HEITMAN REAL ESTATE FUND
- ------------------------
MANAGEMENT LETTER DECEMBER 31, 1995
- ------------------------------------------------------------------------------
REVIEW OF REIT STOCKS 1995 PERFORMANCE
- --------------------------------------
1995 was a bumpy but successful year for REIT stocks, which responded
dramatically in the second half of the year. REITs underperformed the broader
equity markets by a wide margin as the major market indices had banner years.
However, we think this sets the stage for a period of improved relative
performance in 1996.
The Wilshire Real Estate Securities Index1 ("WRESI") returns were negative for
most of 1995 until the beginning of May, after which it rose in surges,
finishing 1995 with a 13.65% total return. The dividend yield2 on the WRESI
at the 1995 year-end stood at 6.50%, down only slightly from the 1994 year-end
level of 6.69%. The Standard and Poor's Composite Index of 500 Stocks3 ("S&P
500"), by contrast, provided a total return of 37.58% in 1995, with the year-
end yield standing at 2.16%. These total return levels are consistent with
the relative cash flow growth results for these two respective indices:
companies in the WRESI increased cash flow on average by 8.8%, consistent with
our expectations, while the S&P 500 stocks increased earnings by over 20%.
With a growing economy, real estate fundamentals continued to improve in 1995
for nearly all property types. The research of Heitman/PRA Securities
Advisors, Inc. ("Heitman/PRA"), the investment adviser to the Heitman Real
Estate Fund indicates that in most regional markets, office, industrial and
hotel properties continue to be available for purchase at significant
discounts to replacement cost. This provides acquisition opportunities for
REITs and keeps a lid on new development, which has been the bane of most real
estate recoveries in past cycles. Most apartment markets have recovered
fully, and indications are that a measure of discipline by apartment
developers has enabled a relatively stable equilibrium to evolve, whereby new
construction just about matches new demand for apartments. Retail real estate
is the one property type for which fundamentals deteriorated somewhat in 1995.
Weak same store retail sales and the resultant business failures, particularly
in the apparel sector, and continued new construction all contributed to
weakening in the regional mall and community center types, whereas the more
necessity-oriented neighborhood centers remained relatively insulated from
these problems.
- --------------------
1 The Wilshire Real Estate Index is an unmanaged index of real estate
securities.
2 A dividend yield is calculated by dividing a stock's annual dividend by
its share price.
3 The S&P 500 is an unmanaged index of common stocks which cannot be
directly invested in.
4 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.
1
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
MANAGEMENT LETTER-CONTINUED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
In terms of capital raising, 1995 was another outstanding year in the REIT
sector. A total of six initial public offerings raised over $7.5 billion of
new equity in 1995, the third highest year on record. Issues of secondary
offerings were the highest ever, at $6.7 billion. This reflects the decline
in volume of initial public offerings and a commensurate increase in the
prevalence of secondary offerings, which has served to increase the average
market capitalization and, therefore, liquidity within the industry.
Interest rates, we believe, had some measure of positive contribution towards
REIT returns in 1995, and, it appears, will continue to in 1996. As the
economy slowed considerably from its robust 1994 pace, and as the Federal
Reserve Board became convinced that inflation was under control, interest
rates across all portions of the maturity spectrum fell considerably. The
yield on the 30-year U.S. Treasury bond4 plummeted almost two full percentage
points in 1995, from 7.88% on December 31, 1994 to 5.95% on December 31, 1995.
Interest rates affect REITs by two primary mechanisms. Lower interest rates
will boost REIT cash flows as interest payments on floating rate debt decline
immediately and interest payments on fixed rate debt decline as this debt is
refinanced in a lower interest rate environment. Secondly, lower interest
rates increase the attractiveness of equities relative to fixed income
investments. REITs, like utility stocks, are one of the primary beneficiaries
of this effect because their high dividends attract yield investors when
interest rates on fixed income investments decline.
REVIEW OF HEITMAN REAL ESTATE FUND 1995 PERFORMANCE
- ---------------------------------------------------
The charts and table below depict the performance of the classes of the
Heitman Real Estate Fund for the period ended December 31, 1995.
