<PAGE> 1
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
Two World Trade Center New York, New York 10048
LETTER TO THE SHAREHOLDERS November 30, 1999
DEAR SHAREHOLDER:
Morgan Stanley Dean Witter Real Estate Fund commenced operations on April 28,
1999. The Fund, which seeks to provide high current income and long-term capital
appreciation, is sub-advised by Morgan Stanley Dean Witter Investment Management
Inc.
MARKET OVERVIEW
Since the Fund's inception, the real estate investment trust (REIT) market has
dramatically underperformed the broader equity market. As a result of this
year's declines, REITs are currently trading at more than a 15 percent discount
to the underlying value of their assets. Despite the attractive arbitrage
between valuations in the public versus private real estate markets, it has
become clear that there is very little interest in the real estate sector at
this time. (The sub-advisor defines arbitrage as a pricing discrepancy between
prices of actual properties in the private real estate markets versus the
implied pricing of properties owned by public companies based on their share
price.) In addition, there has been continued pressure from selling by retail
investors as year-to-date net mutual fund outflows stand at $1.2 billion.
The prices of public real estate securities have continued to decline despite
favorable activity in the underlying real estate markets. Generally, real estate
markets remain in equilibrium in that continued strong levels of demand serve to
mute any serious threat of oversupply. This strength has been evidenced
throughout the year as public companies have continued to report strong
same-property cash-flow growth and correspondingly strong growth in asset value
per share. The Fund's sub-advisor continues to anticipate a moderating of this
growth, primarily a result of smaller re-leasing spreads when expiring (lower
priced) leases are rolled to market rents and of an anticipated slowing in the
U.S. economy. The attractiveness of the real estate market has been evidenced by
a continuing flow of capital from private real estate investors.
<PAGE> 2
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
LETTER TO THE SHAREHOLDERS November 30, 1999, continued
Perhaps the best evidence of the arbitrage opportunity was a series of
announcements of leveraged buyouts throughout the year in which private real
estate investors bought public companies trading at significant discounts to
asset value. Starting in the multifamily apartment sector with leveraged buyouts
of Irvine Apartment Communities and Berkshire Realty (and followed later in the
year by Walden Residential), the activity spread first to the hotel sector with
the leveraged buyout of Sunstone Hotels and then to the retail sector with the
leveraged buyout of Cadillac Fairview. Although there were no leveraged buyouts
completed in the office sector, there continue to be rumors with regard to
several of the companies trading at the largest discounts to their asset value.
Further evidence of favorable arbitrage is the pervasive adoption of share
buyback programs. Instead of buying or developing properties, companies are
effectively utilizing retained cashflow to fund share buybacks to purchase real
estate in the cheapest manner (by buying their stock that trades at a discount
to the private real estate value). Through the third quarter of 1999, more than
50 companies authorized share buyback programs and purchased in excess of $1
billion of stock, representing more than 2 percent of their equity
capitalization. A number of companies sold assets in order to fund their share
buyback program.
PERFORMANCE
For the period from inception through November 30, 1999, Morgan Stanley Dean
Witter Real Estate Fund's Class B shares produced a total return of -12.27
percent. During the same period, the National Association of Real Estate
Investment Trusts Equity Index returned -10.56 percent. The Fund's Class A, C
and D shares returned -11.88 percent, -12.29 percent and -11.69 percent,
respectively. (The performance of the Fund's four share classes varies because
of differing expenses. Total return figures assume the reinvestment of all
distributions and do not reflect the deduction of any applicable sales charges.)
The accompanying chart compares the Fund's performance to that of the NAREIT
index.
The initial negative impact on performance resulting from investing the Fund's
assets in REITs during their rally in April has continued to prove a drag on the
Fund's return relative to its benchmark indexes.
