HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
MANAGEMENT'S LETTER SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
PERFORMANCE
The aggregate total return for the Heitman/PRA Institutional Class of the
Heitman Real Estate Fund (the "Fund") for the third quarter of 1995 was 6.71%.
The year-to-date aggregate total return from January 1, 1995 through September
30, 1995 was 5.84%. For the twelve month period October 1, 1994 through
September 30, 1995, the average annual total return was 6.53%. The average
total return for the five year and since inception (March 13, 1989) periods
ended September 30, 1995 were 13.74% and 6.10%, respectively. Aggregate total
returns for the Advisor Class may be found in the Financial Highlights section
of this report.
As we reported in last quarter's letter, we have moved towards a strategy of
greater diversification in the Fund portfolio. Additionally, in response to
what we viewed as more mature market conditions in the real estate securities
market - contrasting the past eight quarters or so, which were driven largely by
a constant progression of new initial public offerings - we have further refined
our portfolio management process in order to give more weight to the relative
valuations within our sector. The results of these two changes, which were
implemented fully in the third quarter, have been very impressive. As reported
by Lipper Analytical Services, Inc., our third quarter total return of 6.71% was
among the highest of the real estate mutual funds. In addition, our portfolio
has achieved a level of volatility (as defined as the standard deviation of the
daily closing prices over the current quarter) that is substantially lower than
that of the Wilshire Real Estate Securities Index(1) ("WRESI"). The implication
is therefore that we achieved not only a superior total return in the third
quarter, but, more importantly, a superior RISK-ADJUSTED total return.
A strong late September rally was behind the impressive quarterly performance of
the WRESI, which logged a total return of 4.74% during the quarter. This was
driven largely by an influx of new institutional and individual capital into the
sector. As the more robust buoyancy in the broader equity markets seen earlier
in the year begins to ebb, many institutional investors are giving the REIT
sector a more serious look. Additionally, the message that the Wall Street
brokerage houses have been hammering home for several quarters now finally seems
to have taken hold somewhat among individual investors. Specifically,
underlying real estate fundamentals, as they relate to most property types,
continue to surge forward, and the yield spread between most REITs' dividend
- - -----------------------------------
(1) The Wilshire Real Estate Index is an unmanaged index of real estate
securities.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES MAY FLUCTUATE, SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
1
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
MANAGEMENT'S LETTER - CONTINUED SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
yields(2) and the yield on the 10-year U.S. government bond(3) is at an
historically high level. These market conditions have also been instrumental in
the successful raising of over $5 billion in new equity in the public markets so
far this year.
We agree that these components of our sector's total return have continued to
perform reliably: the dividend yield on the REIT-only portion of the WRESI as
of September 30, 1995 was 7.48% (compared to the 10-year government bond yield
as of September 30, 1995 of 6.18%), and the average cash flow growth for
companies in our sector has continued in the 8% range. However, on a year-to-
date basis, the REIT sector has continued to lag the broader markets
considerably.
Outlook
The cash flow growth prospects for 1996 in the universe of real estate companies
that we monitor is estimated to be in excess of 8% on average. This is
reflective of continuing improvement in supply and demand fundamentals for most
property types. As the economy continues to expand, albeit at a somewhat more
moderate pace, income, job and household growth create additional demand for all
types of income-producing real estate. Furthermore, new supply additions,
excess amounts of which are traditionally the bane of healthy real estate
markets, have been remarkably few. The one notable exception to this trend has
been in the apartment sector, where a number of regional markets have
experienced significant amounts of new construction - not so much as to send
these markets into an outright decline, but enough to absorb most of the
incremental new demand, thereby preventing the type of rapid growth in rents
that has prevailed over the last few years. Accordingly, we have taken steps to
lighten our exposure to this sector, concentrating more on office and industrial
property types, which are at much earlier stages in the real estate cycle, and
for which new demand is outstripping what minuscule supply additions there have
been. Finally, interest rates across the entire maturity spectrum continue to
drop, increasing the relative attractiveness of the real estate sector in
general and of relatively high yielding REIT stocks in particular. With all of
- - -----------------------------------
(2) A dividend yield is calculated by dividing a stock's annual dividend
by its share price.
(3) Unlike stocks, government bonds are guaranteed by the U.S. government
and, if held to maturity, offer both a fixed rate of return and fixed
principal value.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES MAY FLUCTUATE, SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
2
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
MANAGEMENT'S LETTER - CONTINUED SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
these positive signals in the marketplace, we believe it may be only a matter of
time before the REIT sector participates in the appreciation that its increasing
stability and growth prospects warrant.
Once again, we appreciate your support and look forward to the opportunity to
serve you in the future.