[GRAPHICAL REPRESENTATION(POINTS AND LINES) REQUIRED BY ITEM 5A OF FORM N-1A]
COMPARISON OF CHANGE IN VALUE OF A $250,000 INVESTMENT IN THE HEITMAN/PRA
INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
3/13/89 9/30/89 9/30/90 9/30/91 9/30/92 9/30/93 9/30/94 12/31/94 12/31/95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INSTITUTIONAL CLASS 250000 262050 193603 231491 265034 365110 346088 348338 386202
WRESI 250000 266650 174122 195609 200069 265592 251250 250622 284831
S&P 500 INDEX 250000 300750 272931 358003 397634 449326 465817 468845 645036
</TABLE>
- --------------------
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT RETURNS
AND PRINCIPAL VALUES WILL FLUCTUATE, SO THAT, WHEN REDEEMED, SHARES MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
2
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
MANAGEMENT LETTER-CONTINUED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
[GRAPHICAL REPRESENTATION(POINTS AND LINES) REQUIRED BY ITEM 5A OF FORM N-1A]
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE ADVISOR CLASS*
<TABLE>
<CAPTION>
5/15/95 12/31/95
<S> <C> <C>
ADVISOR CLASS 9525 10781
WRESI 10000 10963
S&P 500 INDEX 10000 11853
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
- ----------------------------
ADVISORY WILSHIRE
ADVISORY CLASS REAL
HEITMAN/PRA CLASS PUBLIC ESTATE
INSTITUTIONAL NET ASSET OFFERING SECURITIES
CLASS VALUE PRICE(1) INDEX S&P 500
------------- --------- -------- ---------- -------
Inception 3/13/89
through 12/31/95 6.59% n/a n/a 1.93% 14.83%
Inception 5/15/95 (2)
through 12/31/95 (3) n/a 13.19% 7.81% 9.63% 18.53%
Five Year Ending
12/31/95 14.80% n/a n/a 11.40% 16.59%
Three Year Ending
12/31/95 11.05% n/a n/a 10.00% 15.34%
One Year Ending
12/31/95 10.87% n/a n/a 13.65% 37.58%
Quarter Ending
12/31/95 (3) 4.76% 4.53% -0.44% 3.59% 6.02%
(1) Reflects the deduction of the maximum 4.75% sales charges and assumes re-
investment of all dividends at net asset value.
(2) Inception date of Advisor Class.
(3) Represents aggregate total returns.
In accordance with our views on the underlying real estate fundamentals, we
continued to overweight office, industrial, and self-storage sectors, each of
which outperformed the WRESI. At the same time, we underweighted retail
(regional mall, outlet center and strip center operators) sectors, which
underperformed the WRESI. Despite these strategic moves, the Fund
- --------------------
* THE VALUES SHOWN FOR THE ADVISOR CLASS SHARES REFLECT THE EFFECT OF THE
MAXIMUM SALES LOAD OF 4.75%.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT RETURNS
AND PRINCIPAL VALUES WILL FLUCTUATE, SO THAT, WHEN REDEEMED, SHARES MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
3
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
MANAGEMENT LETTER-CONTINUED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
underperformed the WRESI in 1995, primarily due to our abstention from
investment in the non-REIT hotels. These companies comprise a substantial
portion of the WRESI and staged impressive recoveries in 1995.
As of the close of 1995, Heitman/PRA has become integrated into the
organization of its parent, Heitman Financial Ltd. ("Heitman"). As of
December 31, 1995, Heitman and its affiliates, manage over $13 billion in
direct real estate investments in the U.S. on behalf of institutional
investors, providing a presence in most major markets and in all major
property types. This presence, along with the resources of the Heitman
research department, brings to bear one of the most extensive intelligence
networks in the industry in order to facilitate Heitman/PRA's investment
decisions.
OUTLOOK FOR 1996 FOR REIT STOCKS
- --------------------------------
As we look forward to 1996, we continue to see a bright future for the REIT
sector. All of the traditional buy signals are trending positive. Real
estate fundamentals continue to improve. We expect rents and occupancies may
continue to rise in the office, industrial and self-storage sectors as new
construction remains moderate to negligible. In addition, we expect
apartments may continue to witness stable occupancies, modest rent growth and
continued yet subdued new construction. After being battered in 1995, we
believe retail REITs may begin to see recovery in 1996, as their valuations
have fallen to attractive levels in many cases. Overall, we are predicting
cash flow in the REIT sector to reliably grow in the 7% to 8% range in 1996.
