<PAGE>
ANNUAL REPORT MARCH 31, 2000
Prudential
Real Estate Securities Fund
Fund Type Stock
Objective High current income and long-term growth of
capital
(GRAPHIC)
This report is not authorized for distribution to
prospective investors unless preceded or accompanied by a
current prospectus.
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.
(LOGO)
<PAGE>
Build on the Rock
Investment Goals and Style
Prudential Real Estate Securities Fund provides an
opportunity for high current income and long-term growth
of capital by investing primarily in equity-related
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 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.
Portfolio Composition
Expressed as a percentage of
net assets as of 3/31/00
21.4% Office Industrial REIT
18.2 Hotel REIT
13.8 Shopping Center REIT
13.2 Mixed Use & Miscellaneous REIT
12.1 Real Estate Development
11.4 Apartment REIT
4.7 Self-Storage REIT
2.4 Regional Mall REIT
1.1 Leisure & Gaming
0.4 Healthcare
1.3 Cash & Equivalents
Ten Largest Holdings
Expressed as a percentage of
net assets as of 3/31/00
9.6% Starwood Hotels & Resorts
Worldwide, Inc.
Hotels
7.6 Boardwalk Equities, Inc.
Apartments
7.6 Vornado Realty Trust
Shopping Center
6.4 Intrawest Corp.
Real Estate-Development
6.2 Philips International Realty Corp.
Shopping Centers
5.7 Excel Legacy Corp.
Real Estate Development
4.8 Cousins Properties, Inc.
Mixed Use & Miscellaneous
4.4 MeriStar Hotels & Resorts, Inc.
Hotels
4.2 Mission West Properties Inc.
Office Industrial
4.2 Prime Hospitality Corp.
Hotels
<PAGE>
www.prudential.com (800) 225-1852
Performance at a Glance
Cumulative Total Returns1 As of 3/31/00
One Since
Year Inception2
Class A 7.74% -17.35%
Class B 6.96 -18.47
Class C 6.96 -18.47
Class Z 8.02 -16.88
Lipper Real Estate
Fund Avg.3 2.87 -14.73
Average Annual Total Returns1 As of 3/31/00
One Since
Year Inception2
Class A 2.36% -11.92%
Class B 1.96 -12.50
Class C 4.89 -10.64
Class Z 8.02 -9.25
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.
1 Source: Prudential Investments Fund Management LLC and
Lipper Inc. The cumulative total returns do not take into
account sales charges. The average annual total returns
do take into account applicable sales charges. The Fund
charges a maximum front-end sales charge of 5% for Class
A shares. Class B shares are subject to a declining
contingent deferred sales charge (CDSC) of 5%, 4%, 3%,
2%, 1%, and 1% for six years. Class B shares will
automatically convert to Class A shares, on a quarterly
basis, approximately seven years after purchase. Class C
shares are subject to a front-end sales charge of 1% and
a CDSC of 1% for 18 months. Class Z shares are not
subject to a sales charge or distribution and service
(12b-1) fees.
2 Inception date: Class A, B, C, and Z, 5/5/98.
3 Lipper average returns are for all funds in each share
class for the one-year and since-inception periods in the
Real Estate Fund category. The Lipper average is
unmanaged. Real Estate funds invest 65% of their
portfolio in equity securities of domestic and foreign
companies engaged in the real estate industry.
1
<PAGE>
Prudential Real Estate Securities Fund
Message From the Fund's President May 16, 2000
Dear Shareholder,
During the one-year reporting period that ended March 31,
2000, Prudential Real Estate Securities Fund's Class A
shares posted a 7.74% return, handily outperforming the
2.87% return of the Lipper Real Estate Fund Average.
After the initial sales charge, the Fund's Class A shares
returned 2.36%.
Overall, it has been a volatile year in the financial
markets, and real estate securities were not immune from
the extreme gyrations. For much of the reporting period,
investors favored a narrow group of equities, most
notably technology and growth stocks. As a result,
investors largely shunned the Fund's real estate
investment trusts (REITs).
However, in recent weeks, the rich valuations of many
technology issues and concern about an increase in
inflation have led to an abrupt reversal in market
sentiment. Investors began to rotate a portion of their
holdings out of technology stocks and into more value-
oriented securities. This has helped REITs to
outperform their growth stock counterparts for the first
time in many months.
Certainly no one knows in which direction the markets
could be headed next. That's why Prudential recommends
that its clients maintain a broadly diversified
portfolio. Having a REIT component in a portfolio can add
diversification and may help to temper overall risk.
Additionally, the importance of maintaining a long-term
investment approach cannot be overstated, particularly
during periods of short-term market fluctuations.
Thank you for your continued confidence in Prudential
mutual funds.
Sincerely,
John R. Strangfeld, President
Prudential Real Estate Securities Fund
2
<PAGE>
www.prudential.com (800) 225-1852
Investment Adviser's Report
Dear Shareholder,
Perhaps the best way to characterize the environment for
real estate investment trusts (REITs) over the last year
is that it was like a roller coaster ride--one with more
descents than uphill climbs. The reporting period began
on an encouraging note for the Fund, as positive economic
news led to healthy returns in more economically
sensitive stocks. Unfortunately, this turn of events was
short-lived, as investors quickly resumed their focus on
growth and technology securities. The strong demand for
these stocks continued unabated, driving prices up for
the remainder of the year.
Meanwhile, the performance of value securities and REITs
languished, as investors generally ignored them. By the
end of 1999, the Nasdaq had risen an unprecedented 86%,
and growth stocks outpaced value-type stocks by a wide
margin. REIT prices appeared to bottom out in December,
as many investors sought to lock in profits from their
technology and growth issues, while selling their
underperforming REITs to offset capital gains. Since that
time, we have seen REITs experience a modest rebound in
terms of performance. This reversal of fortune picked up
steam toward the end of the first quarter, due to the
sharp sell-off in stocks with high valuations--most
notably in the technology sector. With the turmoil in the
equity markets, investors again showed interest in the
steep discounts and compelling opportunities of many
REITs.
