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Security Capital
[PHOTO APPEAR HERE]
U.S. Real Estate Shares
1999 Annual Report
[LOGO]
Security Capital
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SECURITY CAPITAL
U.S. REAL ESTATE SHARES
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Security Capital U.S. 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, primarily through
investments in real estate securities in the United States. Long-term, the
Fund's objective is to achieve top-quartile returns, as compared with other U.S.
real estate mutual funds that invest primarily in real estate securities in the
United States by integrating in-depth proprietary research with sophisticated
capital markets research and modeling techniques.
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TO OUR SHAREHOLDERS
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1999 was another challenging and frustrating year for investors in U.S. real
estate stocks. The Wilshire Real Estate Securities Index benchmark ("WARESI")
generated a -3.2% return for the year ended December 31, 1999 compared with a
21.1% return for the S&P 500. As stark as this return differential appears, it
was even worse on a price basis since WARESI performance was eased by a healthy
7.2% average dividend return for the year. Since achieving a peak in October
1997, prices for real estate securities are down a cumulative 30.6% through
year-end 1999. As prices have retreated to year-end 1995 levels, earnings (Funds
From Operations or "FFO") per share for WARESI companies have increased 65%,
while real estate market fundamentals as measured by vacancy rates, market rents
and asset valuations have steadily improved!
By property type, the best relative performance in 1999 came from the
multifamily, industrial and office companies, which generated positive total
returns for the year of 10.5%, 5.5% and 3.2%, respectively. Regional mall and
lodging companies faired poorly in 1999 with returns of -15.3% and -13.4%,
respectively. For regional malls, the issue centered on the perception of a
growing Internet threat to traditional retail formats. The selling pressure on
hotel stocks reflected more cyclical concerns with the rapid pace of new hotel
construction in many markets. Healthcare REITs, while not part of the WARESI
benchmark, performed the worst during 1999 with a -24.8% total return. This
primarily reflects the operating and financial distress of healthcare operators
under Medicare's new prospective payment system (PPS).
Security Capital U.S. Real Estate Shares ("SC-US Real Estate Shares") was not
immune in this challenging environment for real estate securities. The Fund
generated a total return for the year ended December 31, 1999 of +0.4%. While
disappointing in the context of a buoyant U.S. equity market, the Fund's
performance solidly surpassed the WARESI benchmark by 362 basis points and
achieved our ongoing goal of first-quartile results among real estate funds. We
attribute this relative performance advantage to our continued focus on
fundamental company research which resulted in an overweight in office and
multifamily companies and an underweight in retail and lodging companies. The
Fund did not own any healthcare REITs during the year.
On December 20, 1999, SC-US Real Estate Shares recorded its 3-year anniversary
and attained an important milestone in the form of highly favorable
reviews/ratings from a number of recognized experts in the area of mutual fund
analysis. In one instance, the Fund has been included in a distinguished
published grouping of funds based on track record, management quality and growth
potential. We would be happy to direct you to these sources.
Additional Perspective & Outlook
After a -22.2% price performance for real estate stocks in 1998, there were few
new factors that emerged in 1999 that easily explained the continuing caution
and wary disposition of
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investors towards the group. Even when the stocks got a boost during the year,
as they did several times from the actions and comments of Warren Buffett and
other market leaders, the positive impact was short-lived and selling pressures
quickly returned. The healthy but moderating trends in real estate market
fundamentals and company earnings certainly were not new news to investors in
1999. In fact, there was actually a stream of good news for real estate markets
as the economy moved away from the chilling effects of the financial markets
crisis of August 1998. In part, we believe the high profile distress of some
lodging companies and healthcare REITs played a role, as did the looming
maturation of $1.6 billion of real estate stocks held by unit investment trusts
and isolated dividend cuts.
While all of these factors contributed to the performance of real estate stocks
in 1999, there was also an impact from the continued strong investment
performance of technology and growth investments. As investment returns and
excitement over new technologies and applications escalated in 1999, the "market
clearing" investment return for value/income investments, including real estate
stocks, increased sharply. By our calculations, the implicit cost of public
equity capital to real estate companies increased an average of 250 basis points
in 1999 to 16.1%. Importantly, this was not a factor for the private direct real
estate market, where pricing and allocation decisions are more insulated by real
estate's designation as its own asset class. These private investors generally
enjoyed abundant liquidity and stable or increasing asset values during 1999.