Low interest rates should continue to exert a powerful effect on REIT stocks
in 1996. Over the years, REITs have tracked the yield on 10-year U.S.
treasury bonds in a fairly predictable manner. Historically, when the ratio
of REIT yields to 10-year U.S. treasury bonds reach 110%, it presages a major
rally in REIT share prices. At the beginning of 1995, when the yield on the
Wilshire REIT Index (the REIT portion of the WRESI) was 7.47% and the 10-year
U.S.treasury bond yield was 7.83%, the ratio stood at 95%. As of the end of
1995, with the Wilshire REIT Index yield at 7.40% and the 10-year U.S.
treasury bond at 5.57%, the ratio was an historically high 133%.
In summary, we believe that, as a result of both the fundamental and technical
indicators, the long term outlook for REITs may continue to be positive for
the next few years. As always, we appreciate your continued confidence and
look forward to serving you in the next year.
Sincerely,
/s/ Dean A. Sotter
Dean A. Sotter
Portfolio Manager
February 26, 1996
ACG CAPITAL CORPORATION IS THE DISTRIBUTOR FOR THE ADVISOR CLASS. RODNEY
SQUARE DISTRIBUTORS, INC. IS THE DISTRIBUTOR FOR THE HEITMAN/PRA INSTITUTIONAL
CLASS.
4
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
SCHEDULE OF INVESTMENTS DECEMBER 31, 1995
- ------------------------------------------------------------------------------
NAREIT MARKET VALUE
SHARES CLASSIFICATION (NOTE 2)
------- -------------- ------------
COMMON STOCK - 93.6%
Alexander Haagen Properties, Inc.....132,700 Equity $ 1,625,575
Avalon Properties, Inc...............165,272 Equity 3,553,348
Cali Realty Corporation..............194,400 Equity 4,252,500
Camden Property Trust................ 97,752 Equity 2,333,829
Carr Realty Corp.....................114,900 Equity 2,800,687
Centerpoint Properties Corp..........168,800 Equity 3,903,500
Charles E. Smith Residential Realty,
Inc................................ 68,700 Equity 1,623,038
Chateau Properties, Inc..............156,958 Equity 3,531,555
Chelsea GCA Realty, Inc.............. 88,193 Equity 2,645,790
Colonial Properties Trust............117,438 Equity 2,994,669
Debartolo Realty Corp................303,700 Equity 3,948,100
Developers Diversified Realty Corp...140,130 Equity 4,203,900
Equity Residential Properties Trust.. 80,700 Equity 2,471,437
Evans Withycombe Residential, Inc....117,300 Equity 2,521,950
Gables Residential Trust............. 71,500 Equity 1,635,563
Grubb & Ellis Realty Income Trust*...189,700 Mortgage 199,185
Kimco Realty Corp....................137,700 Equity 3,752,325
Macerich Company (The)...............190,100 Equity 3,802,000
Merry Land & Investment Company, Inc. 61,500 Equity 1,452,937
Oasis Residential, Inc...............120,000 Equity 2,730,000
Patriot American Hospitality, Inc.... 45,400 Equity 1,169,050
Post Properties, Inc................. 68,177 Equity 2,173,142
ROC Communities, Inc.................149,444 Equity 3,586,656
Rouse Company........................134,100 Equity 2,732,288
Security Capital Industrial Trust....204,700 Equity 3,582,250
Security Capital Pacific Trust.......127,530 Equity 2,518,717
South West Property Trust............283,966 Equity 3,833,541
Sovran Self Storage, Inc.............103,200 Equity 2,721,900
Spieker Properties, Inc..............156,800 Equity 3,939,600
Storage Trust Realty.................130,100 Equity 2,959,775
Storage USA Inc......................101,400 Equity 3,308,175
Taubman Centers, Inc................. 61,800 Equity 618,000
United Dominion Realty Trust.........137,000 Equity 2,055,000
Vornado Realty Trust................. 94,600 Equity 3,547,500
------------
TOTAL COMMON STOCK (COST $85,097,964)................... 94,727,482
------------
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
SCHEDULE OF INVESTMENTS-CONTINUED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
PAR MARKET VALUE
(000) (NOTE 2)
------ ------------
CONVERTIBLE BOND - 4.1%
Liberty Property Trust, 8.00%,
Due 07/01/01 (COST $4,074,000)....... $4,074 $ 4,180,943
------------
TOTAL INVESTMENTS (COST $89,171,964) - 97.7%........... 98,908,425
OTHER ASSETS AND LIABILITIES, NET - 2.3%............... 2,303,524
------------
NET ASSETS _ 100.0%.................................... $101,211,949
============
* NON-INCOME PRODUCING SECURITY.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
STATEMENT OF ASSETS AND LIABILITIES-DECEMBER 31, 1995
- ------------------------------------------------------------------------------
ASSETS:
Investments, at market value (identified cost