Seeking companies with competitive advantages
While this certainly was a challenging period for REITs,
we managed to generate very respectable gains for the
Fund. This was accomplished by maintaining our
disciplined investment approach--one that calls for us to
focus on companies with strong management teams,
compelling business models, and high growth rates.
3
<PAGE>
Prudential Real Estate Securities Fund
Holdings expressed as a percentage of the Fund's net
assets
Comments on Largest Holdings As of 3/31/00
9.6% Starwood Hotels & Resorts Worldwide, Inc./Hotels
Starwood is one of the leading hotel and leisure
companies in the world, with more than 700 hotels in 80
countries. The firm operates premium hotel brands,
including St. Regis, Luxury Collection, Westin, Sheraton,
Four Points, and W brands. Starwood is actively
developing and renovating its hotels, and over the last
year has initiated a preferred guest program.
7.6% Boardwalk Equities, Inc./Apartments
Boardwalk Equities is the largest apartment
owner/manager in Canada, with over 25,000 apartment units
currently in its portfolio. The company usually purchases
apartment complexes below replacement cost, and over the
next 12 to 18 months rehabilitates the properties so it
can then increase rents. Boardwalk has continued to
diversify its apartment holdings and is expanding from
western Canada into eastern Canada.
7.6% Vornado Realty Trust/Shopping Centers
Vornado Realty Trust owns a diversified portfolio
that includes office properties, retail centers, the
Merchandise Mart division, and a refrigerated cold
storage division. In addition, Vornado is the largest
owner/manager of office space in Manhattan, controlling
over 14 million square feet.
6.4% Intrawest Corp./Real Estate-Development
Intrawest is a leading developer and operator of
village-centered resorts in North America. The company
owns 10 mountain ski areas in North America, including
Whistler/Blackcomb, the most popular ski resort in North
America, and Sandestin, a golf resort in Florida. In
addition, Intrawest operates a timeshare business at each
of its resorts.
6.2% Philips International Realty Corp./Shopping Centers
Philips is primarily an owner/operator of retail
centers located in the New York metropolitan area. The
firm's business plan is to develop, or to acquire and
redevelop retail centers in the highly dense New York
metropolitan region. These retail centers are located in
areas with below-average retail per capita and high
barriers to entry for new retail products.
4
<PAGE>
www.prudential.com (800) 225-1852
Investment Adviser's Report
In addition, we are constantly searching for companies
that hold competitive advantages in the marketplace. Two
areas of particular interest are firms that offer
superior services to their customers and those that
possess sustainable rental pricing power. For example,
organizations that provide special
services--whether they are a health club or furnished
office space--can oftentimes increase rental fees and
enjoy higher profit margins. Likewise, firms that own
properties in locations where office space is at a
premium have historically performed well. Some of these
markets currently include New York City, Washington D.C.,
and Silicon Valley.
Two of our largest contributors to performance--Frontline
Capital Group and Pinnacle Holdings--are indicative of the
types of companies we like to include in the Fund's
portfolio. Frontline is a business service provider with
financial interests in a dozen related companies. One of
its business partners offers full-service office suites
for companies that are establishing satellite locations.
These suites can come equipped with everything from
furniture, computers, and customized portals, to on-site
support staffing. Another of Frontline's business
ventures includes offering broadband services in office
locations. In both cases, these special services have
been very well received, and have helped the firm's
growth rates rise substantially.
Frontline was first added to the portfolio as a spin-off
of a previous holding. It's important to point out that
we perform extensive analysis on all spin-offs to
determine whether they merit consideration in the Fund's
portfolio. Our research usually includes an extensive
review of a company's business plan and one-on-one
meetings with company management. In the case of
Frontline, we were richly rewarded for our due diligence,
as its stock price rose nearly tenfold. In recent months,
we have taken steps to pare the holding several times to
lock in gains.
5
<PAGE>
Prudential Real Estate Securities Fund
Investment Adviser's Report
Another example of a winning security was Pinnacle
Holdings, an independent provider of wireless
communications site space in the United States. The firm
focuses primarily on renting space at existing
communications sites to providers of wireless
communications services. Their customers usually include
cellular, wireless data transmission, and radio and
television organizations. With the dramatic increase in
demand for cellular and wireless capabilities, Pinnacle's
stock price has risen dramatically. We've been a
beneficiary of this performance, as the Fund reaped a
gain of over 250%. We took our profits on this position
and, as of March 31, 2000, no longer held the stock.
Not all of our holdings were as successful as Frontline
and Pinnacle. One stock that didn't perform as well as we
had hoped was Public Storage. This firm acquires,
develops, owns and operates storage facilities. It is
also the country's largest owner of mini-warehouses
operated under the "Public Storage" name. While we remain
positive of the long-term potential for this market
leader, its stock has not performed well in the short
term. This was due, in part, to the diluted earnings that
took place when its Class B shares were converted to
Class A shares.
We were also disappointed with our investment in Prime
Hospitality. This firm is an owner, manager, and
franchiser of hotels located throughout the United States
and the Virgin Islands. Prime also controls three high-
quality hotel brands--AmeriSuites, HomeGate Studios &
Suites, and Wellesley Inns. We were encouraged by
management's plan to streamline operations by
selling off some of its assets, and to utilize proceeds
to reduce debt. However, its asset sales were not as
aggressive as hoped, and stiff competition from rivals
such as Marriott and its Courtyard brand led to a decline
in Prime's market share. As of this writing, we no longer
hold shares of this stock.
6
<PAGE>
www.prudential.com (800) 225-1852
Looking Ahead--A reason for optimism
Looking ahead, we are cautiously optimistic about
the outlook for the Fund. While we can't determine
the overall direction of the REIT market, we can
control our destiny to some point with our stock
selection process. Therefore we'll continue to
follow the same investment strategy that worked
well for the Fund over the last year, and we'll
work hard to identify companies with above-average
growth rates, with strong business operations, and
with established competitive advantages.