Regardless of the reason, with real estate asset values stable or increasing and
real estate stock prices back to 1995 levels, a clear public/private pricing gap
persists. Many public real estate companies today trade at 25% or greater
discounts to our calculation of the net asset value of their underlying real
estate portfolios.
We believe the current public/private pricing gap will close or narrow
significantly during the next 24 to 36 months. Although there may be many
companies that continue trading at discounts to their private market real estate
asset values, we believe a select number of real estate stocks will achieve
significant price appreciation as a result of varied catalysts for value
realization or growth. This view reflects three primary observations.
. Real estate asset cash flow streams are stable and undervalued. Currently,
real estate markets are in a healthy equilibrium with low vacancy rates,
strong demand drivers and balanced new supply. We believe large scale
overbuilding is unlikely, tempered by the "transparency" brought to the
real estate market through securitization. Importantly, asset level yields
are stable and attractive on a "real" inflation-adjusted basis.
. Company fundamentals are sound with newly emerging growth opportunities.
Earnings are solid with most companies meeting or exceeding analysts'
earnings estimates. Net interest coverage for the industry is at healthy
levels with most debt in the form of longer term fixed rate loans.
Companies continue to identify value-added cash flow growth strategies that
are complementary to pure asset ownership, including joint
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ventures, expanded service activities that are providing additional revenue
streams, and cost savings through economies of scale and process
innovations.
. Private real estate investment markets are healthy. Significant private
capital continues to seek out U.S. real estate opportunities from both
domestic and offshore sources. As a result, there appears to be abundant
liquidity in the market to ensure efficient pricing of real estate at the
asset level.
Near-term catalysts for price appreciation include public-to-public mergers,
management-led buyouts, and stock buyback programs. As an example, in 1999 there
was in excess of $4.8 billion of privately funded buyout activity involving
public real estate companies. This activity has resulted in healthy price
appreciation for investors in these companies from their pre-announcement
trading ranges. In addition, stock buyback programs totaling $5.2 billion,
funded primarily through private market asset sales, were publicly announced in
1999 and are underway. Beyond these near-term catalysts, we believe growth and
appreciation will be driven by service and technology oriented initiatives made
possible by the REIT Modernization Act recently enacted by Congress. This
important new legislation, which becomes effective January 1, 2001, allows REITs
to pursue a wider array of business activities, on a taxable basis, which are
complimentary to the narrower REIT mandate of owning assets and collecting
rents.
We remain focused on those real estate companies where our research identifies
high quality assets, sound long-term business strategies and attractive total
rate of return potential. We believe the disparity between a healthy real estate
industry and low valuations of real estate securities provides a very attractive
opportunity for long-term investors.
We appreciate your support during 1999 and look forward to a rewarding year in
2000.
Sincerely,
/s/ Anthony R. Manno Jr. /s/ Kenneth D. Statz
Anthony R. Manno Jr. Kenneth D. Statz
President Managing Director
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FUND PERFORMANCE
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The Fund's performance compared to frequently used performance benchmarks is
shown in the table below.
Comparative Returns versus Industry Benchmarks
Average Annual Total Returns
Period Ended December 31, 1999
Since Inception
One-Year Three-Year (12/20/96-12/31/99)
-------- ---------- -------------------
SC-US Real Estate Shares
Class R (Retail) Shares 0.43% 3.44% 4.67%
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SC-US Real Estate Shares
Class I (Institutional) Shares 0.58% 3.51% 4.74%
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NAREIT Equity Index/1/ (4.62)% (1.82)% (0.50)%
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Wilshire Real Estate
Securities Index/2/ (3.19)% (1.43)% (0.05)%
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Past performance is not indicative of future results. The performance of the
above-referenced indices includes reinvested dividends and does not include any
fees or expenses. The underlying portfolio securities of SC-US Real Estate
Shares may differ from those of the indices. (1) 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 (2) Wilshire Real Estate Securities Index is an unmanaged,
market-capitalization weighted index comprising publicly traded REITs and real
estate operating companies except for special purpose and healthcare REITs.