$89,171,964) (Note 3)............................. $ 98,908,425
Cash................................................. 330,742
Receivables:
Capital shares sold............................... 67,057
Dividends......................................... 884,117
Interest.......................................... 162,960
Investment securities sold........................ 1,368,512
Reimbursement due from Advisor.................... 17,876
Other assets......................................... 12,389
------------
TOTAL ASSETS................................. 101,752,078
------------
LIABILITIES:
Payables:
Capital shares redeemed........................... 184,864
Investment management fees (Note 4)............... 63,766
Investment securities purchased................... 108,957
Accrued expenses.................................. 182,542
------------
TOTAL LIABILITIES............................ 540,129
------------
NET ASSETS:
(Applicable to 11,694,435 shares of
$0.001 par value beneficial interest
issued and outstanding; unlimited
number of shares authorized)..................... $101,211,949
============
Net asset value, offering price and
redemption price per Institutional
class share ($95,692,193 / 11,057,916)........... $8.65
=====
Net asset value and redemption price per
Advisor class share ($5,519,756 / 636,519)....... $8.67
=====
Offering price per Advisor class share
($8.67 / 0.9525)................................. $9.10
=====
SOURCE OF NET ASSETS:
Paid-in capital $ 95,618,745
Accumulated net realized loss on investments......... (4,143,257)
Net unrealized appreciation of investments........... 9,736,461
------------
NET ASSETS.............................................. $101,211,949
============
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (Note 2)......................... $4,671,604
Interest................................... 426,351
----------
Total investment income............ 5,097,955
----------
EXPENSES:
Advisory fees (Note 4).....................$ 724,658
Administration fees (Note 4)............... 107,310
Trustees' fees and expenses (Note 5)....... 63,067
Accounting fees (Note 4)................... 56,863
Professional fees.......................... 132,045
Custodian fees............................. 36,235
Insurance.................................. 16,424
Federal Registration fees.................. 1,685
State Registration fees.................... 47,845
Shareholder report fees.................... 14,999
Distribution fees - Advisor Shares (Note 4) 2,985
Shareholder Servicing fees - Advisor Shares
(Note 4)................................. 2,985
Transfer agent fees........................ 55,835
Other...................................... 36,001
----------
Total expenses before expense
reimbursement................... 1,298,937
Reimbursement from Advisor -
Advisor Shares.................. (40,461)
----------
Expenses, net................ 1,258,476
----------
Net investment income........ 3,839,479
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from security transactions.......... (1,952,399)
Net change in unrealized appreciation of investments.. 7,936,118
----------
Net realized and unrealized gain
on investments......................... 5,983,719
----------
Net increase in net assets resulting from
operations.......................................... $9,823,198
==========
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
FOR THE THREE-
FOR THE FISCAL YEAR MONTH PERIOD ENDED
ENDED DECEMBER 31, 1995 DECEMBER 31,1994
----------------------- ------------------
OPERATIONS:
Net investment income (Note 2)...........$ 3,839,479 $ 1,178,235
Net realized loss from security
transactions........................... (1,952,399) (2,179,993)
Net change in unrealized appreciation
of investments......................... 7,936,118 1,423,853
----------- ------------
Net increase in net assets resulting
from operations...................... 9,823,198 422,095
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS -
INSTITUTIONAL SHARES (NOTE 2):
From net investment income ($0.33 and
$0.10 per share, respectively)......... (3,778,062) (1,186,472)
From net capital gains ($0.00 and $0.77
per share, respectively)............... (37,013) (9,104,451)
From tax return of capital ($0.18 and
$0.11 per share, respectively)......... (2,081,064) (1,301,682)
DISTRIBUTIONS TO SHAREHOLDERS - ADVISOR SHARES
(NOTE 2):
From net investment income ($0.23
and $0.00 per share, respectively)..... (69,725) _
From net capital gains ($0.00 and