PORTFOLIO STRATEGY
The overall strategy of the Fund is to provide investors with diversified
exposure to the U.S. real estate market at prices comparable to or better than
the direct market through the purchase of real estate securities, primarily
REITs. Aside from attempting to provide this broad exposure at the most
attractive
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
LETTER TO THE SHAREHOLDERS November 30, 1999, continued
prices, the Fund will generally overweight real estate markets in the favorable
phase of their supply-demand cycle. Given that the U.S. real estate market has
entered the equilibrium phase of its cycle, the Fund generally is focused on
being overweighted in companies that own properties in the more
supply-constrained markets, particularly in urban and in-fill markets.
Currently, the Fund remains overweighted in the residential sector, with a
geographic emphasis in the Pacific, East Coast and mid-Atlantic regions. The
Fund also remains overweighted in the office sector, with a focus on central
business district locations. The Fund is market weighted in owners of retail
properties but has increased its weighting in owners of high-end enclosed
regional malls and reduced its exposure to grocery-anchored shopping centers.
The Fund remains underweighted in the hotel sector, because its sub-advisor
remains cautious with regard to the potential for oversupply and a slowdown in
the U.S. economy. Finally, the Fund remains underweighted in the health-care
sector despite continued declines in these stocks, as the sub-advisor believes
that the sector is still being negatively repriced in the private markets.
LOOKING AHEAD
Unfortunately, as we near the end of a disappointing year, REITs may face the
additional negative technical pressure of year-end tax-loss selling and the
beginnings of the maturity for many unit investment trusts (although each may be
somewhat mitigated by an increased level of share buybacks). The Fund's
sub-advisor anticipates that the offering calendar will remain dormant as a
result of weak pricing, the lack of significant demand from institutional buyers
and the propensity of investors to pummel companies that issue equity. If
current pricing persists, the sub-advisor believes that the market will see a
continuing trend of real estate moving from public into private hands. The
sub-advisor also anticipates a modest shrinking of the net equity base as a
result of leveraged buyouts and larger share repurchase programs.
The Fund's sub-advisor continues to monitor the real estate markets carefully,
as most facilities are at historically high occupancy levels and a slowdown in
the U.S. economy could put pressure on occupancy rates if there is not a similar
reduction in the new supply of properties. However, the current valuation level
for real estate securities, at more than a 15 percent discount to asset value
combined with an active private real estate market, leads the sub-advisor to
remain optimistic that REITs can return to a path of previous historical trend
returns. Finally, the real estate sector continues to offer investors
diversification benefits within their balanced portfolios.
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
LETTER TO THE SHAREHOLDERS November 30, 1999, continued
We appreciate your ongoing support of Morgan Stanley Dean Witter Real Estate
Fund and look forward to continuing to serve your investment needs.
<TABLE>
<S> <C>
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
</TABLE>
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
FUND PERFORMANCE November 30, 1999
GROWTH OF $10,000
($ in Thousands)
[LINE GRAPH]
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D NAREIT
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
April 28, 1999 $ 9475.00 $ 10000.00 $ 10000.00 $ 10000.00 $ 10000.00
April 30, 1999 9522.00 10050.00 10050.00 10050.00 10082.00
May 31, 1999 9655.00 10190.00 10190.00 10190.00 10304.00
June 30, 1999 9608.00 10127.00 10126.00 10154.00 10137.00
July 31, 1999 9216.00 9715.00 9714.00 9741.00 9814.00
August 31,1999 9140.00 9624.00 9623.00 9660.00 9690.00
September 30, 1999 8745.00 9201.00 9198.00 9240.00 9322.00
October 31, 1999 8543.00 8977.00 8985.00 9036.00 9092.00
November 30, 1999 8349.00 8342.00 8685.00 8831.00 8944.00
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. PERFORMANCE FOR CLASS A,
CLASS B, CLASS C, AND CLASS D SHARES WILL VARY DUE TO DIFFERENCES IN SALES
CHARGES AND EXPENSES.