Growth of a $10,000 Investment in Class R (Retail) Shares
Period from December 20, 1996 to December 31, 1999
[GRAPH APPEARS HERE]
Wilshire RE NAREIT
SC-US Securities Equity
Class R Index Index
20-Dec-96 $10,000 $10,000 $10,000
March $10,509 $10,616 $10,483
June $10,997 $11,104 $11,003
September $12,823 $12,507 $12,304
December $12,991 $12,489 $12,519
March $13,047 $12,395 $12,461
June $12,294 $11,826 $11,889
September $11,046 $10,412 $10,638
December $11,437 $10,313 $10,328
March $11,107 $ 9,955 $ 9,830
June $12,616 $11,012 $10,822
September $11,637 $ 9,961 $ 9,951
December $11,486 $ 9,984 $ 9,851
Past performance is not indicative of future results. The performance of SC-US
Real Estate Shares Class I (Institutional) Shares is greater than that of the
SC-US Real Estate Shares Class R (Retail) Shares for the time period indicated
above based on the difference in expenses of each class.
See notes to the financial statements.
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FUND FACTS
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TOP 10 HOLDINGS
% of Total Net Assets
Arden Realty, Inc. 7.1%
Urban Shopping Centers, Inc. 6.8%
Starwood Hotels &
Resorts Worldwide, Inc. 6.7%
TrizecHahn Corporation 6.4%
Avalon Bay Communities, Inc. 6.3%
Boston Properties, Inc. 6.0%
Prentiss Properties Trust 5.3%
Charles E. Smith
Residential Realty, Inc. 4.5%
Highwood Properties, Inc. 4.4%
Public Storage, Inc. 4.3%
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Total 57.8%
FUND AT A GLANCE
Minimum initial investment $2,500/1/
Minimum subsequent investment $250
Up-front sales load None
Redemption fee None
Symbol SUSIX
/1/ $1,000 for IRAs and UGMA/UTMA accounts.
SECTOR WEIGHTINGS
[PIE CHART APPEARS HERE]
Diversified 24.2%
Multifamily 15.6%
Regional Malls 8.0%
Hotels 6.7%
Storage 4.3%
Shopping Centers 4.0%
Other/2/ 11.3%
Office 25.9%
/2/ Other includes short-term investments and other assets in excess of
liabilities.
See notes to the financial statements.
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SECURITY CAPITAL U.S. REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1999
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<TABLE>
<CAPTION>
Shares Market Value
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COMMON STOCKS - 88.7%
OFFICE - 25.9%
<C> <S> <C>
179,800 Arden Realty, Inc. $ 3,607,237
98,500 Boston Properties, Inc. 3,065,813
96,000 Highwoods Properties, Inc. 2,232,000
147,000 Cornerstone Properties, Inc. 2,149,875
87,175 Equity Office Properties Trust 2,146,684
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13,201,609
DIVERSIFIED - 24.2%
193,300 TrizecHahn Corporation 3,261,937
129,200 Prentiss Properties Trust 2,713,200
89,300 Liberty Property Trust 2,165,525
103,800 Reckson Associates Realty Corporation 2,127,900
56,600 Spieker Properties, Inc. 2,062,363
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12,330,925
MULTIFAMILY - 15.6%
94,073 Avalon Bay Communities, Inc. 3,227,880
64,900 Charles E. Smith Residential Realty, Inc. 2,295,837
61,800 Amli Residential Properties Trust 1,247,588
34,350 Essex Property Trust, Inc. 1,167,900
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7,939,205
REGIONAL MALLS - 8.0%
127,500 Urban Shopping Centers, Inc. 3,458,438
22,100 General Growth Properties, Inc. 618,800
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4,077,238
HOTELS - 6.7%
145,500 Starwood Hotels & Resorts Worldwide, Inc. 3,419,250
STORAGE - 4.3%
97,000 Public Storage, Inc. 2,200,688
SHOPPING CENTERS - 4.0%
108,500 Federal Realty Investment Trust 2,041,156
Total common stocks ------------
(cost $47,201,347) 45,210,071
</TABLE>
See notes to the financial statements.
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<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (CONTINUED)
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Principal
Amount Market Value
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SHORT-TERM INVESTMENTS - 8.4%
<S> <C> <C>
$1,757,067 Agreement with State Street Bank and Trust Company,
2.500%, dated 12/31/1999, to be repurchased at
$1,757,433, on 01/03/2000, collateralized by
$1,450,000 U.S. Treasury Bond, 12.375% maturing
on 05/15/2004 (market value $1,792,563) $ 1,757,067
2,500,000 United States Treasury Bill, 2.850%, 01/06/2000 2,499,010
Total short-term investments --------------
(cost $4,256,077) 4,256,077
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Total investments - 97.1%
(cost $51,457,424) 49,466,148
Other assets in excess of liabilities - 2.9% 1,483,176
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Net assets - 100.0% $50,949,324
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</TABLE>
See notes to the financial statements.
