(ICON)
Prudential
Real Estate
Securities Fund
SEMI
ANNUAL
REPORT
Sept. 30, 1998
(LOGO)
<PAGE>
Prudential Real Estate Securities Fund
Performance At A Glance.
From inception (May 5, 1998) through September 30, 1998, the
Prudential Real Estate Securities Fund trailed the average
real
estate fund tracked by Lipper Analytical Services primarily
because
of our emphasis on hotel real estate investment trusts
(REITs). Hotel REITs are more exposed to a falling market
than
other types of real estate securities because they don't
have
long-term leases. Since REITs are often small companies, the
flight from smaller stocks in general in the third quarter,
and
concerns about REITs in particular, dragged the group down.
<TABLE>
Cumulative Total Returns1 As of
9/30/98
<CAPTION>
Since
Inception2
<S> <C>
Class A -22.67%
Class B -22.86
Class C -22.86
Class Z -22.54
Lipper Real Estate Fund Avg.3 -14.48
</TABLE>
Past performance is not indicative of future results.
Principal
and investment return will fluctuate so that an investor's
shares,
when redeemed, may be worth more or less than their original
cost.
1Source: Prudential Investments Fund Management and Lipper
Analytical
Services. The cumulative total returns do not take into
account
sales charges. Since the Fund has been in existence less
than
one year, no average annual total returns are presented. The
Fund charges a maximum front-end sales load of 5% for Class
A
shares and a declining contingent deferred sales charge
(CDSC)
of 5%, 4%, 3%, 2%, 1% and 1% for six years for Class B
shares.
Class B shares will automatically convert to
Class A shares, on a quarterly basis, approximately seven
years after purchase. Class C shares have a 1% CDSC for one
year and, beginning November 2, 1998, are sold with a
front-end sales charge of 1% and a CDSC for 18 months.
Class Z shares are not subject to a sales charge or
distribution fee.
2Inception dates: Class A, B, C, and Z, 5/5/98.
3Lipper returns are for all funds in each share class for
the since inception period in the Lipper Real Estate Fund
category.
How Investments Compared.
(As of 9/30/98)
(GRAPH)
Source: Lipper Analytical Services. Financial markets
change, so
a mutual fund's past performance should never be used to
predict future results. The risks to each of the investments
listed above are different -- we provide 12-month total
returns
for several Lipper mutual fund categories to show you that
reaching for higher returns means tolerating more risk. The
greater the risk, the larger the potential reward or loss.
In addition, we've included historical 20-year average
annual
returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors
have
received higher historical total returns from stocks than
from
most other invest-ments. Smaller capitalization stocks offer
greater potential for long-term growth but may be more
volatile
than larger capitalization stocks.
General Bond Funds provide more income than stock funds,
which can help smooth out their total returns year by year.
But their prices still fluctuate (sometimes significantly)
and their returns have been historically lower than those
of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state agencies and/or municipalities. This
investment provides income that is usually exempt from
federal and state income taxes.
U.S. Taxable Money Funds attempt to preserve a constant
share value; they don't fluctuate much in price but,
historically, their returns have been generally among
the lowest of the major investment categories.
<PAGE>
Robert McConnaughey, Fund Manager (PHOTO)
Portfolio
Manager's Report
The Prudential Real Estate Securities Fund provides an
opportunity for high current income and long-term growth
of capital by investing primarily in equity securities of
real estate companies. We use a value-oriented investment
style:
we seek companies that have the potential for high risk-
adjusted
return on investment capital. Investing in real estate poses
certain risks related to overall and specific economic
conditions,
as well as risks related to an individual property, credit
risk
and interest rate fluctuations. There can be no assurance
that
the Fund will achieve its investment objective.
Poised to
Outperform.
Recent threats to earnings posed by a poor economy have
caused
the real estate sector to perform more poorly than can be
justified.
However, attractive buying opportunities are presenting
themselves,
positioning real estate securities to again
outperform the broader equity markets.
Strategy Session.
Capitalizing on
Untapped Value.
Since the REIT industry is in its infancy, many investment
firms have made little or no dedicated and well-organized
effort to track the industry while it has been evolving
rapidly. In addition, many investors are reluctant to buy
real estate stocks because of their unfamiliarity, the
relatively
small number of potential purchasers, and memories of the
real
estate downturn of the 1980s. As a result, we feel there are
many cases where prices do not reflect the true underlying
value
of the stocks. These pricing inefficiencies were accentuated
by
the broad stock market flight to more familiar and stable
stocks.
As value investors, we actively seek out inefficiencies in
the
REIT market and look for the companies that may be most
difficult for investors to understand. Our goal is to
understand the risk in those complicated stories. We
model worst-case scenarios -- such as a deep recession
and a continued credit crunch -- and identify potential
pitfalls, particularly in relation to debt refinancing and
capital needs. We've re-examined our portfolio and are
confident of our current strategy, despite
the short-term turbulence in the markets.