Sincerely,
/s/ Michael T. Oliver /s/ Dean A. Sotter
Michael T. Oliver, CFA Dean A. Sotter
/s/ Timothy J. Pire, CFA /s/ Randy Newsome /s/ James S. Corl
Timothy J. Pire, CFA Randy Newsome James Corl
November 14, 1995
Heitman/PRA Institutional Class shares are distributed by Rodney
Square Distributors, Inc. Advisor Class shares are distributed by ACG
Capital Corporation.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES MAY FLUCTUATE, SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
3
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
SCHEDULE OF INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
NAREIT MARKET VALUE
SHARES CLASS (NOTE 2)
------ ------ ------------
COMMON STOCK - 93.9%
Alexander Haagen Properties, Inc............ 98,100 Equity $ 1,140,413
Avalon Properties, Inc...................... 182,272 Equity 3,713,792
Camden Property Trust....................... 102,552 Equity 2,268,963
Centerpoint Properties Corp................. 168,800 Equity 3,776,900
Charles E. Smith Residential Realty, Inc.... 73,700 Equity 1,704,313
Chateau Properties, Inc..................... 165,658 Equity 3,582,354
Chelsea GCA Realty, Inc..................... 88,193 Equity 2,634,766
Colonial Properties Trust................... 147,638 Equity 3,672,495
Debartolo Realty Corp....................... 256,700 Equity 3,593,800
Developers Diversified Realty Corp.......... 117,130 Equity 3,528,541
Duke Realty Investments, Inc................ 10,000 Equity 311,250
Equity Residential Properties Trust......... 122,400 Equity 3,687,300
Evans Withycombe Residential, Inc........... 186,600 Equity 3,778,650
Gables Residential Trust.................... 71,500 Equity 1,608,750
Grubb & Ellis Realty Income Trust*.......... 189,700 Mortgage 199,185
HGI Realty, Inc............................. 68,345 Equity 1,640,280
Kimco Realty Corp........................... 90,500 Equity 3,608,687
Liberty Property Trust...................... 35,500 Equity 754,375
Macerich Company (The)...................... 145,300 Equity 3,087,625
Merry Land & Investment Company, Inc........ 85,400 Equity 1,804,075
Oasis Residential, Inc...................... 165,100 Equity 3,714,750
Patriot American Hospitality, Inc........... 45,400 Equity 1,163,375
Post Properties, Inc........................ 114,677 Equity 3,554,987
ROC Communities, Inc........................ 163,244 Equity 3,775,017
Rouse Company............................... 73,100 Equity 1,599,063
Security Capital Industrial Trust........... 251,500 Equity 4,086,875
Security Capital Pacific Trust.............. 197,030 Equity 3,743,570
Shurgard Storage Centers, Inc............... 50,600 Equity 1,258,675
South West Property Trust................... 293,966 Equity 3,748,066
Sovran Self Storage, Inc.................... 99,000 Equity 2,462,625
Spieker Properties, Inc..................... 163,400 Equity 3,921,600
Storage Trust Realty........................ 112,900 Equity 2,300,338
Storage USA Inc............................. 109,900 Equity 3,393,162
United Dominion Realty Trust................ 181,500 Equity 2,586,375
Vornado Realty Trust........................ 94,600 Equity 3,547,500
Wellsford Residential Property Trust........ 74,100 Equity 1,583,888
------------
TOTAL COMMON STOCK (COST $89,843,265)... 96,536,380
------------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
SCHEDULE OF INVESTMENTS (UNAUDITED) - CONTINUED SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
PAR MARKET VALUE
(000) (NOTE 2)
----- ------------
CONVERTIBLE BONDS - 4.2%
Liberty Property Trust, 8.00%, Due 07/01/01
(COST $4,074,000)......................... 4,074 $ 4,292,977
------------
COMMERCIAL PAPER - 4.7%
Merrill Lynch & Co., Inc., 6.50%, Due 10/02/95
(COST $4,857,123)......................... 4,858 4,857,123
------------
TOTAL INVESTMENTS (COST $98,774,388) - 102.8%.................. 105,686,480
OTHER ASSETS AND LIABILITIES, NET - (2.8)%..................... (2,876,364)
------------
NET ASSETS - 100.0%............................................ $102,810,116
============
* Non-income producing security.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) - SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
ASSETS:
Investments, at market value (identified cost
$98,774,388) (Note 3).......................... $105,686,480
Cash............................................. 15,043
Receivables:
Dividends...................................... 988,697
Interest....................................... 81,480
Investment securities sold..................... 280,499
Reimbursement due from Advisor................... 14,076
------------
TOTAL ASSETS................................. 107,066,275
------------
LIABILITIES:
Payables:
Investment management fees (Note 4)............ 62,966
Investment securities purchased................ 4,076,652
Accrued expenses............................... 116,541
------------
TOTAL LIABILITIES............................ 4,256,159
------------
NET ASSETS:
(Applicable to 12,260,342 shares of $0.001 par