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES**
- ------------------------------------------------
<S> <C> <C>
PERIOD ENDED 11/30/99
- --------------------------
Since Inception (4/28/99) (11.88)(1) (16.51)(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES++
- ------------------------------------------------
<S> <C> <C>
PERIOD ENDED 11/30/99
- --------------------------
Since Inception (4/28/99) (12.29)(1) (13.15)(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES+
- ------------------------------------------------
<S> <C> <C>
PERIOD ENDED 11/30/99
- --------------------------
Since Inception (4/28/99) (12.27)(1) (16.58)(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS D SHARES#
- ------------------------------------------------
<S> <C> <C>
PERIOD ENDED 11/30/99
- --------------------------
Since Inception (4/28/99) (11.69)(1)
</TABLE>
- ---------------------
<TABLE>
<S> <C>
(1) Figure shown assumes reinvestment of all distributions and
does not reflect the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and
the deduction of the maximum applicable sales charge. See
the Fund's current prospectus for complete details on fees
and sales charges.
(3) Closing value assuming a complete redemption on November 30,
1999.
(4) The NAREIT Equity Index. Real estate securities are
represented by the NAREIT Equity Index, which is an
unmanaged benchmark of real estate investment trusts
compiled by the National Association of Real Estate
Investment Trust. Real estate stocks will fluctuate with
changes in the values of their underlying properties.
* For periods of less than one year, the fund quotes its total
return on a non-annualized basis.
** The maximum front-end sales charge for Class A is 5.25%.
+ The maximum contingent deferred sales charge (CDSC) for
Class B is 5.0%. The CDSC declines to 0% after six years.
++ The maximum contingent deferred sales charge for Class C
shares is 1% for shares redeemed within one year of
purchase.
# Class D shares have no sales charge.
</TABLE>
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
PORTFOLIO OF INVESTMENTS November 30, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (99.3%)
REIT - Diversified (3.5%)
85,700 Meditrust Corp. (Paired
Stock)....................... $ 562,406
23,200 Rouse Co. (The)............... 508,950
11,100 Security Capital Group Inc.
(Class B)*................... 134,587
41,600 Vornado Realty Trust.......... 1,313,000
-----------
2,518,943
-----------
REIT - Industrial/Office
(34.6%)
161,400 Arden Realty, Inc. ........... 3,106,950
71,700 Boston Properties, Inc. ...... 2,030,006
293,700 Brookfield Properties Corp.
(Canada)..................... 2,759,477
113,500 CarrAmerica Realty Corp. ..... 2,355,125
4,300 Cornerstone Properties,
Inc. ........................ 59,394
5,500 Duke Realty Investments,
Inc. ........................ 101,750
8,900 EastGroup Properties, Inc. ... 154,637
187,200 Equity Office Properties
Trust........................ 4,106,700
150,600 Great Lakes REIT, Inc. ....... 2,193,113
21,600 Mack-Cali Realty Corp. ....... 533,250
24,900 Prentiss Properties Trust..... 504,225
195,500 ProLogis Trust................ 3,555,656
12,600 PS Business Parks, Inc. ...... 274,050
27,200 Spieker Properties, Inc. ..... 952,000
154,900 TrizecHahn Corp. (Canada)..... 2,546,169
-----------
25,232,502
-----------
REIT - Lodging/Resorts (8.2%)
171,000 Host Marriot Corp. ........... 1,592,438
7,332 Interstate Hotels Corp.*...... 24,746
170,293 Starwood Hotels & Resorts
Worldwide, Inc. ............. 3,799,663
214,300 Wyndham International, Inc.