Our analysis and research have told us that the best values
in the real estate market probably lie at the highest end of
the risk spectrum, especially hotels. Hotels are trading at
what we think are incredibly low prices in relation to their
earnings.
Portfolio Composition
Sectors expressed as a percentage of
net assets as of 9/30/98.
Hotel REIT 23.3%
Office Ind. REIT 18.9
Shopping Center/Malls 12.6
Apartment REIT 10.3
Miscellaneous REIT 9.4
Self-Storage REIT 7.7
Health Care REIT 5.9
Short-term/Cash 4.8
Real Estate Development 3.3
Other REITs 2.8
Multi/Single-Family Homes 1.0
Source: Prudential
<PAGE>
What Went Not So Well.
Our Strong Emphasis on Hotel REITs.
Last spring, REITs underperformed in reaction to several
threats.
For instance, there were concerns about rising supply in the
face
of a slowing economy. There were fears that REITs were
overpaying
for acquisitions and issuing too much new equity.
However, by the end of April, we felt these issues were
already
fully discounted in REIT prices. Unfortunately, in the
third
quarter, the global economic crisis threatened our economy's
growth, roiling the equity markets in general and the REITs,
particularly the hotel companies, were sold off further.
Hotels, particularly, are vulnerable to a slowing economy
because
they don't have long-term leases, as apartment buildings and
shopping malls do, and depend on day-to-day decisions by
their
customers. Since our Fund is overweighted in hotels, it
suffered significantly during the highly volatile summer
months
(Patriot American Hospitality, down 48% and Prime
Hospitality,
down 66%). Even though it appeared that the stock prices
already reflected a slowing economy and possible recession
early
in the financial markets' meltdown, investors'
indiscriminate
flight to quality drove prices further down.
And What Went Well.
Added To Our Holdings At Bargain Prices.
Since our key holdings were down to bargain levels in the
third quarter, we bought more of those holdings because we
believe they are well-managed companies and can easily
weather
such market turbulence. In our view, companies -- such as
Vornado
Realty and Trizec Hahn -- that are savvy, have easy access
to
cash, and have sophisticated underwriting capabilitieswill
find
some excellent acquisition opportunities.
One area we purposely avoided during our reporting period
was
mortgage REITs, which invest most of their assets in real
estate
mortgages and derive their income primarily from interest
payments.
We felt that these companies had too much debt and did not
represent a healthy risk/return opportunity. As it turns
out, we were right -- the largest mortgage REIT in the
nation declared bankruptcy in early October and the
industry was decimated.
Five Largest Holdings.
9.7% Vornado Realty Trust
7.4% Starwood Hotels
and Resorts
6.9% Public Storage, Inc.
5.4% Apartment Investment &
Mgmt. Co.
5.0% Equity Residential
Properties Trust
Expressed as a percentage of net assets as of 9/30/98.
Looking Ahead.
REITs Should Become Less Volatile, Less Cyclical.
We believe that technical pressures on REITs will subside in
the intermediate term. They are massively undervalued
compared
to the private market value of the underlying real estate,
bonds,
the S&P 500, and utilities. We anticipate that investors
seeking current cash flow and income will eventually flock
to
the group. And as they become more familiar with REITs and
as
more information is made available to the public markets, we
expect REITs to become a less volatile, less cyclical
industry.
1
<PAGE>
An Interview with Portfolio Manager Robert McConnaughey.
Q. What characterizes your style as a value manager?
A. We look for companies that appear to be undervalued
relative
to their future growth potential. Investment decisions are
made
using an economic value added (EVA) analysis, which measures
the efficiency of a company's use of capital. We further
analyze each security for strong fundamentals, high- quality
management and a low ratio of price to funds from
operations.
Sector and geographic considerations also are applied. We
believe the best-managed companies with the best access to
capital
and the best-positioned portfolios will find opportunity in
the current market. That is largely why we thought the third
quarter's market volatility presented opportunities for us
to add to our existing holdings. In addition, we focus on
total
return (both income and capital appreciation) as opposed to
yield alone. While our security selection process is driven
by valuations, we are careful to maintain sector and
geographic diversity. Equity Residential, for example,
operates apartment buildings in more than 30 states.
Q. What attracted you to Prudential?
A. I was attracted by the firm's tremendous research and
investment expertise in the real estate area. In addition
to five other professionals in our immediate group, we have
at our disposal 10 research professionals and hundreds of
Prudential
people actually managing real estate investments.
Q. How important is all this coverage?
A. Fundamentally, REITs are different from other stock
market
groups. They are younger, with new capital structures and
new
strategies being introduced all the time. To take advantage
of the opportunities this dynamic market presents, we need
to be
able to tap real estate expertise as well as capital markets
expertise. Many of our competitors bring only one or the
other
to the table -- not both. Prudential has both. I believe
Prudential has unsurpassed resources to gather and analyze
data about
what's happening on the property level, with corporate
tenants' credit and in the broader capital markets.