It's also our opinion that REIT prices bottomed out
last December, and that the confluence of events
that contributed to the sector's troubles is
notlikely to be repeated. These events include the
extraordinary run-up in technology stocks, year-end
tax loss selling, and portfolio managers replacing
REITs in their portfolios as "window dressing" to
appease investors as the year drew to a close.
We also feel that the recent instability in the
equity markets could serve to benefit REITs in the
longer term. As investors become more aware of
excessive stock price valuations, we'd expect them
to take a closer look at REITs and the tremendous
opportunities offered by many individual
securities.
All told, we continue to strongly believe that
REITs can play an important part in an investor's
overall portfolio. The upside potential of these
securities presents a compelling value in today's
marketplace.
Prudential Real Estate Securities Fund Management Team
7
<PAGE>
Prudential Real Estate Securities Fund
Portfolio of Investments as of March 31, 2000
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C> <C>
------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 98.7%
Common Stocks
-------------------------------------------------------------------------------------
Apartments 11.4%
56,000 Apartment Investment & Management Co. (Class 'A'
Stock) $ 2,138,500
459,500 Boardwalk Equities, Inc.(a) 4,355,075
--------------
6,493,575
-------------------------------------------------------------------------------------
Health Care 0.4%
232,020 LTC Healthcare Inc.(a) 246,521
-------------------------------------------------------------------------------------
Hotels 18.2%
863,425 MeriStar Hotels & Resorts, Inc.(a) 2,536,311
328,800 Prime Hospitality Corp.(a) 2,383,800
208,000 Starwood Hotels & Resorts Worldwide, Inc. 5,460,000
--------------
10,380,111
-------------------------------------------------------------------------------------
Leisure & Gaming 1.1%
34,000 Sun International Hotels Ltd. (Bahamas)(a) 663,000
-------------------------------------------------------------------------------------
Mixed Use & Miscellaneous 13.2%
74,100 Cousins Properties, Inc. 2,727,806
50,000 Fortress Investment Corp. 668,750
95,800 Franchise Finance Corporation of America 2,227,350
42,816 Frontline Capital Group(a) 1,883,904
--------------
7,507,810
-------------------------------------------------------------------------------------
Office Industrial 21.4%
60,400 Alexandria Real Estate Equities, Inc. 1,812,000
95,000 AMB Property Corp. 2,042,500
45,300 CenterPoint Properties Corp. 1,650,619
76,400 Equity Office Properties Trust 1,919,550
279,800 Mission West Properties Inc. 2,395,787
62,900 Reckson Associates Realty Corp. 1,179,375
28,200 Spieker Properties, Inc. 1,254,900
--------------
12,254,731
</TABLE>
8 See Notes to Financial Statements
<PAGE>
Prudential Real Estate Securities Fund
Portfolio of Investments as of March 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Real Estate-Development 12.1%
955,200 Excel Legacy Corp.(a) $ 3,223,800
217,100 Intrawest Corp. 3,663,563
--------------
6,887,363
-------------------------------------------------------------------------------------
Regional Malls 2.4%
45,000 General Growth Properties, Inc. 1,369,688
-------------------------------------------------------------------------------------
Self Storage 4.7%
101,400 Public Storage, Inc. 2,129,400
28,000 Public Storage, Inc., Ser. A 549,500
--------------
2,678,900
-------------------------------------------------------------------------------------
Shopping Center 13.8%
212,900 Philips International Realty Corp. 3,539,462
129,000 Vornado Realty Trust 4,321,500
--------------
7,860,962
--------------
Total long-term investments (cost $56,071,842) 56,342,661
--------------
SHORT-TERM INVESTMENTS 2.4%
<CAPTION>
Principal
Amount
(000)
<C> <S> <C> <C>
-------------------------------------------------------------------------------------
Repurchase Agreement
$ 1,356 Joint Repurchase Agreement Account, 6.15%, 4/3/00
(cost $1,356,000; Note 5) 1,356,000
--------------
Total Investments 101.1%
(cost $57,427,842; Note 4) 57,698,661
Liabilities in excess of other assets (1.1%) (630,074)
--------------
Net Assets 100% $ 57,068,587
--------------
--------------
</TABLE>
--------------------------------------------------------------------------------
(a) Non-income producing security.
See Notes to Financial Statements 9
<PAGE>
Prudential Real Estate Securities Fund
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
March 31, 2000
<S> <C> <C>
---------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $57,427,842) $ 57,698,661
Cash 614
Dividends and interest receivable 259,603
Deferred organization expenses and other assets 68,481
Receivable for Fund shares sold 48,338
--------------
Total assets 58,075,697
--------------
LIABILITIES
Payable for Fund shares reacquired 759,255
Accrued expenses 174,162
Distribution fee payable 37,074
Management fee payable 36,619
--------------
Total liabilities 1,007,110
--------------
NET ASSETS $ 57,068,587
--------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 7,330
Paid-in capital in excess of par 92,743,525
--------------
92,750,855
Accumulated net realized loss on investments (35,953,087)
Net unrealized appreciation on investments 270,819
--------------
Net assets, March 31, 2000 $ 57,068,587
--------------
--------------
</TABLE>
10 See Notes to Financial Statements
<PAGE>
Prudential Real Estate Securities Fund
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
March 31, 2000
<S> <C> <C>
---------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($16,544,792 / 2,122,563 shares of beneficial interest
issued and outstanding) $7.79
Maximum sales charge (5% of offering price) .41
--------------
Maximum offering price to public $8.20
--------------
--------------
Class B:
Net asset value, offering price and redemption price per
share
($33,615,782 / 4,320,344 shares of beneficial interest
issued and outstanding) $7.78
--------------
--------------
Class C:
Net asset value and redemption price per share
($5,162,101 / 663,457 shares of beneficial interest issued
and outstanding) $7.78
Sales charge (1% of offering price) .08
--------------
Offering price to public $7.86
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per
share ($1,745,912 / 223,717 shares of beneficial interest
issued and outstanding) $7.80
--------------
--------------
</TABLE>
See Notes to Financial Statements 11
<PAGE>
Prudential Real Estate Securities Fund
Statement of Operations
<TABLE>
<CAPTION>
March 31, 2000
<S> <C> <C>
---------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Dividends (net of foreign withholding taxes of $3,748) $ 2,675,100
Interest 91,631
--------------
Total income 2,766,731
--------------
Expenses
Management fee 574,489
Distribution fee--Class A 49,077
Distribution fee--Class B 472,708
Distribution fee--Class C 82,154
Registration fees 140,000
Custodian's fees and expenses 110,000
Transfer agent's fees and expenses 101,000