value beneficial interest issued and outstanding;
unlimited number of shares authorized)......... $102,810,116
============
Net asset value, offering price and redemption
price per Institutional class share
($100,031,680 / 11,930,051).................... $8.38
=====
Net asset value and redemption price per
Advisor class share ($2,778,436 / 330,291)... $8.41
====
Offering price per Advisor class share
($8.41 / .9525)................................ $8.83
====
SOURCE OF NET ASSETS:
Paid-in capital.................................. $100,967,236
Distributions in excess of net investment income. (5,937)
Accumulated net realized loss on investments..... (5,063,275)
Net unrealized appreciation of investments....... 6,912,092
------------
NET ASSETS......................................... $102,810,116
============
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
STATEMENT OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995
(UNAUDITED)
- - --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (Note 2)............................... $ 3,670,259
Interest......................................... 320,814
------------
Total investment income...................... 3,991,073
------------
EXPENSES:
Advisory fees (Note 4)........................... $537,784
Administration fees - Institutional shares
(Note 4)....................................... 71,446
Administration fees - Advisor shares (Note 4).... 5,548
Trustees' fees and expenses (Note 5)............. 52,237
Accounting fees - Institutional shares (Note 4).. 33,671
Accounting fees - Advisor shares (Note 4)........ 5,548
Professional fees................................ 80,409
Custodian fees................................... 23,970
Insurance........................................ 49,697
Federal Registration fees........................ 1,001
State Registration fees - Institutional shares... 19,277
State Registration fees - Advisor shares......... 207
Shareholder report fees - Institutional shares... 5,763
Shareholder report fees - Advisor shares......... 39
Distribution fees - Advisor shares (Note 4)...... 722
Shareholder Servicing fees - Advisor shares(Note 4) 722
Transfer agent fees - Institutional shares....... 30,824
Transfer agent fees - Advisor shares............. 3,995
Other............................................ 20,418
---------
Total expenses before expense reimbursement.. 943,278
Reimbursement from Advisor - Advisor shares.. (14,076)
---------
Expenses, net.............................. 929,202
------------
Net investment income............................ 3,061,871
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from security transactions..... (2,910,113)
Net change in unrealized appreciation of
investments.................................... 5,111,749
------------
Net realized and unrealized gain on investments 2,201,636
------------
Net increase in net assets resulting from operations $ 5,263,507
============
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
FOR THE
NINE-MONTH FOR THE
PERIOD ENDED THREE-MONTH
SEPTEMBER 30, PERIOD ENDED
1995 DECEMBER 31,
(UNAUDITED) 1994
------------- ------------
OPERATIONS:
Net investment income (Note 2)................... $3,061,871 $1,178,235
Net realized loss from security transactions..... (2,910,113) (2,179,993)
Net change in unrealized appreciation of
investments.................................... 5,111,749 1,423,853
------------ ------------
Net increase in net assets resulting from
operations................................... 5,263,507 422,095
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS - INSTITUTIONAL SHARES (NOTE 2):
From net investment income ($0.26 and $0.10 per
share, respectively)........................... (3,051,782) (1,186,472)
From net capital gains ($0.00 and $0.77 per
share, respectively)........................... 0 (9,104,451)
From tax return of capital ($0.12 and $0.11
per share, respectively)....................... (1,424,827) (1,301,682)
DISTRIBUTIONS TO SHAREHOLDERS - ADVISOR SHARES (NOTE 2):
From net investment income ($0.17 and $0.00
per share, respectively)....................... (24,334) --
From net capital gains ($0.00 and $0.00
per share, respectively)....................... 0 --
From tax return of capital ($0.08 and $0.00
per share, respectively)....................... (11,377) --
------------ ------------
Total distributions paid to shareholders....... (4,512,320) (11,592,605)
------------ ------------
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
STATEMENT OF CHANGES IN NET ASSETS - CONTINUED
- - --------------------------------------------------------------------------------
FOR THE
NINE-MONTH FOR THE
PERIOD ENDED THREE-MONTH
SEPTEMBER 30, PERIOD ENDED
1995 DECEMBER 31,
(UNAUDITED) 1994
------------- ------------
CAPITAL SHARE TRANSACTIONS:
Receipt from Institutional shares sold........... 15,662,841 5,006,204
Receipt from Institutional shares issued on
reinvestment of distributions.................. 2,166,948 6,867,624