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SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES-DECEMBER 31, 1999
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<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at market value
(cost $51,457,424) $49,466,148
Receivable for fund shares sold 1,000,763
Dividends and interest receivable 502,504
Deferred organization costs 48,699
Other assets 4,622
Total assets 51,022,736
LIABILITIES:
Payable to distributor 10,506
Payable for fund shares redeemed 4,810
Accrued expenses and other liabilities 58,096
Total liabilities 73,412
Net assets $50,949,324
NET ASSETS CONSIST OF:
Capital stock $58,714,385
Accumulated undistributed net realized loss on investments (5,773,785)
Net unrealized depreciation on investments (1,991,276)
Total net assets $50,949,324
CLASS I:
Net assets $46,409,723
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 4,951,420
Net asset value and redemption price per share $9.37
CLASS R:
Net assets $ 4,539,601
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 484,467
Net asset value and redemption price per share $9.37
</TABLE>
See notes to the financial statements.
8
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SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF OPERATIONS-YEAR ENDED DECEMBER 31, 1999
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<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividend income $ 3,358,901
Interest income 80,558
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Total investment income 3,439,459
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EXPENSES:
Investment advisory fee 383,479
Distribution expense - Class I 151,876
Distribution expense - Class R 7,907
Administration fee 12,783
Sub-administration fee 93,288
Transfer agent, custody and accounting costs 133,720
Federal and state registration 49,667
Professional fees 114,863
Shareholders reports and notices 40,423
Directors' fees and expenses 23,921
Amortization of organization expenses 23,608
Other 1,613
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Total expenses before reimbursement 1,037,148
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Less: Reimbursement from adviser (265,522)
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Net expenses 771,626
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Net investment income $ 2,667,833
===========
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments $ 1,688,769
Change in unrealized appreciation on investments (2,890,064)
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Net realized and unrealized loss on investments (1,201,295)
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Net increase in net assets resulting from operations $ 1,466,538
===========
</TABLE>
See notes to the financial statements.
9
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SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
Year ended Year ended
Dec. 31, 1999 Dec. 31, 1998
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<S> <C> <C>
OPERATIONS:
Net investment income $ 2,667,833 $ 5,067,089
Net realized gain (loss) on investments 1,688,769 (6,891,855)
Change in unrealized appreciation
on investments (2,890,064) (12,286,350)
------------ ------------
Net increase (decrease) in net assets
resulting from operations 1,466,538 (14,111,116)
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 24,317,153 9,750,054
Shares issued to holders in
reinvestment of dividends 897,177 720,546
Cost of shares redeemed (67,481,770) (11,297,204)
------------ ------------
Net decrease in net assets from
capital share transactions (42,267,440) (826,604)
DISTRIBUTIONS TO
CLASS I SHAREHOLDERS:
From net investment income (2,546,365) (4,936,792)
From net realized gains -- (1,997,333)
Return of capital (366,516) (389,531)
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Total distributions Class I (2,912,881) (7,323,656)
DISTRIBUTIONS TO
CLASS R SHAREHOLDERS:
From net investment income (128,690) (137,519)
From net realized gains -- (12,118)
Return of capital (18,523) (10,851)
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Total distributions Class R (147,213) (160,488)
Total decrease in net assets (43,860,996) (22,421,864)
NET ASSETS:
Beginning of year 94,810,320 117,232,184
------------ ------------
End of year $ 50,949,324 $ 94,810,320
============ ============
</TABLE>
See notes to the financial statements.