$0.00 per share, respectively)......... (683) _
From tax return of capital ($0.13
and $0.00 per share, respectively)..... (38,406) _
----------- ------------
Total distributions paid to
shareholders......................... (6,004,953) (11,592,605)
----------- ------------
CAPITAL SHARE TRANSACTIONS:
Receipt from Institutional Shares sold 16,694,861 5,006,204
Receipt from Institutional Shares issued
on reinvestment of distributions....... 3,002,158 6,867,624
Institutional Shares redeemed............(33,136,352) (11,402,549)
Receipt from Advisor Shares sold......... 10,634,266 _
Receipt from Advisor Shares issued on
reinvestment of distributions.......... 72,560 _
Advisor Shares redeemed.................. (5,442,423) _
----------- ------------
Increase (decrease) in net assets
resulting from capital share
transactions........................... (8,174,930) 471,279
----------- ------------
TOTAL DECREASE IN NET ASSETS......... (4,356,685) (10,699,231)
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
STATEMENTS OF CHANGES IN NET ASSETS-CONTINUED
- ------------------------------------------------------------------------------
NET ASSETS:
Beginning of period $105,568,634 $116,267,865
------------ ------------
End of period (including undistributed
net investment income of $0 and
$8,308, respectively)................ $101,211,949 $105,568,634
============ ============
TRANSACTIONS IN SHARES OF BENEFICIAL
INTEREST WERE:
Institutional Shares sold.............. 2,056,156 579,574
Institutional Shares issued on
reinvestment of distributions........ 368,561 838,537
Institutional Shares redeemed.......... (4,093,559) (1,291,748)
Advisor Shares sold.................... 1,276,166 _
Advisor Shares issued on reinvestment
of distributions..................... 8,519 _
Advisor Shares redeemed................ (648,167) _
------------ ------------
Net increase (decrease) in shares...... (1,032,324) 126,363
Shares outstanding - Beginning balance. 12,726,759 12,600,396
------------ ------------
Shares outstanding - Ending balance.... 11,694,435 12,726,759
============ ============
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
The table below sets forth financial data for a share of beneficial interest
outstanding throughout each fiscal period presented.
INSTITUTIONAL SHARES
FOR
FOR THE THE THREE-
FISCAL MONTH
YEAR PERIOD FOR THE FISCAL YEARS ENDED
ENDED ENDED SEPTEMBER 30,
DEC. 31, DEC. 31, ----------------------------
1995 1994 1994 1993 1992 1991
------- -------- ------ ------ ------ ------
NET ASSET VALUE, BEGINNING
OF PERIOD................ $ 8.30 $ 9.23 $10.95 $ 8.29 $ 7.66 $ 6.99
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.... 0.33a 0.10a 0.32a 0.40 0.45 0.49
Net realized and
unrealized gain(loss)
on investments......... 0.53 (0.05) (0.92) 2.67 0.63 0.67
------ ------ ------ ------ ------ ------
Total from investment
operations......... 0.86 0.05 (0.60) 3.07 1.08 1.16
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
From net investment
income................ (0.33)a (0.10)a (0.31)a (0.41) (0.45) (0.49)
From net realized gain
on investments........... 0.00 (0.77) (0.67) 0.00 0.00 0.00
From tax return of
capital................ (0.18)b (0.11)b (0.14)b 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total distributions.. (0.51) (0.98) (1.12) (0.41) (0.45) (0.49)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD................... $ 8.65 $ 8.30 $ 9.23 $10.95 $ 8.29 $ 7.66
====== ====== ====== ====== ====== ======
Total Return............... 10.87% 0.65%c (5.22)% 37.76% 14.49% 19.56%
Ratios/Supplemental Data
Net assets, end of period
(in 000's)............ $95,692 $105,569 $116,268 $141,672 $66,521 $54,880
Ratio of expenses to
average net assets..... 1.29% 1.28%* 1.22% 1.24% 1.37% 1.25%
Ratio of net investment
income to average net
assets................. 3.97%a 4.35%* a 2.87%a 4.37% 5.75% 7.36%
Portfolio Turnover....... 65.33% 37.55%* 90.11% 61.47% 28.05% 16.24%
- --------------------
* 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
11
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
FINANCIAL HIGHLIGHTS-CONTINUED
- ------------------------------------------------------------------------------
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, 1991 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 an accounting pronouncement affecting the presentation of
distributions to shareholders. The financial highlights for the years
ended September 30, 1991 through 1993 have not been restated.