Institutional shares redeemed.................... (24,056,346) (11,402,549)
Receipt from Advisor shares sold................. 7,927,703 --
Receipt from Advisor shares issued on reinvestment
of distributions............................... 30,691 --
Advisor shares redeemed.......................... (5,241,542) --
------------ ------------
Increase (decrease) in net assets resulting
from capital share transactions(a)........... (3,509,705) 471,279
------------ ------------
TOTAL DECREASE IN NET ASSETS (2,758,518) (10,699,231)
NET ASSETS:
Beginning of period.............................. 105,568,634 116,267,865
------------ ------------
End of period (including undistributed net
investment income of $(5,937) and $8,308,
respectively).................................. $102,810,116 $105,568,634
============ ============
(a)Transactions in shares of beneficial interest were:
Institutional shares sold........................ 1,933,455 579,574
Institutional shares issued on reinvestment of
distributions.................................. 271,444 838,537
Institutional shares redeemed.................... (3,001,607) (1,291,748)
Advisor shares sold.............................. 951,366 --
Advisor shares issued on reinvestment of
distributions.................................. 3,662 --
Advisor shares redeemed.......................... (624,737) --
------------ ------------
Net increase (decrease) in shares (466,417) 126,363
Shares outstanding - Beginning balance........... 12,726,759 12,600,396
------------ ------------
Shares outstanding - Ending balance.............. 12,260,342 12,726,759
============ ============
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
FINANCIAL HIGHLIGHTS
- - --------------------------------------------------------------------------------
The table below sets forth financial data for a share of beneficial interest
outstanding throughout each fiscal period presented.
INSTITUTIONAL SHARES
FOR THE FOR THE
NINE- THREE-
MONTH MONTH
PERIOD PERIOD FOR THE FISCAL
SEPT. 30, ENDED YEARS ENDED SEPTEMBER 30,
1995 DEC. 31, -----------------------------
(UNAUDITED) 1994 1994 1993 1992 1991 1990
--------- ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
BEGINNING OF PERIOD........... $8.30 $9.23 $10.95 $8.29 $7.66 $6.99 $10.25
------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......... 0.26a 0.10a 0.32a 0.40 0.45 0.49 0.64
Net realized and unrealized gain
(loss) on investments........ 0.20 (0.05) (0.92) 2.67 0.63 0.67 (3.16)
------ ------ ------ ------ ------ ------ ------
Total from investment
operations................. 0.46 0.05 (0.60) 3.07 1.08 1.16 (2.52)
------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS
From net investment income.... (0.26)a(0.10)a(0.31)a(0.41) (0.45) (0.49) (0.64)
From net realized gain on
investments.................. 0.00 (0.77) (0.67) 0.00 0.00 0.00 (0.10)
From tax return of capital.... (0.12)b(0.11)b(0.14)b 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------ ------
Total distributions......... (0.38) (0.98) (1.12) (0.41) (0.45) (0.49) (0.74)
------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD. $8.38 $8.30 $9.23 $10.95 $8.29 $7.66 $6.99
====== ====== ====== ====== ====== ====== ======
Total Return................... 5.84%c 0.65%c(5.22)% 37.76% 14.49%19.56%(26.11)%
Ratios/Supplemental Data
Net assets, end of period
(in 000'S)................ $100,032 $116,268 $66,521 $18,481
$105,569 $141,672 $54,880
Ratio of expenses to average
net assets................... 1.29%* 1.28%* 1.22% 1.24% 1.37% 1.25% 1.54%
Ratio of net investment income
to average net assets........ 4.27%*a4.35%*a2.87%a 4.37% 5.75% 7.36% 7.25%
Portfolio Turnover.............70.06%*37.55%*90.11% 61.47% 28.05% 16.24% 24.98%
10
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
FINANCIAL HIGHLIGHTS - CONTINUED
- - --------------------------------------------------------------------------------
INSTITUTIONAL SHARES - continued
- - --------------------------------
* Annualized.
a Dividend receipts from REIT investments generally may include a return
of capital. For financial reporting purposes, through September 30,
1993, the Fund recorded all dividend receipts, including the returns
of capital, as net investment income. As more fully explained in Note
2, the Fund changed its dividend recognition policy during the fiscal
year ended September 30, 1994. The financial highlights for the years
ended September 30, 1990 through 1993 have not been restated.
b Historically, the Fund has distributed to its shareholders amounts
approximating dividends received from the REITs. As more fully
explained in Note 2, the Fund, for the fiscal year ended September 30,
1994, adopted a recently released accounting pronouncement affecting
the presentation of distributions to shareholders. The financial
highlights for the years ended September 30, 1990 through 1993 have
not been restated.
c The total returns for the fiscal periods ended September 30, 1995 and
December 31, 1994 have not been annualized.