10
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<TABLE>
<CAPTION>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
FINANCIAL HIGHLIGHTS
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Dec. 20, 1996/1/
Year ended Year ended Year ended through
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997/2/ Dec. 31, 1996
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Class I Class R Class I Class R Class I Class R
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<S> <C> <C> <C> <C> <C> <C> <C>
For a share outstanding for each period:
Net asset value, beginning of period $ 9.82 $ 9.82 $ 11.95 $ 11.95 $ 10.38 $ 10.38 $ 10.00
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Income from investment operations:
Net investment income 0.45 0.44 0.42 0.38 0.46/3/ 0.46/3/ 0.02
Net realized and unrealized gain (loss)
on investments (0.39) (0.39) (1.80) (1.76) 2.11 2.11 0.36
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Total from investment operations 0.06 0.05 (1.38) (1.38) 2.57 2.57 0.38
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Less distributions:
Dividends from net investment income (0.45) (0.44) (0.43) (0.43) (0.46) (0.46) --
Dividends from net realized gains -- -- (0.29) (0.29) (0.54) (0.54) --
Return of capital (0.06) (0.06) (0.03) (0.03) -- -- --
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Total distributions (0.51) (0.50) (0.75) (0.75) (1.00) (1.00) --
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Net asset value, end of period $ 9.37 $ 9.37 $ 9.82 $ 9.82 $ 11.95 $ 11.95 $ 10.38
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Total return/4/ 0.58% 0.43% (11.94)% (11.97)% 25.20% 25.19% 3.77%
Supplemental data and ratios:
Net assets, end of period ($000) $46,410 $4,539 $ 90,540 $ 4,271 $116,560 $ 672 $10,247
Ratio of expenses to
average net assets/5/,/6/ 1.20% 1.35% 1.00% 1.15% 0.94% 0.95% --%
Ratio of net investment income to
average net assets/5/,/6/ 4.18% 4.04% 4.75% 4.60% 4.08% 4.07% 19.71%
Portfolio turnover rate/7/ 49.66% 49.66% 109.49% 109.49% 104.17% 104.17% --%
</TABLE>
/1/ Inception date.
/2/ On December 16, 1997, the Fund's existing shareholders were split into
Class I and Class R 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.
/6/ Without voluntary expense reimbursements of $256,747 for Class I and $8,775
for Class R for the year ended December 31, 1999, the ratio of expenses to
average net assets would have been 1.62% for both Classes, and the ratio of
net investment income to average net assets would have been 3.76% for both
Classes. Without voluntary expense reimbursements of $301,721 for Class I
and $3,478 for Class R for the year ended December 31, 1998, the ratio of
expenses to average net assets would have been 1.29% for both Classes, and
the ratio of net investment income to average net assets would have been
4.46% for both Classes. Without voluntary expense reimbursements of $30,276
and $167 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 rate is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements.
11
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SECURITY CAPITAL U.S. REAL ESTATE SHARES
NOTES TO THE FINANCIAL STATEMENTS-DECEMBER 31, 1999
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1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Capital U.S. 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 is comprised of two investment portfolios,
the Fund and Security Capital European 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 December 20,
1996.
Effective February 1, 2000, Class R shares of the Fund were combined with
the Class I shares of the Fund with the surviving class being known as
Security Capital U.S. Real Estate Shares ("SC-US").
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' Valuation Committee. 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
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 comply in future years and to distribute investment company net
taxable income and net capital gains to shareholders. As of December 31,
1999, the Fund has a realized capital loss carryforward, for federal income
tax purposes, of $3,919,058 (expires December 31, 2006), available to be
used to offset future realized capital gains. As of December 31, 1999, the
Fund has elected for Federal income tax purposes to defer a $1,572,439
current year post October capital loss as though the loss was incurred on
the first day of the next fiscal year.
12
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NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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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 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.
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. Distributions received from the REITs that are determined to
be capital gains or losses are recorded by the Fund as a realized gain or loss
on the investment. The character of such distributions, for tax and financial
reporting purposes, is determined by the Fund based on estimates and
information received by the Fund from the REITs.
d) Repurchase Agreements - The Fund may enter into repurchase agreements with
brokers, dealers or banks that meet the credit guidelines approved by the Board
of Directors. In a repurchase agreement, a fund buys a security from a seller
that has agreed to repurchase the same security at a mutually agreed upon date
and price. If the seller is unable to make timely repurchase, the fund's
expected proceeds could be delayed, or the fund could suffer a loss in
principal or current interest, or incur costs in liquidating the collateral.
e) 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.
f) 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
13
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NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
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
Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Year Ended 12/31/99:
- ---------------------------------------------------------------------------------------------
Amount Shares
-------------------------
<S> <C> <C>
Class I Shares:
Shares sold $ 19,952,507 2,027,897
Shares issued to holders in reinvestment of dividends 776,057 79,866
Shares redeemed (63,391,015) (6,377,077)
-------------------------
Net decrease $(42,662,451) (4,269,314)
-------------------------
Class R Shares:
Shares sold $ 4,364,646 455,863
Shares issued to holders in reinvestment of dividends 121,120 12,565
Shares redeemed (4,090,755) (418,787)
-------------------------
Net increase $ 395,011 49,641
-------------------------
Year Ended 12/31/98:
- ---------------------------------------------------------------------------------------------
Amount Shares
-------------------------
Class I Shares:
Shares sold $ 5,322,503 509,433
Shares issued to holders in reinvestment of dividends 563,921 56,034
Shares redeemed (10,809,047) (1,100,613)
-------------------------
Net decrease $ (4,922,623) (535,146)
-------------------------
Class R Shares:
Shares sold $ 4,427,551 411,251
Shares issued to holders in reinvestment of dividends 156,625 15,304
Shares redeemed (488,157) (47,963)
-------------------------
Net increase $ 4,096,019 378,592
-------------------------
</TABLE>
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term investments by the Fund for
the year ended December 31, 1999, were $30,423,778 and $74,740,000,
respectively.