Q. Is the worst over for REITs?
A. We believe so. While companies may still have to take
some
austerity measures, we strongly believe that such events are
already reflected in the price of their stock. For example,
we have already seen Prime Hospitality replace its chairman
and
CEO in late September. This was followed by the resignation
of its president in mid-October. Furthermore, given the
number
of loans Patriot American Hospitality has coming due in the
near term, it may have to sell some properties at
lower-than-expected prices. Perhaps it will have to issue
equity at lower prices or possibly cut its dividends to
please its lenders.
We think that all these events have already been
anticipated, and are reflected in the low current prices
of REIT stocks. Once the companies take the necessary steps
and reassure investors that they can continue as operating
companies, their stocks should trade at more reasonable
valuations and prices may double from current levels.
2
<PAGE>
President's Letter November 9,
1998
(PHOTO)
Guarding Against Uncertainty.
Dear Shareholder:
As we enter the final months of the year, the news from the
financial markets is decidedly mixed. After setting record
highs earlier, stocks, as measured by the Dow Jones
Industrial
Average, experienced a series of steep sell-offs in late
summer.
The market rebounded in early fall, helped by two interest
rate
cuts by the Federal Reserve.
During this uncertainty there was also good news to report.
Bonds appreciated as investors fled troubled Asian and other
emerging markets for the safe haven of U.S. debt securities
- --
especially Treasuries. The U.S. economy remains strong, with
steady growth and low inflation.
Guarding against uncertainty in the current market
environment
can be challenging. That's why it is important to manage
your
expectations and diversify your portfolio.
Keep A Good Perspective.
Experienced mutual fund investors understand that financial
markets
will always rise and fall -- that's what markets do.
Although past
performance may not be indicative of future results, stocks
and
bonds have, over time, consistently produced attractive
returns
that have kept ahead of inflation. In fact, investors who
remained
focused on the long term and did not sell during the recent
market
volatility were rewarded. Stock prices, as measured by the
Standard
& Poor's 500 Index, have rebounded nearly 25% since their
August
Lows -- setting a new record high on November 23, 1998.
Diversify. Diversify. Diversify.
Because asset classes seldom move in lockstep, owning a mix
of
stock, bond, and money market mutual funds can help lessen
the
effects of a market downturn over time. In fact, a well-
diversified
portfolio may retain or perhaps even gain in value
during times of uncertainty.
We're Here To Help.
How diversified is your portfolio? Your Prudential
professional
will be glad to review your current allocations. He or she
will
recommend adjustments based upon your goals, market
conditions,
risk tolerance, and potential investment opportunities.
Thank you for your confidence in Prudential mutual funds.
We'll
continue to do our part in keeping you informed.
Sincerely,
Brian M. Storms
President
3
<PAGE>
Portfolio of Investments as
of September 30, 1998
(Unaudited) PRUDENTIAL REAL ESTATE
SECURITIES FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------
- -----
LONG-TERM INVESTMENTS--95.2%
COMMON STOCKS
------------------------------------------------------
- -----
Apartments--10.3%
163,900 Apartment Investment & Management
Co. (Class 'A' Stock) $
6,187,225
136,000 Equity Residential Properties
Trust
5,737,500
-------
- ------
11,924,725
- ------------------------------------------------------------
Health Care--5.9%
158,300 Eldertrust
2,315,137
126,200 LTC Properties, Inc.
2,200,613
136,200 Meditrust Corp.
2,323,912
-------
- ------
6,839,662
- ------------------------------------------------------------
Hotels--23.3%
68,900 Bristol Hotels & Resorts, Inc.(a)
305,744
67,093 Felcor Lodging Trust, Inc.
1,631,199
164,600 Host Marriott Corp.
2,088,362
72,150 Meristar Hospitality Corp.
1,231,059
14,125 Meristar Hotels & Resorts, Inc.(a)
38,844
361,600 Patriot American Hospitality, Inc.
4,610,400
623,300 Prime Hospitality Corp.
4,363,100
281,500 Starwood Hotels & Resorts
8,585,750
87,200 Sun International Hotels Ltd.
(Bahamas)(a)
3,308,150
87,000 Sunstone Hotel Investors, Inc.
788,437
-------
- ------
26,951,045
- ------------------------------------------------------------
Manufactured Homes--1.4%
107,400 Asset Investors Corp.
1,597,575
- ------------------------------------------------------------
Mixed Use & Miscellaneous--9.4%
16,800 Alexander's, Inc.(a)
1,289,400
209,700 Catellus Development Corp.(a)
2,726,100
221,600 Commercial Assets, Inc. $
1,232,650
540,000 Excel Legacy Corp.(a)
1,569,375
67,800 SFX Entertainment, Inc.