Reports to shareholders 70,000
Legal fees and expenses 35,000
Audit fee and expenses 25,000
Amortization of organizational expense 21,203
Trustees' fees and expenses 16,000
Amortization of prepaid offering cost 10,915
Miscellaneous 7,686
--------------
Total expenses 1,715,232
--------------
Net investment income 1,051,499
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (4,756,064)
Foreign currency transactions 2,592
--------------
(4,753,472)
--------------
Net change in unrealized appreciation on investments 8,859,325
--------------
Net gain on investments 4,105,853
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,157,352
--------------
--------------
</TABLE>
12 See Notes to Financial Statements
<PAGE>
This page intentionally left blank
See Notes to Financial Statements 13
<PAGE>
Prudential Real Estate Securities Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year May 5, 1998(a)
Ended through
March 31, 2000 March 31, 1999
<S> <C> <C> <C>
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 1,051,499 $ 3,194,420
Net realized loss on investments and foreign
currency transactions (4,753,472) (31,196,504)
Net change in unrealized
appreciation/depreciation of investments 8,859,325 (8,588,506)
-------------- --------------
Net increase (decrease) in net assets
resulting from operations 5,157,352 (36,590,590)
-------------- --------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A (559,630) (825,297)
Class B (1,007,051) (1,535,935)
Class C (179,414) (287,685)
Class Z (41,497) (84,843)
-------------- --------------
(1,787,592) (2,733,760)
-------------- --------------
Distributions in excess of net investment
income
Class A (8,994) --
Class B (21,865) --
Class C (3,865) --
Class Z (613) --
-------------- --------------
(35,337) --
-------------- --------------
Tax return of capital distributions
Class A (85,320) --
Class B (207,414) --
Class C (36,663) --
Class Z (5,817) --
-------------- --------------
(335,214) --
-------------- --------------
</TABLE>
14 See Notes to Financial Statements
<PAGE>
Prudential Real Estate Securities Fund
Statement of Changes in Net Assets Cont'd.
<TABLE>
<CAPTION>
Year May 5, 1998(a)
Ended through
March 31, 2000 March 31, 1999
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Fund share transactions (net of share
conversions)
(Note 6)
Proceeds from shares sold $ 10,662,694 $183,649,803
Net asset value of shares issued in
reinvestment of dividends and
distributions 1,776,637 2,333,376
Cost of shares reacquired (47,093,302) (58,035,480)
-------------- --------------
Net increase (decrease) in net assets from
Fund share transactions (34,653,971) 127,947,699
-------------- --------------
Total increase (decrease) (31,654,762) 88,623,349
NET ASSETS
Beginning of period 88,723,349 100,000
-------------- --------------
End of period (b) $ 57,068,587 $ 88,723,349
-------------- --------------
-------------- --------------
------------------------------
(a) Commencement of investment operations
(b) Includes undistributed net investment income
of: $ -- $ 736,093
-------------- --------------
</TABLE>
See Notes to Financial Statements 15
<PAGE>
Prudential Real Estate Securities Fund
Notes to Financial Statements
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 of beneficial interest each of
Class A, Class B, Class C and Class Z 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.
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.
Corporate bonds (other than convertible debt) and U.S. Government 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 by an independent pricing service. 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.
Repurchase Agreements: 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.
To the extent that any repurchase transaction exceeds one business day, the
value of collateral is marked-to-market on a daily basis to ensure adequacy of
the collateral. If the seller defaults and the value of
16
<PAGE>
Prudential Real Estate Securities Fund
Notes to Financial Statements Cont'd.
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.
All securities are valued as of 4:15 p.m. New York time.
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 gains 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.
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
17
<PAGE>
Prudential Real Estate Securities Fund
Notes to Financial Statements Cont'd.
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.
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.
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.
Offering and Organization Expenses: Approximately $219,400 were
incurred and expensed in connection with the organization and offering of the
Fund. Offering cost of approximately $110,700 was amortized ratably over a
period of twelve months from the date the Fund commenced investment operations.
Organization cost of approximately $108,700 is being amortized ratably over a
period of sixty months from the date the Fund commenced investment operations.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants, Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease distribution in excess of net investment income
by $370,551, decrease paid-in capital in excess of par by $367,332 and increase
accumulated net realized loss on investments by $3,219 for certain expenses not
deductible for tax purposes, foreign currency gains and tax return of capital
distributions. Net investment income, net realized gains and net assets were not
affected by this change.
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
18
<PAGE>
Prudential Real Estate Securities Fund
Notes to Financial Statements Cont'd.
agreement with The Prudential Investment Corporation ('PIC'); PIC furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the services of PIC, the cost of 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 has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS') which acts as the distributor of the Class A,
Class B, Class C and Class Z shares. The Fund compensates 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. The distribution fees were accrued daily and payable monthly. No
distribution or service fees were 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 year ended March 31, 2000.
PIMS has advised the Fund that it received approximately $88,100 and
$13,700 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended March 31, 2000. From these fees,
PIMS paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended March 31, 2000, it
received approximately $512,000 and $8,500 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America ('Prudential').
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purposes of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date
19
<PAGE>
Prudential Real Estate Securities Fund
Notes to Financial Statements Cont'd.
of the SCA is March 9, 2001. Prior to March 9, 2000, the commitment fee was .065
of 1% of the unused portion of the credit facility. The Fund did not borrow any
amounts pursuant to the SCA during the year ended March 31, 2000.