As of December 31, 1999, gross unrealized appreciation and depreciation of
investments for federal income tax purposes were as follows:
Appreciation $ 1,052,177
(Depreciation) (3,325,741)
-----------
Net depreciation on investments $(2,273,564)
-----------
As of December 31, 1999, the cost of investments for federal income tax
purposes was $51,739,712.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
SC-REMFs has entered into an Investment Advisory Agreement with Security
Capital Global Capital Management Group Incorporated ("GCMG") an indirect,
wholly owned subsidiary of Security Capital Group Incorporated ("Security
Capital"). Pursuant to the Advisory Agreement, GCMG is entitled to receive a
management fee, calculated daily and payable monthly, at the annual rate of
0.60% as applied to the Fund's average daily net assets.
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 1.20% and 1.35% of the net assets of the Class I and Class R
shares, respectively, computed on a daily basis, for the year ended December
31, 1999. Beginning January 1, 2000, the annual rate for Class I will be
1.35%. Effective February 1, 2000, the annual rate for the SC-US shares will
be 1.35%.
GCMG also serves as the Fund's administrator. GCMG charges 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.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
5. DISTRIBUTION AND SERVICING PLANS
The Fund has adopted plans with respect to Class I and Class R shares
pursuant to Rule 12b-1 under the 1940 Act ("Distribution Plans"). Under the
Distribution Plans, the Fund pays to Security Capital Markets Group
Incorporated, an indirect, wholly owned subsidiary of Security Capital, 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 respect of
these services such amount as it may determine. For the year ended December
31, 1999, the Fund has made cash payments totaling $428,700 as required by
the adopted Distribution Plans.
6. REORGANIZATION
The Fund was formerly the sole investment portfolio of Security Capital
Employee REIT Fund 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 Fund was restructured as one of two investment portfolios of
SC-REMFs on December 31, 1998.
The Reorganization was a taxable event to SCERF and a capital gain of
$1,002,746 was realized for tax purposes. As a result, the tax basis of
securities held was higher than the basis for financial reporting purposes by
$30,491 and $24,444 as of December 31, 1999 and December 31, 1998,
respectively.
7. ORGANIZATION COSTS
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.
8. PRINCIPAL SHAREHOLDERS
As of December 31, 1999, SC Realty Incorporated, a wholly owned subsidiary of
Security Capital, owned 51.6% of the Fund's total outstanding shares.
16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the board of directors and shareholders of
Security Capital U.S. Real Estate Shares:
We have audited the accompanying statement of assets and liabilities of Security
Capital U.S. 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, 1999, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
the years ended December 31, 1999, 1998 and 1997 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, 1999, 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 as of December 31, 1999, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for the
years ended December 31, 1999, 1998 and 1997 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, 2000
17
<PAGE>
================================================================================
DIRECTORS AND OFFICERS
Anthony R. Manno Jr.
Director, Chairman and President
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 MANAGEMENT TEAM
Anthony R. Manno Jr.
Director, Chairman and President
Kenneth D. Statz
Managing Director
Kevin W. Bedell
Senior Vice President
Anne Darnley
Vice President
Matthew E. Lamphier
Securities Analyst
Matthew D. Hansen
Securities Trader
Bernard Krieg
Analyst
Robert P. Van Bergen Jr.
Analyst
John H. Woo
Analyst
INVESTMENT ADVISER
Security Capital Global Capital
Management Group Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
AUDITORS
Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
LEGAL COUNSEL
Mayer, Brown & Platt
1909 K Street, N.W.
Washington, D.C. 20006
18
<PAGE>
[LOGO]
11 South LaSalle Street, Chicago, Illinois 60603
1-888-SECURITY www.securitycapital.com
403/404ANNL99