c The total return for the fiscal period ended December 31, 1994 has not
been annualized.
12
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
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 DEC. 31, 1995
--------------------------
NET ASSET VALUE, BEGINNING OF PERIOD................... $8.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. 0.23a
Net realized and unrealized gain
on investments.................................. 0.80
-----
Total from investment operations........ 1.03
-----
DISTRIBUTIONS
From net investment income........................ (0.23)a
From net realized gain on
investments..................................... 0.00
From tax return of capital........................ (0.13) b
-----
Total distributions..................... (0.36)
-----
NET ASSET VALUE, END OF PERIOD......................... $8.67
=====
Total Return c ........................................ 13.19% c
Ratios/Supplemental Data
Net assets, end of period (in 000's).............. $5,520
Ratio of expenses to average net assets........... 1.99%* d
Ratio of net investment income to
average net assets.............................. 4.27%* a d
Portfolio Turnover................................ 65.33%*
- --------------------
* Annualized.
a Dividend receipts from REIT investments generally may include a return of
capital, which the Fund records as a reduction in the cost basis of its
investments.
b Historically, the Fund has distributed to its shareholders amounts
approximating dividends received from the REITs. Such distributions may
include a portion which may be a return of capital.
c 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 has not been annualized.
d The Advisor has agreed to reimburse a portion of the Advisor Shares'
expenses. The annualized expense ratio, had there been no reimbursement
of expenses by the Advisor, would have been 5.34% for the period ended
December 31, 1995. The annualized ratio of net investment income to
average net assets, had there been no reimbursement of expenses by the
Advisor, would have been 0.92% for the period ended December 31, 1995.
13
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 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's investment objective
is to obtain high total return consistent with reasonable risk by investing
primarily in equity securities of public companies principally engaged in the
real estate business.
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
14
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
NOTES TO FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
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 provided by the REITs, 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.
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 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
15
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
NOTES TO FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
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 December 31, 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. As a
regulated investment company, the Fund will be entitled to claim a dividends
paid deduction for distributions of income and capital gains to shareholders.
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. At December 31, 1995, the Fund
had losses deferred due to "wash sales" transactions of approximately
$397,000. The Fund offers two classes of shares. The Internal Revenue
Service has not issued formal guidance concerning the circumstances in which
the allocation of class specific expenses may result in a fund's distributions
being deemed preferential. Under the Internal Revenue Code, a fund that makes
preferential distributions will not qualify for the dividends paid deduction.
In management's opinion, the fund's distributions to its respective classes
are not preferential within the meaning of the Internal Revenue Code.
Accordingly, the accompanying financial statements do not include any
provision for tax liabilities, on distributions to the Fund's classes, which
amount would be less than 1% of the Fund's net assets at December 31, 1995.
16
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
NOTES TO FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
The Fund has a net tax basis capital loss carryforward of approximately
$3,735,000 as of December 31, 1995, 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 as follows: approximately $2,179,000 on December 31, 2002 and
approximately $1,556,000 on December 31, 2003.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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.
NOTE 3 - INVESTMENT SECURITIES
For the fiscal year ended December 31, 1995, the cost of purchases and the
proceeds from sales of investment securities (excluding short-term
investments) aggregated $62,015,833 and $70,148,394, respectively. Cost for
federal income tax purposes is $89,568,863 and unrealized appreciation
consists of:
Gross unrealized appreciation $9,966,623
Gross unrealized depreciation (627,061)
----------
Net unrealized appreciation $9,339,562
==========
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
17
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
NOTES TO FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
NOTE 4 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES-CONT.