(Class 'A' Stock)(a)
2,110,275
74,900 U.S. Restaurant Properties, Inc.
1,905,269
-------
- ------
10,833,069
- ------------------------------------------------------------
Multi-Family--1.0%
122,500 Wellsford Real Properties, Inc.(a)
1,140,781
- ------------------------------------------------------------
Office Industrial--18.9%
155,800 Alexandria Real Estate Equities
4,226,075
105,400 Duke Reality Investments, Inc.
2,443,962
158,700 Equity Office Properties Trust
3,888,150
80,000 Mack California Reality Corp.
2,400,000
170,500 Reckson Associates Reality Corp.
4,006,750
61,216 Reckson Services Industries,
Inc.(a)
143,475
253,500 Trizec Hahn, Corp.
4,753,125
-------
- ------
21,861,537
- ------------------------------------------------------------
Real Estate-Development--3.3%
50,000 Fortress Investment Corp.(a)
900,000
187,400 Intrawest Corp.
2,869,563
-------
- ------
3,769,563
- ------------------------------------------------------------
Regional Malls--1.4%
109,800 Philips International Reality
Corp.
1,681,313
- ------------------------------------------------------------
Self Storage--7.7%
46,800 PS Business Parks, Inc.
959,400
295,900 Public Storage, Inc.
7,933,819
-------
- ------
8,893,219
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL REAL ESTATE SECURITIES FUND
Portfolio of Investments as of September 30, 1998
(Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
--------------------------------------------------------
- ---
Shopping Centers--12.6%
86,900 Kimco Realty Corp. $
3,302,200
339,600 Vornado Realty Trust
11,249,250
-------
- ------
14,551,450
-------
- ------
Total long-term investments
(cost $135,865,166)
110,043,939
-------
- ------
<CAPTION>
Principal
Amount
(000)
SHORT-TERM INVESTMENT--2.5%
------------------------------------------------------
- ------
<C> <S> <C>
Repurchase Agreement
$2,898 Joint Repurchase Agreement
Account,
5.52%, 10/1/98 (Note 5)
(cost $2,898,000)
2,898,000
- ------------------------------------------------------------
Total Investments--97.7%
(cost $138,763,166; Note 4)
112,941,939
Other assets in excess of
liabilities--2.3%
2,702,786
-------
- ------
Net Assets--100% $
115,644,725
-------
- ------
-------
- ------
</TABLE>
- ---------------
(a) Non-income producing security.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 5
<PAGE>
Statement of Assets and Liabilities
(Unaudited) PRUDENTIAL REAL ESTATE
SECURITIES FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Assets
September 30, 1998
<S>
<C>
Investments, at value (cost
$138,763,166)...............................................
................ $112,941,939
Cash........................................................
............................................
320
Receivable for investments
sold........................................................
................. 2,134,207
Receivable for Fund shares
sold........................................................
................. 687,679
Dividends and interest
receivable..................................................
..................... 235,255
Deferred expenses and other
assets......................................................
................ 214,917
- ------------------
Total
assets......................................................
................................... 116,214,317
- ------------------
Liabilities
Payable for Fund shares
reacquired..................................................
.................... 348,722
Accrued expenses and other
liabilities.................................................
................. 78,600
Distribution fee
payable.....................................................
........................... 72,417
Management fee
payable.....................................................
............................. 69,853
- ------------------
Total
liabilities.................................................
................................... 569,592
- ------------------
Net
Assets......................................................
........................................
$115,644,725
- ------------------
- ------------------
Net assets were comprised of:
Shares of beneficial interest, at
par.........................................................
....... $ 15,035
Paid-in capital in excess of
par.........................................................
............ 151,912,470
- ------------------
151,927,505
Undistributed net investment
income......................................................
............ 1,093,409
Accumulated net realized loss on
investments.................................................
........ (11,554,962)
Net unrealized depreciation on
investments.................................................
.......... (25,821,227)
- ------------------
Net assets, September 30,
1998........................................................
.................. $115,644,725
- ------------------
- ------------------
Class A:
Net asset value and redemption price per share
($30,157,778 / 3,915,632 shares of beneficial interest
issued and outstanding)....................
$7.70
Maximum sales charge (5% of offering
price)......................................................
.... .41
- ------------------
Maximum offering price to
public......................................................
............... $8.11
- ------------------
- ------------------
Class B:
Net asset value, offering price and redemption price per
share
($69,536,879 / 9,045,566 shares of beneficial interest
issued and outstanding)....................
$7.69
- ------------------
- ------------------
Class C:
Net asset value, offering price and redemption price per
share
($12,954,112 / 1,685,383 shares of beneficial interest
issued and outstanding)....................
$7.69
- ------------------
- ------------------
Class Z:
Net asset value, offering price and redemption price per
share
($2,995,956 / 388,472 shares of beneficial interest
issued and outstanding).......................
