciation) (88,634)
--------
Net appreciation on investments $ 81,941
========
</TABLE>
At December 31, 1998, the cost of investments for federal income tax purposes
was $5,941,427.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
SC-REMFs has entered into an Investment Advisory Agreement with Security Capital
Global Capital Management Group Incorporated ("GCMG"). Pursuant to the Advisory
Agreement, GCMG is entitled to receive a management fee, calculated daily and
payable monthly, at the annual rate of 0.85% as applied to the Fund's average
daily net assets. GCMG has entered into an investment sub-advisory agreement
with Security Capital Global Capital Management Group (Europe) S.A. ("GCMG-
Europe") ("Sub-Advisory Agreement") pursuant to which GCMG-Europe provides
various portfolio management and investment advisory services to the Fund. Under
the Sub-Advisory Agreement, GCMG-Europe receives a monthly management fee from
GCMG equal to the annual rate of 0.08% of the Fund's average daily net asset
value.
GCMG voluntarily agreed 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 1.45% and 1.60% of the average net assets of the Class I Shares and Class R
Shares respectively, computed on a daily basis, for the period ended December
31, 1998.
GCMG also serves as the Fund's administrator. GCMG 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.
State Street Bank and Trust Company ("State Street"), a publicly held bank
holding company, serves as sub-administrator, custodian, and accounting services
agent for the Fund. Sub-administration, custodian, and accounting services will
be charged by State Street according to contractual fee schedules agreed to by
the Fund.
Boston Financial Data Services, Inc. ("BFDS"), a privately held company and an
affiliate of State Street, serves as transfer agent for the Fund. Transfer agent
services will be charged by BFDS according to contractual fee schedules agreed
to by the Fund.
5. CONCENTRATION OF RISKS
The Fund will invest a substantial portion of its assets in publicly-traded real
estate companies organized principally in European nations. The Fund may be
subject to risks similar to those associated with the direct ownership of real
estate (in addition to securities market risks) because of its policy of
concentration in the securities of companies in the real estate industry. Such
risks include declines in the value of real estate, risks related to general and
local economic conditions, possible lack of availability of mortgage funds,
overbuilding, extended vacancies of properties, increased competition, increases
in real estate taxes and operating expenses, changes in zoning laws, losses due
to costs resulting from the clean-up of environmental problems, liability to
third parties for damages resulting from environmental problems, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the
appeal of properties to customers and changes in interest rates.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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The Fund will invest primarily in foreign securities. Substantial risks are
involved when investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization, or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock market movements,
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
in the U.S. Foreign companies are generally not subject to the same accounting
and auditing and financial reporting standards as those for U.S. Companies, and
auditing practices and requirements may not be comparable to those applicable to
U.S. companies. The Fund may encounter difficulties or be unable to vote
proxies, exercise shareholder rights, pursue legal remedies, and obtain
judgments in foreign courts. Also, most foreign countries withhold portions of
income and dividends at the source, requiring investors to reclaim taxes
withheld.
The securities of some foreign companies and foreign securities markets are less
liquid and at times more volatile than securities of comparable U.S. companies
and U.S. securities markets.
The foregoing discussion is general in nature and is subject to the risk
considerations described in the Fund's Prospectus and Statement of Additional
Information.
6. DISTRIBUTION AND SERVICING PLANS
The Fund has adopted distribution plans with respect to 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
distribution 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 the respect of these
services such amounts as it may determine. The Fund has made no payments
pursuant to the Plans for the period ended December 31, 1998.
7. PRINCIPAL SHAREHOLDERS
As of December 31, 1998, SC Realty Incorporated, a wholly owned subsidiary of
Security Capital Group Incorporated, GCMG's parent corporation, owned 99.9% of
the Fund's total outstanding shares.
12
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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To the board of directors and shareholders of
Security Capital European Real Estate Shares:
We have audited the accompanying statement of assets and liabilities of Security
Capital European Real Estate Shares (a separate portfolio of Security Capital
Real Estate Mutual Funds Incorporated, a Maryland corporation), including the
schedule of investments, as of December 31, 1998, and the related statements of
operations and changes in net assets and the financial highlights for the period
from June 30, 1998 (date of inception) to December 31, 1998. 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 audit.
We conducted our audit 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, 1998, 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 audit
provides 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 European Real Estate Shares as of December 31, 1998, the
results of its operations, the changes in its net assets, and the financial
highlights for the period from June 30, 1998 (date of inception) to December 31,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 15, 1999
<PAGE>
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Directors and Officers
Anthony R. Manno Jr.
Director, Chairman and President
John H. Gardner Jr.
Director, Managing Director
Robert H. Abrams
Director
Stephen F. Kasbeer
Director
George F. Keane
Director
Kenneth D. Statz
Managing Director
Kevin W. Bedell
Senior Vice President
Jeffrey C. Nellessen
Vice President, Treasurer and Assistant Secretary
David T. Novick
Vice President and Secretary
Michael J. Heller
Assistant Treasurer
Investment Adviser
Security Capital Global Capital
Management Group Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
Investment Subadviser
Security Capital Global Capital
Management Group (Europe) S.A.
Boulevard de la Woluwe 34
Brussels, Belgium 1200
Investment Management Team
Anthony R. Manno Jr.
Director, Chairman and President
W. Joseph Houlihan
Managing Director
Gerios Rovers
Vice President
Marina Jamalian
Analyst
Bernhard Krieg
Analyst
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
SECURITY CAPITAL
11 South LaSalle Street, Chicago, IL 60603
1-888-SECURITY www.securitycapital.com
<PAGE>
[LOGO APPEARS HERE]
SECURITY CAPITAL
11 South LaSalle Street, Chicago, IL 60603
1-888-SECURITY www.securitycapital.com
405/406ANNL98