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 year ended March 31, 2000, the
Fund incurred fees of approximately $94,400 for the services of PMFS. As of
March 31, 2000, approximately $6,700 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
For the year ended March 31, 2000, Prudential Securities Incorporated
('PSI'), an indirect, wholly owned subsidiary of Prudential, earned
approximately $17,000 in brokerage commissions from portfolio transactions
executed on behalf of the Fund.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended March 31, 2000 were $74,470,107 and $40,130,513,
respectively.
The federal income tax basis of the Fund's investments at March 31, 2000
was $59,268,424 and, accordingly, net unrealized depreciation for federal income
tax purposes was $1,569,763 (gross unrealized appreciation--$3,232,928; gross
unrealized depreciation--$4,802,691).
For federal income tax purposes, the Fund had a capital loss carryforward
as of March 31, 2000, of approximately $32,666,000, of which $11,509,000 expires
in 2007 and $21,157,000 expires in 2008. Accordingly, no capital gains
distributions are expected to be paid to shareholders until future net gains
have been realized in excess of such carryforward.
The Fund will elect for United States Federal income tax purposes, to
treat net capital losses of approximately $1,445,000 and foreign currency losses
of approximately $600 incurred in the five months ended March 31, 2000 as having
been incurred in the following fiscal year.
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 .21% undivided
interest in the joint account. The undivided interest for the Fund represented
$1,356,000 in principal
20
<PAGE>
Prudential Real Estate Securities Fund
Notes to Financial Statements Cont'd.
amount. As of such date, each repurchase agreement in the joint account and the
value of the collateral therefor was as follows:
Bear, Stearns & Co., Inc., 6.10%, in the principal amount of $120,000,000,
repurchase price $120,061,000, due 4/3/00. The value of the collateral including
accrued interest was $123,642,827.
Credit Suisse First Boston Corp., 6.10%, in the principal amount of
$130,000,000, repurchase price $130,066,083, due 4/3/00. The value of the
collateral including accrued interest was $134,450,258.
Greenwich Capital Markets, Inc., 6.15%%, in the principal amount of
$100,000,000, repurchase price $100,051,250, due 4/3/00. The value of the
collateral including accrued interest was $102,005,200.
Goldman, Sachs & Co., 6.09%, in the principal amount of $100,000,000,
repurchase price $100,050,750, due 4/3/00. The value of the collateral including
accrued interest was $102,000,425.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 6.25%, in the principal
amount of $207,289,000, repurchase price $207,396,963, due 4/3/00. The value of
the collateral including accrued interest was $211,435,308.
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. 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. Prior to November 2, 1998, Class C shares were sold with a contingent
deferred sales charge of 1% during the first year. 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.
21
<PAGE>
Prudential Real Estate Securities Fund
Notes to Financial Statements Cont'd.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
---------------------------------------------------------- ----------- -------------
<S> <C> <C>
Year ended March 31, 2000:
Shares sold 522,363 $ 4,045,340
Shares issued in reinvestment of dividends and
distributions 62,550 479,160
Shares reacquired (1,488,857) (11,455,221)
----------- -------------
Net decrease in shares outstanding before conversion (903,944) (6,930,721)
Shares issued upon conversion from Class B 14,648 114,057
----------- -------------
Net decrease in shares outstanding (889,296) $ (6,816,664)
----------- -------------
----------- -------------
May 5, 1998(a) through March 31, 1999:
Shares sold 5,418,784 $ 52,253,903
Shares issued in reinvestment of dividends 87,252 660,149
Shares reacquired (2,512,126) (20,082,311)
----------- -------------
Net increase in shares outstanding before conversion 2,993,910 32,831,741
Shares issued upon conversion and/or exchange from Class B 15,449 117,251
----------- -------------
Net increase in shares outstanding 3,009,359 $ 32,948,992
----------- -------------
----------- -------------
<CAPTION>
Class B
----------------------------------------------------------
<S> <C> <C>
Year ended March 31, 2000:
Shares sold 449,448 $ 3,620,253
Shares issued in reinvestment of dividends and
distributions 136,720 1,050,158
Shares reacquired (3,616,798) (27,558,916)
----------- -------------
Net decrease in shares outstanding before conversion (3,030,630) (22,888,505)
Shares reacquired upon conversion into Class A (14,670) (114,057)
----------- -------------
Net decrease in shares outstanding (3,045,300) $ (23,002,562)
----------- -------------
----------- -------------
May 5, 1998(a) through March 31, 1999:
Shares sold 10,731,112 $ 104,685,527
Shares issued in reinvestment of dividends 176,671 1,325,148
Shares reacquired (3,529,166) (27,759,014)
----------- -------------
Net increase in shares outstanding before conversion 7,378,617 78,251,661
Shares reacquired upon conversion and/or exchange into
Class A (15,473) (117,251)
----------- -------------
Net increase in shares outstanding 7,363,144 $ 78,134,410
----------- -------------
----------- -------------
------------------------------
(a) Commencement of offering of Class A, B, C and Z shares.
</TABLE>
22
<PAGE>
Prudential Real Estate Securities Fund
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class C Shares Amount
---------------------------------------------------------- ----------- -------------
Year ended March 31, 2000:
<S> <C> <C>
Shares sold 196,869 $ 1,611,167
Shares issued in reinvestment of dividends and
distributions 26,227 201,703
Shares reacquired (886,875) (6,791,591)
----------- -------------
Net decrease in shares outstanding (663,779) $ (4,978,721)
----------- -------------
----------- -------------
May 5, 1998(a) through March 31, 1999:
Shares sold 2,158,917 $ 21,074,499
Shares issued in reinvestment of dividends 35,227 264,830
Shares reacquired (869,408) (6,947,352)
----------- -------------
Net increase in shares outstanding 1,324,736 $ 14,391,977
----------- -------------
----------- -------------
<CAPTION>
Class Z
----------------------------------------------------------
<S> <C> <C>
Year ended March 31, 2000:
Shares sold 181,158 $ 1,385,934
Shares issued in reinvestment of dividends and
distributions 5,991 45,616
Shares reacquired (168,210) (1,287,574)
----------- -------------
Net increase in shares outstanding 18,939 $ 143,976
----------- -------------
----------- -------------
May 5, 1998(a) through March 31, 1999:
Shares sold 600,131 $ 5,635,874
Shares issued in reinvestment of dividends 11,026 83,249
Shares reacquired (408,879) (3,246,803)
----------- -------------
Net increase in shares outstanding 202,278 $ 2,472,320
----------- -------------
----------- -------------
------------------------------
(a) Commencement of offering of Class A, B, C and Z shares.