$7.71
- ------------------
- ------------------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL REAL ESTATE SECURITIES FUND
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
May 5,
1998(a)
Through
Net Investment Income September 30,
1998
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $7,597)...................... $
2,550,984
Interest.................................
163,988
-------------
- -----
Total income..........................
2,714,972
-------------
- -----
Expenses
Management fee...........................
422,062
Distribution fee--Class A................
38,290
Distribution fee--Class B................
330,982
Distribution fee--Class C................
65,122
Registration fees........................
76,000
Transfer agent's fees and expenses.......
55,000
Custodian's fees and expenses............
42,000
Reports to shareholders..................
17,000
Legal fees and expenses..................
13,000
Audit fee and expenses...................
11,000
Amortization of deferred organization
expense...............................
10,000
Trustees' fees...........................
7,000
Miscellaneous............................
2,316
-------------
- -----
Total expenses........................
1,089,772
-------------
- -----
Net investment income.......................
1,625,200
-------------
- -----
Realized and Unrealized
Gain on Investments
Net realized gain on:
Investment transactions..................
(11,554,855)
Foreign currency transactions............
(107)
-------------
- -----
(11,554,962)
-------------
- -----
Net change in unrealized depreciation on
investments..............................
(25,821,227)
-------------
- -----
Net loss on investments.....................
(37,376,189)
-------------
- -----
Net Decrease in Net Assets
Resulting from Operations...................
$(35,750,989)
-------------
- -----
-------------
- -----
</TABLE>
(a) Commencement of investment operations.
PRUDENTIAL REAL ESTATE SECURITIES FUND
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
May 5, 1998(a)
Increase in Through
Net Assets September 30,
1998
<S> <C>
Operations
Net investment income.................. $ 1,625,200
Net realized loss on investments....... (11,554,962)
Net change in unrealized depreciation
of investments...................... (25,821,227)
----------------
- --
Net decrease in net assets resulting
from operations..................... (35,750,989)
----------------
- --
Dividends from net investment income
(Note 1)
Class A............................. (177,722)
Class B............................. (281,173)
Class C............................. (55,294)
Class Z............................. (17,602)
----------------
- --
(531,791)
----------------
- --
Fund share transactions (net of share
conversions) (Note 6)
Proceeds from shares sold.............. 172,141,413
Net asset value of shares issued in
reinvestment of dividends........... 456,880
Cost of shares reacquired.............. (20,770,788)
----------------
- --
Net increase in net assets from Fund
share transactions.................. 151,827,505
----------------
- --
Total increase............................ 115,544,725
Net Assets
Beginning of period....................... 100,000
----------------
- --
End of period(b).......................... $115,644,725
----------------
- --
----------------
- --
- ---------------
(a) Commencement of investment operations.
(b) Includes undistributed net investment
income of.............................. $ 1,093,409
----------------
- --
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 7
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL REAL ESTATE
SECURITIES FUND
- ------------------------------------------------------------
- --------------------
Prudential Real Estate Securities Fund (the 'Fund') is
registered under the
Investment Company Act of 1940 as a nondiversified, open-
end, management
investment company. The Fund was established as a Delaware
business trust on
October 24, 1997. The Fund issued 2,500 shares each of Class
A, Class B, Class C
and Class Z beneficial interest on February 18, 1998 to
Prudential Investments
Fund Management LLC ('PIFM'). Investment operations
commenced on May 5, 1998.
The investment objective of the Fund is high current income
and long-term growth
of capital. It seeks to achieve this objective by investing
primarily in equity
securities of real estate companies. The ability of the
issuers of the debt
securities held by the Fund to meet their obligations may be
affected by
economic developments in a specific industry or country.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting
policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments in securities traded on a
national securities
exchange (or reported on the Nasdaq National Market) are
valued at the last sale
price on such exchange on the day of valuation or, if there
was no sale on such
day, the mean between the last bid and asked prices quoted
on such day.
Convertible debt securities that are actively traded in the
over-the-counter
market, including listed securities for which the primary
market is believed to
be over-the-counter, are valued at the mean between the most
recently quoted bid
and asked prices provided by principal market makers. Other
securities are
valued at the mean between the most recently quoted bid and
asked prices.
Securities which are otherwise not readily marketable or
securities for which
market quotations are not readily available are valued in
good faith at fair
value in accordance with procedures adopted by the Fund's
Board of Trustees.
Short-term securities which mature in more than 60 days are
valued based upon
current market quotations. Short-term securities which
mature in 60 days or less
are valued at amortized cost which approximates market
value.