(Class A)*................... 602,719
-----------
6,019,566
-----------
REIT - Residential (27.9%)
30,900 Amli Residential Properties
Trust........................ 658,556
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------
<C> <S> <C>
31,400 Apartment Investment &
Management Co. (Class A)..... $ 1,167,688
105,300 Archstone Communities Trust... 2,112,581
162,400 Avalonbay Communities,
Inc. ........................ 5,257,700
42,900 Charles E. Smith Residential
Realty, Inc. ................ 1,394,250
114,100 Chateau Communities, Inc. .... 2,966,600
28,700 Equity Residential Properties
Trust........................ 1,153,381
125,100 Essex Property Trust, Inc. ... 4,057,931
67,500 Manufactured Home Communities,
Inc. ........................ 1,598,906
-----------
20,367,593
-----------
REIT - Retail (21.0%)
204,500 Burnham Pacific Properties,
Inc. ........................ 2,006,656
44,800 Federal Realty Investment
Trust........................ 806,400
148,700 Pan Pacific Retail Properties,
Inc. ........................ 2,527,900
114,300 Regency Realty Corp. ......... 2,314,575
145,900 Simon Property Group, Inc. ... 3,401,294
293,100 Taubman Centers, Inc. ........ 3,187,463
41,500 Urban Shopping Centers,
Inc. ........................ 1,071,219
-----------
15,315,507
-----------
REIT - Storage (4.1%)
57,700 Public Storage, Inc. ......... 1,316,281
76,100 Shurgard Storage Centers, Inc.
(Class A).................... 1,697,981
-----------
3,014,262
-----------
TOTAL COMMON STOCKS
(Identified Cost
$84,781,692).................. 72,468,373
-----------
RIGHTS (0.0%)
226,100 Wyndham International,
Inc.*........................ --
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
PORTFOLIO OF INVESTMENTS November 30, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENT (1.1%)
REPURCHASE AGREEMENT
$ 836 The Bank of New York
5.375% due 12/01/99
(dated 11/30/99; proceeds
$836,373)(a)
(Identified Cost $836,249)... $ 836,249
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(Identified Cost
$85,617,941)(b).................. 100.4% 73,304,622
LIABILITIES IN EXCESS OF
OTHER ASSETS..................... (0.4) (300,264)
----- -----------
NET ASSETS....................... 100.0% $73,004,358
===== ===========
</TABLE>
- ---------------------
* Non-income producing security.
(a) Collateralized by $15,253 U.S. Treasury Bond 5.25% due 02/15/29 valued at
$13,167 and $3,505,438 U.S. Treasury Note 0.00% due 11/15/21 valued at
$839,658.
(b) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $104,168 and the
aggregate gross unrealized depreciation is $12,417,487, resulting in net
unrealized depreciation of $12,313,319.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1999
ASSETS:
Investments in securities, at value
(identified cost $85,617,941).............................. $ 73,304,622
Receivable for:
Shares of beneficial interest sold...................... 141,029
Dividends............................................... 111,060
Investment sold......................................... 17,327
Deferred offering costs..................................... 72,176
Prepaid expenses and other assets........................... 5,746
------------
TOTAL ASSETS............................................ 73,651,960
------------
LIABILITIES:
Payable for:
Shares of beneficial interest repurchased............... 376,204
Investment management fee............................... 66,793
Plan of distribution fee................................ 62,851
Offering costs.............................................. 70,380
Accrued expenses and other payables......................... 71,374
------------
TOTAL LIABILITIES....................................... 647,602
------------
NET ASSETS.............................................. $ 73,004,358
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $ 85,308,566
Net unrealized depreciation................................. (12,313,319)
Undistributed net investment income......................... 113,624
Net realized loss........................................... (104,513)
------------
NET ASSETS.............................................. $ 73,004,358
============
CLASS A SHARES:
Net Assets.................................................. $5,634,266
Shares Outstanding (unlimited authorized, $.01 par value)... 652,548
NET ASSET VALUE PER SHARE............................... $8.63
============
MAXIMUM OFFERING PRICE PER SHARE,
(net asset value plus 5.54% of net asset value)........ $9.11
============
CLASS B SHARES:
Net Assets.................................................. $59,645,259
Shares Outstanding (unlimited authorized, $.01 par value)... 6,917,798
NET ASSET VALUE PER SHARE............................... $8.62
============
CLASS C SHARES:
Net Assets.................................................. $7,698,454
Shares Outstanding (unlimited authorized, $.01 par value)... 892,643
NET ASSET VALUE PER SHARE............................... $8.62
============
CLASS D SHARES:
Net Assets.................................................. $26,379
Shares Outstanding (unlimited authorized, $.01 par value)... 3,052
NET ASSET VALUE PER SHARE............................... $8.64