</TABLE>
Note 7. Dividends
On April 10, 2000 the Board of Trustees of the Fund declared the following
dividends per share, payable on April 13, 2000 to shareholders of record on
April 12, 2000.
<TABLE>
<CAPTION>
Class B
Class A and C Class Z
------- ------------- -------
<S> <C> <C> <C>
Ordinary Income $.032 $.018 $.037
</TABLE>
23
<PAGE>
Prudential Real Estate Securities Fund
Financial Highlights
<TABLE>
<CAPTION>
Class A
---------------------------------------
Year Ended May 5, 1998(a)
March 31, Through
2000 March 31, 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 7.46 $ 10.00
-------- --------
Income from investment operations
Net investment income .15(e) .27
Net realized and unrealized gain (loss) on
investment transactions .42 (2.60)
-------- --------
Total from investment operations .57 (2.33)
-------- --------
Less distributions
Dividends from net investment income (.21) (.21)
Distributions in excess of net investment
income --(d) --
Tax return of capital distributions (.03) --
-------- --------
Total distributions (.24) (.21)
-------- --------
Net asset value, end of period $ 7.79 $ 7.46
-------- --------
-------- --------
TOTAL RETURN(b): 7.74% (23.29)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $16,545 $22,465
Average net assets (000) $19,631 $31,941
Ratios to average net assets:
Expenses, including distribution fees 1.70% 1.56%(c)
Expenses, excluding distribution fees 1.45% 1.31%(c)
Net investment income 1.93% 3.47%(c)
For Class A, B, C and Z shares:
Portfolio turnover 54% 122%
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) 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.
(c) Annualized.
(d) Less than $.005 per share.
(e) Calculations are made based on average month-end shares outstanding during
the year.
24 See Notes to Financial Statements
<PAGE>
Prudential Real Estate Securities Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
---------------------------------------
Year Ended May 5, 1998(a)
March 31, Through
2000 March 31, 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 7.45 $ 10.00
-------- --------
Income from investment operations
Net investment income .09(e) .20
Net realized and unrealized gain (loss) on
investment transactions .42 (2.58)
-------- --------
Total from investment operations .51 (2.38)
-------- --------
Less distributions
Dividends from net investment income (.15) (.17)
Distributions in excess of net investment
income --(d) --
Tax return of capital distributions (.03) --
-------- --------
Total distributions (.18) (.17)
-------- --------
Net asset value, end of period $ 7.78 $ 7.45
-------- --------
-------- --------
TOTAL RETURN(b): 6.96% (23.78)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $33,616 $54,845
Average net assets (000) $47,271 $72,034
Ratios to average net assets:
Expenses, including distribution fees 2.45% 2.31%(c)
Expenses, excluding distribution fees 1.45% 1.31%(c)
Net investment income 1.16% 2.70%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) 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.
(c) Annualized.
(d) Less than $.005 per share.
(e) Calculations are made based on average month-end shares outstanding during
the year.
See Notes to Financial Statements 25
<PAGE>
Prudential Real Estate Securities Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
---------------------------------------
Year Ended May 5, 1998(a)
March 31, Through
2000 March 31, 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 7.45 $ 10.00
------- --------
Income from investment operations
Net investment income .09(e) .20
Net realized and unrealized gain (loss) on
investment transactions .42 (2.58)
------- --------
Total from investment operations .51 (2.38)
------- --------
Less distributions
Dividends from net investment income (.15) (.17)
Distributions in excess of net investment
income --(d) --
Tax return of capital distributions (.03) --
------- --------
Total distributions (.18) (.17)
------- --------
Net asset value, end of period $ 7.78 $ 7.45
------- --------
------- --------
TOTAL RETURN(b): 6.96% (23.78)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 5,162 $ 9,883
Average net assets (000) $ 8,215 $13,672
Ratios to average net assets:
Expenses, including distribution fees 2.45% 2.31%(c)
Expenses, excluding distribution fees 1.45% 1.31%(c)
Net investment income 1.12% 2.71%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) 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.
(c) Annualized.
(d) Less than $.005 per share.
(e) Calculations are made based on average month-end shares outstanding during
the year.
26 See Notes to Financial Statements
<PAGE>
Prudential Real Estate Securities Fund
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
---------------------------------------
Year Ended May 5, 1998(a)
March 31, Through
2000 March 31, 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 7.47 $ 10.00
-------- --------
Income from investment operations
Net investment income .18(e) .29
Net realized and unrealized gain (loss) on
investment transactions .41 (2.59)
-------- --------
Total from investment operations .59 (2.30)
-------- --------
Less distributions
Dividends from net investment income (.23) (.23)
Distributions in excess of net investment
income --(d) --
Tax return of capital distributions (.03) --
-------- --------
Total distributions (.26) (.23)
-------- --------
Net asset value, end of period $ 7.80 $ 7.47
-------- --------
-------- --------
TOTAL RETURN(b): 8.02% (23.05)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 1,746 $ 1,530
Average net assets (000) $ 1,482 $ 2,894
Ratios to average net assets:
Expenses, including distribution fees 1.45% 1.31%(c)
Expenses, excluding distribution fees 1.45% 1.31%(c)
Net investment income 2.32% 3.76%(c)
</TABLE>
------------------------------
(a) Commencement of investment operations.
(b) 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.
(c) Annualized.
(d) Less than $.005 per share.
(e) Calculations are made based on average month-end shares outstanding during
the year.