11
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
FINANCIAL HIGHLIGHTS - CONTINUED
- - --------------------------------------------------------------------------------
The table below sets forth financial data for a share of beneficial interest
outstanding throughout the fiscal period presented.
ADVISOR SHARES
FOR THE PERIOD
MAY 15, 1995
(COMMENCEMENT OF OPERATIONS)
THROUGH SEPT. 30, 1995
(UNAUDITED)
-----------
NET ASSET VALUE,
BEGINNING OF PERIOD........... $8.00
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......... 0.13a
Net realized and unrealized gain
on investments............... 0.53
------
Total from investment
operations................. 0.66
------
DISTRIBUTIONS
From net investment income.... (0.17)a
From net realized gain on
investments.................. 0.00
From tax return of capital.... (0.08)a
------
Total distributions......... (0.25)
------
NET ASSET VALUE, END OF PERIOD. $8.41
======
Total Return................... 8.28%b
Ratios/Supplemental Data
Net assets, end of period
(in 000'S)................... $2,778
Ratio of expenses to average
net assets.................... 2.01%*
Ratio of net investment income
to average net assets......... 4.70%*a
Portfolio Turnover............. 70.06%*
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
FINANCIAL HIGHLIGHTS - CONTINUED
- - --------------------------------------------------------------------------------
ADVISOR SHARES - continued
- - --------------------------
* Annualized.
a See Note 2 to Financial Statements.
b This result does not include the sales charge. If the charge had been
included, the return would have been lower. The total return for the
fiscal period ended September 30, 1995 has not been annualized.
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
Heitman Securities Trust (the "Trust") is registered as a diversified open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Trust was organized on September 15, 1988, as a
Massachusetts business trust under a Master Trust Agreement. The Master Trust
Agreement permits the issuance of an unlimited number of shares of beneficial
interest in separate series, with shares of each series representing interests
in a separate portfolio of assets. Heitman Real Estate Fund (the "Fund") was
organized as a series of the Trust on September 15, 1988 and shares of the Trust
representing interests in the Fund were registered with the Securities and
Exchange Commission on January 4, 1989.
The Fund offers two classes of shares (Institutional Shares and Advisor Shares).
Institutional Shares and Advisor Shares are substantially identical, except that
Advisor Shares bear the fees that are payable under a Distribution Plan adopted
by the Board of Trustees ( the "Distribution Plan") at an annual rate of 0.25%
of the average daily net assets of Advisor Shares. Additionally, the Advisor
Shares bear the fees payable to Service Organizations pursuant to a Shareholder
Servicing Plan at an annual rate of 0.25% of the average daily net assets of
Advisor Shares owned by shareholders with whom the Service Organizations have a
servicing relationship. In addition to the fees paid pursuant to the
Distribution Plan and the Shareholder Servicing Plan, each class bears the
expenses associated with transfer agent fees and expenses, printing of their
shareholder reports, registration fees, administrative, and accounting fees.
Institutional Shares commenced operations on March 13, 1989 and Advisor Shares
commenced operations on May 15, 1995.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT SECURITIES TRANSACTIONS AND INVESTMENT INCOME
- - --------------------------------------------------------
The Fund's investment securities portfolio consists primarily of investments in
public companies engaged in the real estate business. Investment securities
transactions are recorded on a trade date basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Realized gains or losses on sales of
investment securities are determined on the first-in, first-out ("FIFO") basis.
The majority of the dividend income recorded by the Fund is from Real Estate
Investment Trusts ("REITs"). For tax purposes, a portion of these dividends
consists of capital gains and returns of capital. For financial reporting
purposes through September 30, 1993, these dividends were recorded as dividend
income, and the investment in the REIT reported at market value. During the
fiscal year ended September 30, 1994, effective October 1, 1993, the Fund
changed its accounting policy to record the return of capital portion of
dividends received as a reduction in the cost basis of its investments in the
REITs. This change has no effect on the calculation of net asset value per
share.
14
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
For the year ended September 30, 1994, the return of capital portion of
dividends received was based on estimates provided by the REITs to the Fund
Administrator. Such estimates were adjusted to actual return of capital amounts
as reported by the REITs as of December 31, 1994. These adjustments increased
the cost basis of investments and investment income and decreased unrealized
appreciation by $119,135 in the three-month period ended December 31, 1994.
For the nine-month period ended September 30, 1995, the return of capital
portion of dividends received was estimated based upon past experience with the
REITs. Such estimates will be adjusted to actual when reported by the REITs at
the end of the calendar year.