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.
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.
18
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
NOTES TO FINANCIAL STATEMENTS-CONTINUED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
NOTE 4 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES-CONT.
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 fiscal year ended December 31, 1995, fees paid to the
Distributor amounted to $2,985.
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 fiscal year ended
December 31, 1995, fees paid to Service Organizations amounted to $2,985.
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.
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.
19
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------------------------------------------------------
To the Shareholders and Trustees of Heitman Real Estate Fund:
We have audited the accompanying statement of assets and liabilities of
Heitman Real Estate Fund, including the schedule of investments, as of
December 31, 1995, and the related statement of operations, statements of
changes in net assets and financial highlights for the periods presented.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1995, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Heitman Real Estate Fund as of December 31, 1995, the results of its
operations, changes in its net assets, and financial highlights for the
periods presented, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, PA
February 26, 1996
20
<PAGE>
HEITMAN REAL ESTATE FUND
- ------------------------
DIVIDEND NOTICES DECEMBER 31, 1995
- ------------------------------------------------------------------------------
The following information is required by section 854(b)(2) of the Internal
Revenue Code and is based on the Fund's tax year January 1, 1995 through
December 31, 1995:
INSTITUTIONAL CLASS SHARES
ORDINARY INCOME
DISTRIBUTIONS PER SHARE
-----------------------
LONG TERM
TOTAL FROM FROM RETURN OF CAPITAL
DATE DIVIDEND INVESTMENT SHORT TERM CAPITAL GAINS
PAID PER SHARE INCOME CAPITAL GAINS PER SHARE PER SHARE
- -------- --------- ---------- ------------- --------- ---------
03/30/95 $0.133 $0.085 $0.000 $0.047 $0.001
06/29/95 $0.132 $0.084 $0.000 $0.047 $0.001
09/29/95 $0.114 $0.073 $0.000 $0.041 $0.000
12/29/95 $0.128 $0.082 $0.000 $0.045 $0.001
ADVISOR CLASS SHARES
ORDINARY INCOME
DISTRIBUTIONS PER SHARE
-----------------------
LONG TERM
TOTAL FROM FROM RETURN OF CAPITAL
DATE DIVIDEND INVESTMENT SHORT TERM CAPITAL GAINS
PAID PER SHARE INCOME CAPITAL GAINS PER SHARE PER SHARE
- -------- --------- ---------- ------------- --------- ---------
06/29/95 $0.132 $0.082 $0.000 $0.050 $0.000
09/29/95 $0.110 $0.070 $0.000 $0.039 $0.001
12/29/95 $0.120 $0.077 $0.000 $0.042 $0.001
By now shareholders to whom year-end tax reporting is required by the IRS
should have received their Form 1099-DIV from the Fund. Form 1099-DIV
provides you with the nature and dollar amounts of all distributions paid in
calendar year 1995 and should be used to complete your 1995 tax return.
21
<PAGE>
INVESTMENT ADVISOR
HEITMAN/PRA SECURITIES ADVISORS, INC.
180 NORTH LASALLE STREET, SUITE 3600
CHICAGO, IL 60601
HEITMAN REAL ESTATE FUND
OFFICERS
WILLIAM L. RAMSEYER, PRESIDENT
DEAN A. SOTTER, VICE PRESIDENT AND TREASURER
NANCY B. LYNN, SECRETARY
TIMOTHY J. PIRE, ASSISTANT SECRETARY
LAURIE V. BROOKS, ASSISTANT SECRETARY
JOHN J. KELLEY, ASSISTANT TREASURER
BOARD OF TRUSTEES
ROBERT W. BEENEY
DONALD L. FOOTE
JOHN F. GOYDAS
WILLIAM L. RAMSEYER
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
ANNUAL REPORT
DECEMBER 31, 1995
TRANSFER AGENT AND ADMINISTRATOR
RODNEY SQUARE MANAGEMENT CORPORATION
RODNEY SQUARE NORTH
1100 N. MARKET STREET
WILMINGTON, DE 19890
TRUST HEADQUARTERS
180 NORTH LASALLE STREET, SUITE 3600
CHICAGO, IL 60601
(800) 435-1405