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the period April 28, 1999* through November 30, 1999
NET INVESTMENT INCOME:
INCOME
Dividends (net of $9,664 foreign withholding tax)........... $ 2,529,824
Interest.................................................... 127,921
------------
TOTAL INCOME............................................ 2,657,745
------------
EXPENSES
Investment management fee................................... 491,882
Plan of distribution fee (Class A shares)................... 9,874
Plan of distribution fee (Class B shares)................... 394,304
Plan of distribution fee (Class C shares)................... 57,216
Offering costs.............................................. 105,824
Transfer agent fees and expenses............................ 61,582
Professional fees........................................... 52,100
Registration fees........................................... 27,552
Shareholder reports and notices............................. 10,909
Custodian fees.............................................. 9,819
Trustees' fees and expenses................................. 5,543
Other....................................................... 1,384
------------
TOTAL EXPENSES.......................................... 1,227,989
------------
NET INVESTMENT INCOME................................... 1,429,756
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss on investments............................ (395,281)
Capital gain distributions received......................... 290,768
------------
NET REALIZED LOSS....................................... (104,513)
------------
Net unrealized depreciation................................. (12,313,319)
------------
NET LOSS................................................ (12,417,832)
------------
NET DECREASE................................................ $(10,988,076)
============
</TABLE>
- ---------------------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
APRIL 28, 1999*
THROUGH
NOVEMBER 30, 1999
- -------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................... $ 1,429,756
Net realized loss........................................... (104,513)
Net unrealized depreciation................................. (12,313,319)
------------
NET DECREASE............................................ (10,988,076)
------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares.............................................. (142,441)
Class B shares.............................................. (1,182,548)
Class C shares.............................................. (164,052)
Class D shares.............................................. (624)
------------
TOTAL DIVIDENDS......................................... (1,489,665)
------------
Net increase from transactions in shares of beneficial
interest................................................... 85,382,099
------------
NET INCREASE............................................ 72,904,358
NET ASSETS:
Beginning of period......................................... 100,000
------------
END OF PERIOD
(Including undistributed net investment income of
$113,624)............................................... $ 73,004,358
============
</TABLE>
- ---------------------
* Commencement of operations.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS November 30, 1999
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter Real Estate Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as a non-diversified,
open-end management investment company. The Fund's investment objective is to
provide high current income and long-term capital appreciation. The Fund seeks
to achieve its objective by investing primarily in equity securities of
companies that are principally engaged in the U.S. real estate industry,
including real estate investment trusts. The Fund was organized as a
Massachusetts business trust on November 23, 1998 and had no operations other
than those relating to organizational matters and the issuance of 2,500 shares
of beneficial interest by each class for $25,000 of each class to Morgan Stanley
Dean Witter Advisors Inc. (the "Investment Manager") to effect the Fund's
initial capitalization. The Fund commenced operations on April 28, 1999.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where a security is traded on more than one exchange, the security is
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (3) when market
quotations are not readily available, including circumstances under which it is
determined by the Investment Manager or Morgan Stanley Dean Witter Investment
Management Inc. (the "Sub-Advisor"), an affiliate of the Investment Manager,
that sale or bid prices are not reflective of a security's market value,
portfolio securities are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the
Trustees (valuation of debt securities for which market
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS November 30, 1999, continued
quotations are not readily available may be based upon current market prices of
securities which are comparable in coupon, rating and maturity or an appropriate
matrix utilizing similar factors); and (4) short-term debt securities having a
maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily.
C. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
D. FEDERAL INCOME TAX STATUS -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Fund records dividends and
distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
F. OFFERING COSTS -- The Investment Manager incurred offering costs on behalf of
the Fund in the amount of approximately $178,000, which will be reimbursed for
the full amount thereof. Such expenses were deferred and are being amortized on
the straight-line method over a period of approximately one year or less from
the commencement of operations.
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS November 30, 1999, continued
2. INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 1.0% to the net assets of the Fund determined as of the close of
each business day.
Under the terms of the Agreement, in addition to managing the Fund's
investments, the Investment Manager maintains certain of the Fund's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Fund who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Fund.
Under a Sub-Advisory Agreement between the Sub-Advisor and the Investment
Manager, the Sub-Advisor provides the Fund with investment advice and portfolio
management relating to the Fund's investments. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Advisor monthly compensation equal to 40% of its monthly compensation.
3. PLAN OF DISTRIBUTION
Shares of the Fund are distributed by Morgan Stanley Dean Witter Distributors
Inc. (the "Distributor"), an affiliate of the Investment Manager and
Sub-Advisor. The Fund has adopted a Plan of Distribution (the "Plan") pursuant
to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the
Distributor a fee which is accrued daily and paid monthly at the following
annual rates: (i) Class A -- up to 0.25% of the average daily net assets of
Class A; (ii) Class B -- 1.0% of the average daily net assets of Class B; and
(iii) Class C -- up to 1.0% of the average daily net assets of Class C. In the
case of Class A shares, amounts paid under the Plan are paid to the Distributor
for services provided. In the case of Class B and Class C shares, amounts paid
under the Plan are paid to the Distributor for (1) services provided and the
expenses borne by it and others in the distribution of the shares of these
Classes, including the payment of commissions for sales of these Classes and
incentive compensation to, and expenses of Morgan Stanley Dean Witter Financial
Advisors and others who engage in or support distribution of the shares or who
service shareholder accounts, including overhead and telephone expenses; (2)
printing and distribution of prospectuses and reports used in connection with
the offering of these shares to other than current shareholders; and (3)
preparation, printing and distribution of sales literature and advertising
materials. In addition, the Distributor may utilize fees paid pursuant to the
Plan, in the case of Class B shares, to compensate Dean Witter
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS November 30, 1999, continued
Reynolds Inc. ("DWR"), an affiliate of the Investment Manager, Sub-Advisor and
Distributor, and other selected broker-dealers for their opportunity costs in
advancing such amounts, which compensation would be in the form of a carrying
charge on any unreimbursed expenses.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts, including
carrying charges, totaled $4,551,718 at November 30, 1999.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Dean Witter Financial Advisors or other
selected broker-dealer representatives may be reimbursed in the subsequent
calendar year. For the period ended November 30, 1999, the distribution fee was
accrued for Class A shares and Class C shares at the annual rate of 0.25% and
1.0%, respectively.
The Distributor has informed the Fund that for the period ended November 30,
1999, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $3,274, $100,905
and $14,574, respectively and received $22,069 in
front-end sales charges from sales of the Fund's Class A shares. The respective
shareholders pay such charges which are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the period ended November 30, 1999 aggregated
$105,380,672 and $19,874,250, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of Investment Manager,
Sub-Advisor and Distributor, is the Fund's transfer agent.
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS November 30, 1999, continued
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 28, 1999*
THROUGH
NOVEMBER 30, 1999
------------------------
SHARES AMOUNT
---------- -----------
<S> <C> <C>
CLASS A SHARES
Sold........................................................ 1,018,402 $ 9,991,037
Reinvestment of dividends................................... 12,614 119,098
Redeemed.................................................... (380,968) (3,512,632)
---------- -----------
Net increase - Class A...................................... 650,048 6,597,503
---------- -----------
CLASS B SHARES
Sold........................................................ 7,905,926 78,867,679
Reinvestment of dividends................................... 93,767 883,747
Redeemed.................................................... (1,084,395) (9,987,438)
---------- -----------
Net increase - Class B...................................... 6,915,298 69,763,988
---------- -----------
CLASS C SHARES
Sold........................................................ 1,178,369 11,769,700
Reinvestment of dividends................................... 15,030 142,127
Redeemed.................................................... (303,256) (2,869,650)
---------- -----------
Net increase - Class C...................................... 890,143 9,042,177
---------- -----------
CLASS D SHARES
Sold........................................................ 986,391 9,768,008
Reinvestment of dividends................................... 66 624
Redeemed.................................................... (985,905) (9,790,201)
---------- -----------
Net decrease - Class D...................................... 552 (21,569)
---------- -----------
Net increase in Fund........................................ 8,456,041 $85,382,099
========== ===========
</TABLE>
- ---------------------
* Commencement of operations.