Generally, the Fund has distributed to its shareholders amounts approximating
dividends received from the REITs. Accordingly, the Fund's distributions to
shareholders have included the return of capital received from the REITs as well
as returns of capital attributed to distributions of other income for financial
reporting purposes which was not subject to current taxation. In accordance with
Statement of Position 93-2, Determination, Disclosure and Financial Statement
Presentation of Income, Capital Gain and Return of Capital Distributions by
Investment Companies ("SOP"), distributions representing a return of capital for
tax purposes are charged to paid-in capital. The Fund adopted the SOP, effective
October 1, 1993, the cumulative effect of which resulted in a reduction of paid-
in capital of $2,751,000, and increases to accumulated undistributed income and
realized gains of $1,584,000 and $1,167,000, respectively. These adjustments had
no impact on the net asset value of the Fund.
The financial highlights for prior periods have not been restated to reflect the
change in accounting policy for recognizing dividends received or the change in
presentation for distributions to shareholders under SOP 93-2. For the fiscal
years September 30, 1993, 1992, 1991 and 1990, the return of capital portion of
such distributions amounted to approximately 27%, 23%, 23% and 26%,
respectively, which was determined by notifications from the REITs in prior
periods.
INVESTMENT SECURITIES VALUATION
- - -------------------------------
Investment securities traded on a national securities exchange are valued at the
last reported sales price on the day of valuation. If there has been no sale,
the investment security is valued at the average between the closing bid and
closing offer quoted on such day. Investment securities traded only in the over-
the-counter market are valued at the last price reported on the National Market
System, or, if the security is not reported on the National Market System, at
the last reported bid on such day. Convertible bonds for which there has been no
sale are valued based on the market value of the underlying security and the
conversion factor. Otherwise, the investment security is valued by such method
as the Trustees shall determine in good faith to reflect its fair market value.
Because the Fund may invest a substantial portion of its assets in REITs, the
Fund may also be subject to certain risks associated with direct investments in
15
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
REITs. REITs may be affected by changes in the value of their underlying
properties and by defaults by borrowers or tenants. Furthermore, REITs are
dependent upon specialized management skills, have limited diversification and
are, therefore, subject to risks inherent in financing a limited number of
projects. REITs depend generally on their ability to generate cash flow to make
distributions to shareholders, and certain REITs have self-liquidation
provisions by which mortgages held may be paid in full and distributions of
capital returns may be made at any time. In addition, the performance of a REIT
may be affected by its failure to qualify for tax-free pass-through of income
under the Internal Revenue Code or its failure to maintain exemption from
registration under the 1940 Act.
Effective May 14, 1992, Grubb & Ellis Realty Trust ("GRIT") completed its
dissolution by transferring all its remaining assets to a liquidating trust. On
the date of the dissolution, GRIT's shares were canceled and replaced by
beneficial interests in a liquidating trust, which are not transferable.
Disclosed in the annual report of GRIT dated December 31, 1991, were an
estimated remaining proceeds per share of $4.17 for the liquidating trust. The
last publicly quoted price on a national securities exchange for GRIT was $3.00
per share. On March 25, 1994, the Fund received a distribution from GRIT in the
amount of $369,915, representing $1.95 for each share of the GRIT liquidating
trust held by the Fund. The Trustees have determined that the Fund's ownership
in the liquidating trust should be valued at $1.05 per share. At September 30,
1995, the Fund owned 189,700 shares of the GRIT liquidating trust for a value of
$199,185.
INCOME TAXES
- - ------------
The Fund intends to qualify each year as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended. Accordingly, the
Fund will not be liable for federal income taxes to the extent its taxable
investment income and net realized capital gains are fully distributed to
shareholders. The Fund is also subject to a nondeductible 4% excise tax
calculated as a percentage of certain undistributed amounts of net investment
income and net capital gains. The Fund intends to distribute its net investment
income and capital gains as necessary to avoid this excise tax. Therefore, no
federal income or excise tax provisions are required. The Fund has a net tax
basis capital loss carryforward of approximately $2,179,000 as of December 31,
1994, which may be applied against any realized net taxable capital gains of
each succeeding fiscal year until fully utilized or until the expiration date,
whichever occurs first. The carryforward expires on December 31, 2002.
EXPENSES
- - --------
All expenses of the Fund (other than transfer agent fees and expenses, reports
to shareholder expenses, registration and filing fees, administrative and
accounting fees, expenses incurred under the Distribution Plan, and expenses
incurred under the Shareholder Servicing Plan) are allocated to each class on
the basis of the net asset value of that class in relation to the net asset
value of the Fund.