In connection with transactions in repurchase agreements, it
is the Fund's
policy that its custodian or designated subcustodians under
triparty repurchase
agreements, as the case may be, take possession of the
underlying collateral
securities, the value of which exceeds the principal amount
of the repurchase
transaction, including accrued interest. If the seller
defaults and the value of
the collateral declines or if bankruptcy proceedings are
commenced with respect
to the seller of the security, realization of the collateral
by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the
Fund are maintained
in U.S. dollars. Foreign currency amounts are translated
into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and
liabilities--at the
current rates of exchange;
(ii) purchases and sales of investment securities, income
and expenses--at the
rates of exchange prevailing on the respective dates of such
transactions.
Although the net assets of the Fund are presented at the
foreign exchange rates
and market values at the close of the period, the Fund does
not isolate that
portion of the results of operations arising as a result of
changes in the
foreign exchange rates from the fluctuations arising from
changes in the market
prices of the securities held at period end. Similarly, the
Fund does not
isolate the effect of changes in foreign exchange rates from
the fluctuations
arising from changes in the market prices of long-term debt
securities sold
during the period. Accordingly, such realized foreign
currency gains and losses
are included in the reported net realized gains/losses on
investment
transactions.
Net realized losses on foreign currency transactions
represents net foreign
exchange gains and losses from sales and maturities of short-
term securities and
forward currency contracts, holding of foreign currencies,
currency gains or
losses realized between the trade and settlement dates on
securities
transactions, and the difference between the amounts of
interest and foreign
taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts
actually received or paid. Net currency gains and losses
from valuing foreign
currency denominated assets (excluding investments) and
liabilities at period
end exchange rates are reflected as a component of net
unrealized
appreciation/depreciation on investments and foreign
currencies.
Foreign security and currency transactions may involve
certain considerations
and risks not typically associated with those of U.S.
companies as a result of,
among other factors, the possibility of political or
economic instability and
the level of governmental supervision and regulation of
foreign securities
markets.
Securities Transactions and Investment Income: Securities
transactions are
recorded on the trade date. Realized gains and losses on
sales of investments
are calculated on the identified cost basis. Dividend income
is recorded on the
ex-dividend date; interest income is recorded on the accrual
basis. Expenses are
recorded on the accrual basis which may require the use of
certain estimates by
management.
- ------------------------------------------------------------
- --------------------
8
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL REAL ESTATE
SECURITIES FUND
- ------------------------------------------------------------
- --------------------
Net investment income (other than distribution fees) and
unrealized and realized
gains or losses are allocated daily to each class of shares
of the Fund based
upon the relative proportion of net assets of each class at
the beginning of the
day.
Income Taxes: It is the Fund's policy to meet the
requirements of the Internal
Revenue Code applicable to regulated investment companies
and to distribute all
of its taxable net income to its shareholders. Therefore, no
federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided
for in accordance with
the Fund's understanding of the applicable country's tax
rates.
Dividends and Distributions: The Fund expects to pay
dividends out of net
investment income quarterly and make distributions at least
annually of any net
capital gains. Dividends and distributions are recorded on
the ex-dividend date.
Income distributions and capital gain distributions are
determined in accordance
with income tax regulations which may differ from generally
accepted accounting
principles. These differences are primarily due to differing
treatment of
distributions from Real Estate Investment Trusts.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to
this agreement, PIFM
has responsibility for all investment advisory services and
supervises the
subadviser's performance of such services. PIFM has entered
into a subadvisory
agreement with The Prudential Investment Corporation
('PIC'); PIC furnishes
investment advisory services in connection with the
management of the Fund. PIFM
pays for the cost of the subadviser's services, the
compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping
costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable
monthly at an annual
rate of .75 of 1% of the Fund's average daily net assets.
The Fund had a distribution agreement with Prudential
Securities Incorporated
('PSI'), which acted as the distributor of the Class A,
Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential
Investment
Management Services LLC ('PIMS') became the distributor of
the Fund effective
June 1, 1998 and is serving the Fund under the same terms
and conditions as
under the arrangements with PSI. The Fund compensated PSI
and PIMS for
distributing and servicing the Fund's Class A, Class B and
Class C shares,
pursuant to plans of distribution (the 'Class A, B and C
Plans') regardless of
expenses actually incurred by them. The distribution fees
are accrued daily and
payable monthly. No distribution or service fees are paid to
PIMS as distributor
of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates
PIMS for
distribution-related activities at an annual rate of up to
.30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C
shares, respectively.
Such expenses under the Plans were .25 of 1% of the average
daily net assets of
Class A shares and 1% of the average daily net assets of
both the Class B and C
shares for the period May 5, 1998 through September 30,
1998.
PSI and PIMS have advised the Fund that they received
approximately $1,299,000
in front-end sales charges resulting from sales of Class A
shares during the
period May 5, 1998 through September 30, 1998. From these
fees, PSI and PIMS
paid such sales charges to dealers, which in turn paid
commissions to
salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the period May
5, 1998 through
September 30, 1998, they received approximately $38,500 and
$13,500 in
contingent deferred sales charges imposed upon certain
redemptions by Class B
and Class C shareholders, respectively.