See Notes to Financial Statements 27
<PAGE>
Prudential Real Estate Securities Fund
Report of Independent Accountants
The Shareholders and Board of Trustees of
Prudential Real Estate Securities Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Real Estate Securities
Fund (the 'Fund') at March 31, 2000, the results of its operations for the year
then ended, the changes in its net assets and the financial highlights for the
year then ended and for the period May 5, 1998 (commencement of operations)
through March 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements and financial
highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at March 31,
2000 by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
May 23, 2000
28
<PAGE>
Prudential Real Estate Securities Fund
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Fund's fiscal period end (March 31, 2000) as to the federal tax status of
dividends paid by the Fund during such fiscal period. Accordingly, we are
advising you that in the fiscal period ended March 31, 2000, dividends were paid
of $.24, $.18, $.18 and $.26 per share (representing net investment income for
Class A, B, C and Z shares respectively, which are taxable as ordinary income).
We wish to advise you that the corporate dividends received deduction for
the Fund is 27%. Only funds that invest in U.S. equity securities are entitled
to pass-through a corporate dividends received deduction.
In January 2000, you were advised on IRS Form 1099 DIV or substitute 1099
DIV as to the federal tax status of the dividends received by you in calendar
year 1999.
29
<PAGE>
Prudential Real Estate Securities Fund
Getting the Most From Your Prudential Mutual Fund
Some mutual fund shareholders won't ever read this--they
don't read annual and semiannual reports. It's quite
understandable. These annual and semiannual reports are
prepared to comply with federal regulations, and are
often written in language that is difficult to
understand. So when most people run into those
particularly daunting sections of these reports, they
don't read them.
We think that's a mistake
At Prudential Mutual Funds, we've made some changes to
our report to make it easier to understand and more
pleasant to read. We hope you'll find it profitable to
spend a few minutes familiarizing yourself with your
investment. Here's what you'll find in the report:
Performance at a Glance
Since an investment's performance is often a
shareholder's primary concern, we present performance
information in two different formats. You'll find it
first on the "Performance at a Glance" page where we
compare the Fund and the comparable average calculated by
Lipper, Inc., a nationally recognized mutual fund rating
agency. We report both the cumulative total returns and
the average annual total returns. The cumulative total
return is the total amount of income and appreciation the
Fund has achieved in various time periods. The average
annual total return is an annualized representation of
the Fund's performance. It gives you an idea of how much
the Fund has earned in an average year for a given time
period. Under the performance box, you'll see legends
that explain the performance information, whether fees
and sales charges have been included in returns, and the
inception dates for the Fund's share classes.
See the performance comparison charts at the back of the
report for more performance information. Please keep in
mind that past performance is not indicative of future
results.
<PAGE>
www.prudential.com (800) 225-1852
Performance review
The portfolio manager, who invests your money for you,
reports on successful--and not-so-successful--strategies in this
section of your report. Look for recent purchases and
sales here, as well as information about the sectors the
portfolio manager favors, and any changes that are on the
drawing board.
Portfolio of Investments
This is where the report begins to appear technical, but
it's really just a listing of each security held at the end of the reporting
period, along with valuations and other information.
Please note that sometimes we discuss a security in the
Performance Review that doesn't appear in this listing
because it was sold before the close of the reporting
period.
Statement of Assets and Liabilities
The balance sheet shows the assets (the value of the
Fund's holdings), liabilities (how much the Fund owes), and net assets (the
Fund's equity, or holdings after the Fund pays its debts) as of
the end of the reporting period. It also shows how we
calculate the net asset value per share for each class of
shares. The net asset value is reduced by payment of your
dividend, capital gain, or other distribution, but
remember that the money or new shares are being paid or
issued to you. The net asset value fluctuates daily,
along with the value of every security in the portfolio.
Statement of Operations
This is the income statement, which details income
(mostly interest and
dividends earned) and expenses (including what you pay us
to manage your money). You'll also see capital gains
here--both realized and unrealized.
<PAGE>
Prudential Real Estate Securities Fund
Getting the Most From Your Prudential Mutual Fund
Statement of Changes in Net Assets
This schedule shows how income and expenses translate
into changes
in net assets. The Fund is required to pay out the bulk
of its income to shareholders every year, and this
statement shows you how we do it (through
dividends and distributions) and how that affects the net
assets. This statement also shows how money from
investors flowed into and out of the Fund.
Notes to Financial Statements
This is the kind of technical material that can
intimidate readers, but it does contain useful
information. The Notes provide a brief history and
explanation of your Fund's objectives. In addition, they
outline how Prudential Mutual Funds prices securities.
The Notes also explain who manages and distributes the
Fund's shares and, more importantly, how much they are
paid for doing so. Finally, the Notes explain how many
shares are outstanding and the number issued and redeemed
over the period.
Financial Highlights
This information contains many elements from prior pages,
but on a per-share basis. It is designed to help you understand
how the Fund performed, and to compare this year's performance and
expenses to those of prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and
certifies that the information is fairly presented and
complies with generally accepted accounting principles.
Tax Information
This is information that we report annually about how
much of your total return is taxable. Should you have any
questions, you may want to consult a tax adviser.
<PAGE>
www.prudential.com (800) 225-1852
Performance Comparison
These charts are included in the annual report and are
required by the Securities Exchange Commission.
Performance is presented here as a hypothetical $10,000
investment in the Fund since its inception or for 10
years (whichever is shorter). To help you put that return
in context, we are required to include the performance of an unmanaged,
broad-based securities index as well. The index does not
reflect the cost of buying the securities it contains or
the cost of managing a mutual fund. Of course, the index
holdings do not mirror those of the Fund--the index is a
broad-based reference point commonly used by investors to
measure how well they are doing. A definition of the
selected index is also provided. Investors cannot invest
directly in an index.