16
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
NOTE 3 - INVESTMENT SECURITIES
For the nine-month period ended September 30, 1995, the cost of purchases and
the proceeds from sales of investment securities (excluding short-term
investments) aggregated $49,669,714 and $52,744,408, respectively. Cost for
financial statement reporting and tax purposes is $98,774,388 and unrealized
appreciation consists of:
Gross unrealized appreciation $7,442,202
Gross unrealized depreciation (530,110)
----------
Net unrealized appreciation $6,912,092
==========
NOTE 4 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund entered into an Investment Management Agreement (the "Agreement") with
Heitman/PRA Securities Advisors, Inc. (the "Advisor") on January 31, 1995. The
Advisor is a wholly owned subsidiary of Heitman Financial Ltd. ("Heitman"), a
wholly owned subsidiary of United Asset Management Corporation. The Fund pays
the Advisor a fee for its services, calculated daily and paid monthly, at the
annual rate of 0.75% of the Fund's first $100 million of average daily net
assets and 0.65% of the average daily net assets of the Fund in excess of $100
million, excluding assets invested in any money market mutual fund. The
Agreement provides that in the event total expenses of the Fund (exclusive of
interest, taxes, brokerage expenses, distribution expenses and extraordinary
items) for any fiscal year of the Fund exceed (i) 1.75% of the Fund's average
net assets up to $50 million or (ii) 1.50% if the Fund's average net assets
exceed $50 million, the Advisor will pay or reimburse the Fund for that excess
up to the amount of its advisory fee during that fiscal year.
Prior to January 31, 1995, PRA Securities Advisors, L.P. (the "Prior Advisor")
served as the Fund's advisor pursuant to an Investment Management Agreement
whose terms were substantially the same as the Fund's current Agreement with the
Advisor.
From the commencement of operations (March 13, 1989) through December 2, 1990,
the administrative, accounting and bookkeeping services were provided to the
Fund by the Prior Advisor, while transfer agent services were provided by the
Trust, all costs for which were borne by the Prior Advisor. For the period
December 3, 1990 through September 30, 1991, transfer agent services were
provided to the Fund by Fund/Plan Services, Inc. ("FPS") with the cost being
borne by the Fund. During the period December 3, 1990 through September 18,
1991, the Prior Advisor subcontracted with FPS to perform administrative,
accounting and bookkeeping services to the Fund, at the Prior Advisor's cost.
Under the terms of an administrative services agreement between the Trust and
FPS, effective September 19, 1991, administrative, accounting and bookkeeping
services were provided by FPS with the costs borne by the Fund.
17
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
NOTE 4 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
(CONTINUED)
On November 19, 1993, the Board of Trustees elected not to renew the agreement
between the Fund and FPS. Effective December 4, 1993, all services previously
contracted to FPS are now being performed by Rodney Square Management
Corporation ("Rodney Square"), a wholly owned subsidiary of Wilmington Trust
Company ("WTC"), which is wholly owned by Wilmington Trust Corporation, a
publicly held bank holding company. For accounting services provided, Rodney
Square receives an annual fee of $45,000 plus an amount equal to 0.02% of that
portion of the Institutional shares' average daily net assets for the year in
excess of $100 million, plus any out-of-pocket expenses. In addition, for
accounting services provided, Rodney Square also receives an amount equal to
0.02% of the Fund's average daily net assets with respect to the Advisor Shares,
subject to a minimum annual fee of $25,000, plus any out-of-pocket expenses.
Also, for administrative services provided, Rodney Square receives a monthly
administration fee from the Fund at an annual rate of 0.10% of the Fund's
average daily net assets, plus any out-of-pocket expenses. Additionally, for
administrative services provided, the Advisor shares are subject to a minimum
annual fee of $25,000. Finally, effective January 3, 1994, all transfer agent
services previously contracted to FPS are now being performed by Rodney Square.
The Fund has adopted a Distribution Plan for the Advisor Shares in accordance
with the regulations under the 1940 Act. Under the provisions of the
Distribution Plan, the Fund makes payments to ACG Capital Corporation, the
distributor for the Advisor Shares ( "ACG" or the "Distributor") at an annual
rate of 0.25% of the daily net assets of Advisor Shares of the Fund as a
distribution fee. The distribution fees are used by the Distributor to finance
activities primarily intended to result in the sale of Advisor Shares of the
Fund. During the period ended September 30, 1995, no payments were made to the
Distributor pursuant to the Distribution Plan.
The Fund has also adopted a Shareholder Servicing Plan for the Advisor Shares.