6. FEDERAL INCOME TAX STATUS
At November 30, 1999, the Fund had a net capital loss carryover of approximately
$71,000 which will be available through November 30, 2007 to offset future
capital gains to the extent provided by regulations.
As of November 30, 1999, the Fund had temporary book/tax differences
attributable to capital loss deferrals on wash sales and permanent book/tax
differences attributable to nondeductible expenses. To reflect reclassifications
arising from the permanent differences, paid-in-capital was charged and
undistributed net investment income was credited $173,533.
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout the period:
<TABLE>
<CAPTION>
FOR THE PERIOD APRIL 28, 1999*
THROUGH NOVEMBER 30, 1999**
-------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
SHARES SHARES SHARES SHARES
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss)............................... 0.21 0.16 0.16 0.15
Net realized and unrealized loss........................... (1.38) (1.37) (1.38) (1.30)
------ ------ ------ ------
Total loss from investment operations....................... (1.17) (1.21) (1.22) (1.15)
------ ------ ------ ------
Less dividends from net investment income................... (0.20) (0.17) (0.16) (0.21)
------ ------ ------ ------
Net asset value, end of period.............................. $ 8.63 $ 8.62 $ 8.62 $ 8.64
====== ====== ====== ======
TOTAL RETURN+(1)............................................ (11.88)% (12.27)% (12.29)% (11.69)%
RATIOS TO AVERAGE NET ASSETS(2)(3):
Expenses.................................................... 1.81% 2.56% 2.56% 1.56%
Net investment income....................................... 3.59% 2.84% 2.84% 3.84%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $5,634 $59,645 $7,698 $26
Portfolio turnover rate..................................... 27% 27% 27% 27%
</TABLE>
- ---------------------
* Commencement of operations.
** The per share amounts were computed using an average number of shares
outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net
asset value as of the last business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
SEE NOTES TO FINANCIAL STATEMENTS
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER REAL ESTATE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER REAL ESTATE 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 Morgan Stanley Dean Witter Real
Estate Fund (the "Fund") at November 30, 1999, and the results of its
operations, the changes in its net assets and the financial highlights for the
period April 28, 1999 (commencement of operations) through November 30, 1999, in
conformity with generally accepted accounting principles. 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 audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards 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
audit, which included confirmation of securities at November 30, 1999 by
correspondence with the custodian, provides a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
January 13, 2000
--------------------------------------------------------------------
1999 FEDERAL TAX NOTICE (unaudited)
During the fiscal year ended November 30, 1999, 100% of the
income dividends qualified for the dividends received
deduction available to corporations.
17
<PAGE> 18
(This Page Intentionally Left Blank)
18
<PAGE> 19
(This Page Intentionally Left Blank)
19
<PAGE> 20
TRUSTEES
- ----------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- ----------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- ----------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- ----------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- ----------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
SUB-ADVISOR
Morgan Stanley Dean Witter
Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its officers and trustees,
fees, expenses and other pertinent information, please see the prospectus of the
Fund.
The financial statements included herein have been taken from the records of the
Fund without examination by the independent accountants and accordingly they do
not express an opinion thereon.
MORGAN STANLEY
DEAN WITTER
REAL ESTATE FUND
Annual Report
November 30, 1999