<PAGE>
Prudential Real Estate Securities Fund
Class A Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 3/31/00
One Year Five Years Ten Years Since Inception
With Sales Charge 2.36% N/A N/A -11.92%
Without Sales Charge 7.74% N/A N/A -9.52%
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. The graph compares a
$10,000 investment in Prudential Real Estate Securities
Fund (Class A shares) with a similar investment in the
Wilshire Real Estate Securities Index (the Index)
portraying the initial account values at the commencement
of operations of Class A shares, and at the end of the
current fiscal year (March 31), as measured on a
quarterly basis, beginning in May 1998 for Class A
shares. For purposes of the graph, and unless otherwise
indicated, it has been assumed that (a) the maximum
applicable front-end sales charge was deducted from the
initial $10,000 investment in Class A shares; (b) all
recurring fees (including management fees) were deducted;
and (c) all dividends and distributions were reinvested.
The Index is a market capitalization-weighted index
comprised of over 120 publicly traded REITs and real
estate operating companies (REOCs). The Index is
unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of
sales charges or operating expenses of a mutual fund. The
Index is not the only index that may be used to
characterize performance of REIT funds. Other indexes may
portray different comparative performance. Investors
cannot invest directly in an index.
This graph is furnished to you in accordance with SEC
regulations.
<PAGE>
www.prudential.com (800) 225-1852
Class B Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 3/31/00
One Year Five Years Ten Years Since Inception
With Sales Charge 1.96% N/A N/A -12.50%
Without Sales Charge 6.96% N/A N/A -10.16%
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. The graph compares a
$10,000 investment in Prudential Real Estate Securities
Fund (Class B shares) with a similar investment in the
Wilshire Real Estate Securities Index (the Index)
portraying the initial account values at the commencement
of operations of Class B shares, and at the end of the
current fiscal year (March 31), as measured on a
quarterly basis, beginning in May 1998 for Class B
shares. For purposes of the graph, and unless otherwise
indicated, it has been assumed that (a) the maximum
applicable contingent deferred sales charge was deducted
from the value of the investment in Class B shares,
assuming full redemption on March 31, 2000; (b) all
recurring fees (including management fees) were deducted;
and (c) all dividends and distributions were reinvested.
Class B shares will automatically convert to Class A
shares, on a quarterly basis, beginning approximately
seven years after purchase. This conversion feature is
not reflected in the graph.
The Index is a market capitalization-weighted index
comprised of over 120 publicly traded REITs and real
estate operating companies (REOCs). The Index is
unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of
sales charges or operating expenses of a mutual fund. The
Index is not the only index that may be used to
characterize performance of REIT funds. Other indexes may
portray different comparative performance. Investors
cannot invest directly in an index.
This graph is furnished to you in accordance with SEC
regulations.
<PAGE>
Prudential Real Estate Securities Fund
Class C Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 3/31/00
One Year Five Years Ten Years Since Inception
With Sales Charge 4.89% N/A N/A -10.64%
Without Sales Charge 6.96% N/A N/A -10.16%
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. The graph compares a
$10,000 investment in Prudential Real Estate Securities
Fund (Class C shares) with a similar investment in the
Wilshire Real Estate Securities Index (the Index)
portraying the initial account values at the commencement
of operations of Class C shares, and at the end of the
current fiscal year (March 31), as
measured on a quarterly basis, beginning in May 1998 for
Class C shares. For purposes of the graph, and unless
otherwise indicated, it has been assumed that (a) the
maximum applicable front-end sales charge was deducted
for the initial $10,000 investment in Class C shares; (b)
the maximum applicable contingent deferred sales charge
was deducted from the value of the investment in Class C
shares, assuming full redemption on March 31, 2000; (c)
all recurring fees (including management fees) were
deducted; and
(d) all dividends and distributions were reinvested.
The Index is a market capitalization-weighted index
comprised of over 120 publicly traded REITs and real
estate operating companies (REOCs). The Index is
unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of
sales charges or operating expenses of a mutual fund. The
Index is not the only index that may be used to
characterize performance of REIT funds. Other indexes may
portray different comparative performance. Investors
cannot invest directly in an index.
This graph is furnished to you in accordance with SEC
regulations.
<PAGE>
www.prudential.com (800) 225-1852
Class Z Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 3/31/00
One Year Five Years Ten Years Since Inception
With Sales Charge 8.02% N/A N/A -9.25%
Without Sales Charge 8.02% N/A N/A -9.25%
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. The graph compares a
$10,000 investment in Prudential Real Estate Securities
Fund (Class Z shares) with a similar investment in the
Wilshire Real Estate Securities Index (the Index)
portraying the initial account values at the commencement
of operations of Class Z shares, and at the end of the
current fiscal year (March 31), as measured on a
quarterly basis, beginning in May 1998 for Class Z
shares. . For purposes of the graph, and unless otherwise
indicated, it has been assumed that (a) all recurring
fees (including management fees) were deducted; and (b)
all dividends and distributions were reinvested. Class Z
shares are not subject to a sales charge or distribution
and service (12b-1) fees.
The Index is a market capitalization-weighted index
comprised of over 120 publicly traded REITs and real
estate operating companies (REOCs). The Index is
unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of
sales charges or operating expenses of a mutual fund. The
Index is not the only index that may be used to
characterize performance of REIT funds. Other indexes may
portray different comparative performance. Investors
cannot invest directly in an index.
This graph is furnished to you in accordance with SEC
regulations.
<PAGE>
<PAGE>
For More Information
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
Visit Prudential's web site at:
http://www.prudential.com
Trustees
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
Robin B. Smith
John R. Strangfeld
Louis A. Weil, III
Clay T. Whitehead
Officers
John R. Strangfeld, President
Bernard Winograd, Vice President
Robert F. Gunia, Vice President
David R. Odenath, Jr., Vice President
Grace C. Torres, Treasurer
Marguerite E.H. Morrison, Secretary
Stephen M. Ungerman, Assistant Treasurer
William V. Healey, Assistant 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
194 Wood Avenue South
Iselin, NJ 08830
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
Fund Symbols NASDAQ CUSIP
Class A PURAX 74436U102
Class B PURBX 74436U201
Class C -- 74436U300
Class Z -- 74436U409
MF 182E
(LOGO)Printed on Recycled Paper