Pursuant to the Shareholder Servicing Plan, the Trust contracts with Service
Organizations to provide a variety of shareholder services, such as maintaining
shareholder accounts and records, answering inquiries regarding the Fund, and
processing purchase and redemption orders. The Fund pays fees to Service
Organizations in amounts up to an annual rate of 0.25% of the daily net asset
value of Advisor Shares owned by shareholders with whom the Service Organization
has a servicing relationship. During the period ended September 30, 1995, no
payments were made relating to the Shareholder Servicing Plan.
NOTE 5 - REMUNERATION OF TRUSTEES
Independent Trustees are each paid an annual fee of $10,000, plus $1,000 per
meeting attended or $500 for participation by telephone, plus travel expenses in
connection with meetings. Independent Trustees are Robert W. Beeney, Donald L.
Foote, Maurice Wiener, John F. Goydas and George C. Weir. Mr. Weir is
voluntarily waiving his fees.
Certain officers and trustees of the Fund are also officers and/or affiliates of
the Advisor and certain shareholders.
18
<PAGE>
HEITMAN REAL ESTATE FUND [Boxed with first word in reverse print]
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED SEPTEMBER 30, 1995
- - --------------------------------------------------------------------------------
NOTE 6 - THE CUSTODIAN AGREEMENT
WTC serves as Custodian of the assets of the Fund, pursuant to an agreement
dated December 6, 1993.
NOTE 7 - CHANGE IN FISCAL YEAR-END
On December 5, 1994, the Board of Trustees of the Fund voted to change the
fiscal year-end of the Fund from September 30th to December 31st. This change
was implemented beginning with the three-month period ended December 31, 1994.
NOTE 8 - CONTINGENCIES
During fiscal 1993 and 1994, the Trust determined that FPS had permitted shares
of the Fund to be sold in numerous states, without such shares being qualified
for sale under the Blue Sky laws of those states. Management believes that
these registration problems resulted from the failure of FPS to exercise
reasonable care in performing its obligations as administrator, and the Fund has
notified FPS of the Fund's intention to seek recovery from FPS for all
liabilities incurred in connection with these matters.
In most states, the Fund has completed all actions necessary to remedy these
registration problems. In certain of these states, actions taken have included
paying fines and/or offering rescission rights. In those states where actions
remain to be taken, the Fund may be subject to similar obligations. To date,
most costs of remedying the problems have been borne by FPS and the balance by
the Prior Advisor. The Fund has not borne any costs to date.
The Fund maintains liability insurance and has notified its insurance carrier of
potential claims that may be asserted with respect to these matters.
Additionally, the Advisor and Heitman have agreed to indemnify the Fund and hold
it harmless for any amount not so covered by FPS or the insurance carrier to the
extent not reimbursed by insurance, without a limitation on the aggregate
amount, subject to having the right to control all proceedings and settlement
discussions with state regulators and others relating to this matter and
obtaining the Trust's right of recourse against third parties.
In Management's opinion, any remaining contingent liabilities that may be
incurred by the Fund in connection with these registration matters will not have
a material adverse effect on the financial condition or results of operations of
the Fund.
19
<PAGE>
INVESTMENT ADVISOR
Heitman/PRA Securities Advisors, Inc.
180 North LaSalle Street, Suite 3600
Chicago, IL 60601
OFFICERS
Michael T. Oliver, President
Dean A. Sotter, Vice President and Treasurer
Nancy B. Lynn, Secretary
Timothy J. Pire, Assistant Secretary
Laurie V. Brooks, Assistant Secretary HEITMAN REAL ESTATE FUND
John J. Kelley, Assistant Treasurer [Boxed with first word in
reverse print]
BOARD OF TRUSTEES
Robert W. Beeney
Donald L. Foote
John F. Goydas
Michael T. Oliver
George C. Weir
Maurice Wiener
DISTRIBUTOR - HEITMAN/PRA INSTITUTIONAL CLASS
Rodney Square Distributors, Inc.
Rodney Square North
1100 N. Market Street
Wilmington, DE 19890
DISTRIBUTOR - ADVISOR CLASS
ACG Capital Corporation
1661 Tice Valley Boulevard #200
Walnut Creek, CA 94595
(800) 888-REIT
CUSTODIAN
Wilmington Trust Company
Rodney Square North
1100 N. Market Street
Wilmington, DE 19890
TRANSFER AGENT AND ADMINISTRATOR QUARTERLY REPORT
Rodney Square Management Corporation
Rodney Square North
1100 N. Market Street September 30, 1995
Wilmington, DE 19890
TRUST HEADQUARTERS
180 North LaSalle Street, Suite 3600
Chicago, IL 60601
(800) 435-1405
[LOGO]
HF06 [Outline of Box, Letter H, Box]