PSI, PIFM, PIC and PIMS are indirect, wholly owned
subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment
companies (the
'Funds'), has a credit agreement (the 'Agreement') with an
unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000.
Interest on any such
borrowings outstanding will be at market rates. The purpose
of the Agreement is
to serve as an alternative source of funding for capital
share redemptions. The
Fund did not borrow any amounts pursuant to the Agreement
during the period
ended September 30, 1998. The Funds pay a commitment fee at
an annual rate of
.055 of 1% on the unused portion of the credit facility. The
commitment fee is
accrued and paid quarterly on a pro rata basis by the Funds.
The Agreement
expires on December 29, 1998.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned
subsidiary of PIFM,
serves as the Fund's transfer agent. During the period May
5, 1998 through
September 30, 1998, the Fund incurred fees of approximately
$53,000 for the
services of PMFS. As of September 30, 1998, approximately
$10,700 of such fees
were due to PMFS. Transfer agent fees
- ------------------------------------------------------------
- --------------------
9
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL REAL ESTATE
SECURITIES FUND
- ------------------------------------------------------------
- --------------------
and expenses in the Statement of Operations include certain
out-of-pocket
expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than
short-term investments,
for the period May 5, 1998 through September 30, 1998 were
$227,362,125 and
$79,714,582, respectively.
The federal income tax basis of the Fund's investments at
September 30, 1998 was
$139,278,230 and, accordingly, net unrealized depreciation
for federal income
tax purposes was $26,336,291 (gross unrealized appreciation-
- -$244,579; gross
unrealized depreciation--$26,580,870).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment
companies, transfers
uninvested cash balances into a single joint account, the
daily aggregate
balance of which is invested in one or more repurchase
agreements collateralized
by U.S. Treasury or federal agency obligations. The Fund had
a .39% undivided
interest in the joint account. The undivided interest for
the Fund represented
$2,898,000 in principal amount. As of such date, each
repurchase agreement in
the joint account and the value of the collateral therefor
was as follows:
Warburg Dillon Read LLC, 5.52%, in the principal amount of
$210,000,000,
repurchase price $210,032,200, due 10/1/98. The value of the
collateral
including accrued interest was $214,255,819.
Bear, Stearns & Co., 5.58%, in the principal amount of
$210,000,000, repurchase
price $210,032,550, due 10/1/98 The value of the collateral
including accrued
interest was $214,893,617.
Credit Suisse First Boston Corp., 5.55%, in the principal
amount of
$107,606,000, repurchase price $107,622,589, due 10/1/98.
The value of the
collateral including accrued interest was $111,084,883.
Goldman Sachs & Co., Inc., 5.45%, in the principal amount of
$210,000,000,
repurchase price $210,031,792, due 10/1/98. The value of the
collateral
including accrued interest was $214,200,293.
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z
shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B
shares are sold with a
contingent deferred sales charge which declines from 5% to
zero depending on the
period of time the shares are held. Prior to November 2,
1998, Class C shares
were sold with a contingent deferred sales charge of 1%
during the first year.
Effective November 2, 1998, Class C shares are sold with a
front-end sales
charge of 1% and a contingent deferred sales charge of 1%
during the first 18
months. Class B shares will automatically convert to Class A
shares on a
quarterly basis approximately seven years after purchase. A
special exchange
privilege is also available for shareholders who qualified
to purchase Class A
shares at net asset value. Class Z shares are not subject to
any sales or
redemption charge and are offered exclusively for sale to a
limited group of
investors.
The Fund has authorized an unlimited number of shares of
beneficial interest at
$.001 par value divided into four classes, designated Class
A, Class B, Class C
and Class Z.
Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ----------- ---------
- ----
<S> <C> <C>
May 5, 1998(a) through September
30, 1998:
Shares sold...................... 4,777,248 $
47,363,231
Shares issued in reinvestment of
dividends...................... 14,952
145,035
Shares reacquired................ (882,547)
(7,634,234)
----------- ---------
- ----
Net increase in shares
outstanding before
conversion..................... 3,909,653
39,874,032
Shares issued upon conversion
and/or exchange from Class B... 3,479
24,861
----------- ---------
- ----
Net increase in shares
outstanding.................... 3,913,132 $
39,898,893
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class B
- ---------------------------------
<S> <C> <C>
May 5, 1998(a) through September
30, 1998:
Shares sold...................... 10,122,183 $
100,052,162
Shares issued in reinvestment of
dividends...................... 25,191
244,104
Shares reacquired................ (1,100,824)
(9,325,146)
----------- ---------
- ----
Net increase in shares
outstanding before
conversion..................... 9,046,550
90,971,120
Shares reacquired upon conversion
and/or exchange into Class A... (3,484)
(24,861)
----------- ---------
- ----
Net increase in shares
outstanding.................... 9,043,066 $
90,946,259
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
10
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL REAL ESTATE
SECURITIES FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- --------------------------------- ----------- ---------
- ----
<S> <C> <C>
May 5, 1998(a) through September
30, 1998:
Shares sold...................... 1,983,418 $
19,728,537
Shares issued in reinvestment of
dividends and distributions.... 5,218
50,564
Shares reacquired................ (305,753)
(2,664,101)
----------- ---------
- ----
Net increase in shares
outstanding.................... 1,682,883 $
17,115,000
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class Z
- ---------------------------------
<S> <C> <C>
May 5, 1998(a) through September
30, 1998:
Shares sold...................... 515,768 $
4,997,483
Shares issued in reinvestment of
dividends and distributions.... 1,771
17,177
Shares reacquired................ (131,567)
(1,147,307)
----------- ---------
- ----
Net increase in shares
outstanding.................... 385,972 $
3,867,353
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
(a) Commencement of investment operations.
- ------------------------------------------------------------
Note 7. Dividends
On October 7, 1998 the Board of Trustees of the Fund
declared the following
dividends per share, payable on October 15, 1998 to
shareholders of record on
October 12, 1998.
<TABLE>
<CAPTION>
Class Class B
Class
A and C
Z
--------- --------- --
- -------
<S> <C> <C>
<C>
Ordinary Income................. $ .08 $.066
$.085
</TABLE>
- ------------------------------------------------------------
- --------------------
11
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL REAL
ESTATE SECURITIES FUND
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A Class B Class C
----------
- ----------- --------------------- ------------------
- ---
May 5,
1998(b) May 5, 1998(b) May 5, 1998(b)
Through Through Through
September 30, September 30,
September 30,
1998 1998 1998
----------
- ----------- --------------------- ------------------
- ---
<S> <C>
<C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $
10.00 $ 10.00 $ 10.00
--
- ---- ------ ------
Income from investment operations
Net investment income.........................
.13 .10 .10
Net realized and unrealized gain on investment
transactions...............................
(2.39) (2.38) (2.38)
--
- ---- ------ ------
Total from investment operations...........
(2.26) (2.28) (2.28)
--
- ---- ------ ------
Less distributions
Dividends from net investment income..........
(.04) (.03) (.03)
--
- ---- ------ ------
Net asset value, end of period................ $
7.70 $ 7.69 $ 7.69
--
- ---- ------ ------
--
- ---- ------ ------
TOTAL RETURN(a):..............................
(22.67)% (22.86)% (22.86)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...............
$30,158 $69,537 $12,954
Average net assets (000)......................
$38,030 $82,183 $16,170
Ratios to average net assets:
Expenses, including distribution fees......
1.41%(c) 2.16%(c) 2.16%(c)
Expenses, excluding distribution fees......
1.16%(c) 1.16%(c) 1.16%(c)
Net investment income......................
3.37%(c) 2.65%(c) 2.64%(c)
For Class A, B, C and Z shares:
Portfolio turnover............................
62%
<CAPTION>
Class
Z
------------
- ---------
May 5,
1998(b)
Through
September 30,
1998
------------
- ---------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $
10.00
----
- --
Income from investment operations
Net investment income.........................
.13
Net realized and unrealized gain on investment
transactions...............................
(2.37)
----
- --
Total from investment operations...........
(2.24)
----
- --
Less distributions
Dividends from net investment income..........
(.05)
----
- --
Net asset value, end of period................ $
7.71
----
- --
----
- --
TOTAL RETURN(a):..............................
(22.54)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $
2,996
Average net assets (000)...................... $
3,348
Ratios to average net assets:
Expenses, including distribution fees......
1.16%(c)
Expenses, excluding distribution fees......
1.16%(c)
Net investment income......................
3.72%(c)
For Class A, B, C and Z shares:
Portfolio turnover............................
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales
loads. Total return is
calculated assuming a purchase of shares on the first
day and a sale on the
last day of each period reported and includes
reinvestment of dividends and
distributions. Total returns for periods less than a
full year are not
annualized.
(b) Commencement of investment operations.
(c) Annualized.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 12
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Trustees
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Mendel A. Melzer, CFA
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Brian M. Storms
Louis A. Weil, III
Clay T. Whitehead
Officers
Brian M. Storms, President
Bernard Winograd, Vice President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Marguerite E.H. Morrison, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about
the Fund's portfolio holdings are for the period covered
by this report and are subject to change thereafter.
The accompanying financial statements as of September 30,
1998 were not audited and, accordingly, no opinion is
expressed on them.
This report is not authorized for distribution to
prospective
investors unless preceded or accompanied by a current
prospectus.
<PAGE>
(LOGO)
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
BULK RATE
U.S. POSTAGE
PAID
Permit 6807
New York, NY
74436U102
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