HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER JUNE 30, 1996
- ---------------------------------------------------------------------------
GROWTH IN THE CAPITAL BASE
Expansion of the capital base of U.S. REITs continued at an impressive pace
during the first half of 1996. Through June, the year-to-date growth in the
market capitalization of the Wilshire Real Estate Securities Index1
("WRESI") was 16% or $7.8 billion. The WRESI consists of 112 companies with
a total market capitalization of $56.6 billion. As in 1995, secondary
public offerings provided the main source of the growth. By contrast,
Initial Public Offerings ("IPOs") fueled the rapid growth in the REIT
market in 1993 and 1994.
Why is this significant to an investor? First, as the market capitalization
of the REITs broadens, the overall level of liquidity rises, providing
increased investor comfort with the sector. Second, evidence exists that
the REIT market is behaving efficiently. REITs have not attracted capital
equally. This suggests that the market is discriminating, and rationing
capital accordingly.
What features separate the "haves" and the "have nots" within the REIT
industry, (i.e., those companies that have access to capital vs. those that
do not)? They include the market's assessment of a company's ability to
increase cash flow per share, the quality of its management, and the
prospects for the specific markets and property types in which the company
is invested. Finally, the market is assessing the opportunities the company
has to acquire, develop or redevelop properties. The market's assessment of
a company shows up in its stock price and its ability to launch follow-on
offerings. In a sense, a REIT's cost of capital is its cost of goods sold.
Hence, those companies that can purchase their inputs cheaper than their
competition tend to have a competitive advantage. In the case of REITs,
increasing stock prices lower the cost of capital and therefore the cost of
goods sold.
REIT PERFORMANCE REVIEW
At the beginning of the year, the 10-year Treasury2 rate stood at 5.57%,
subsequently increasing to 6.74% by mid-year. Common wisdom holds that REIT
yields and interest rates are so correlated that a poor performance in the
bond market inevitably leads to negative REIT returns. Recent events help
dispel this bit of common wisdom. Even in this rising interest rate
environment, the WRESI and its two principal sub-indices reported the
following positive returns for the six months ending June 30, 1996; note
that the REITs constitute 81% of the WRESI.
PERFORMANCE WEIGHTINGS
----------- ----------
Wilshire Real Estate Securities Index 9.2% 100%
Wilshire REIT Index 6.9% 81%
Wilshire REOC Index3 21.5% 19%
REITs also had a positive, albeit modest return in 1994, which was one of
the worst years in bond market history. The safe dividends and solid 6% to
9% average growth in cash flow per share cushion REITs somewhat from these
- ----------------
1 Wilshire Real Estate Securities Index is an unmanaged index of real
estate securities.
2 Unlike stocks, government bonds are guaranteed by the U.S. government
and, if held to maturity, offer both fixed rate of return and fixed
principal value.
3 REOC stands for real estate operating company. REOCs share many
characteristics with REITs, stemming from the fact that both types of
companies derive their earnings principally from rents on commercial
property and other real estate-related income.
1
HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER - CONTINUED JUNE 30, 1996
- ---------------------------------------------------------------------------
downturns. The safety in REIT dividends derives from the income stream
which is rental income from properties and income from property management
contracts, both of which are typically less volatile than corporate
earnings.
The Index is also divided into ten property type sub-indices. The year-to-
date total returns through June 30, 1996 are as follows, including the
percentage each property type represents of the WRESI.
TOTAL RETURN WEIGHTINGS
RETAIL ------------ ----------
Local Retail 7.4% 15.9%
Regional Retail 15.7% 11.3%
Factory Outlets (3.7)% 1.9%
HOUSING
Apartments 5.9% 22.0%
Manufactured Housing 8.1% 2.4%
Hotel 17.5% 17.8%
DIVERSIFIED 8.4% 11.6%
OFFICE 10.0% 6.7%
INDUSTRIAL 5.5% 4.7%
STORAGE 2.9% 5.7%
On a property type basis, the major outperformer was the hotel sector,
which has built on its 1995 return of 30%. Recent investors in this
property class clearly think that opportunities in the full-service hotel
sector will continue. Further, they appear to anticipate ongoing openings
for growth via acquisitions and redevelopment.
Regional mall companies also had a terrific run in the first six months.
Unlike hotels, however, the stronger performance for mall REITs follows an
unimpressive return in 1995 of just 2.79%. Why the change in perception?
Perhaps the growth euphoria in the overall stock market, justified by
impressive earnings per share growth in the S&P 500, has worn off and value
is coming back in style. Strong retail sales gains through the first six
months of 1996 represent another possible explanation.
The office REITs turned in a solid first half performance but were also the
subject of some disappointment. The anticipation on Wall Street was that
1996 would bring several office IPOs. Why have no IPOs occurred during an
up year for the REIT industry? Remember that in an IPO it helps the sponsor
if they can recapitalize their company with attractively priced debt as
well as equity. In 1993 and the first part of 1994, both elements were in
place. Today's interest rates are not as attractive. Further, the other
fundamental contrast with the 1993-94 period is that private capital, both
debt and equity, has returned to the market, providing private companies
with numerous alternatives for financing their growth plans.
The apartment and industrial REITs turned in a modest performance in the
first half of 1996, with returns of 5.9% and 5.5%, respectively. These
sectors had solid returns in 1995 and both continue to grow their asset
base through acquisitions.
2
HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER - CONTINUED JUNE 30, 1996
- ---------------------------------------------------------------------------
MINI-MERGER MANIA
The first half of 1996 showed evidence of the long-anticipated industry
consolidation. The Simon Property Group, Inc. and DeBartolo Realty Corp.
merger, which closed on August 9, 1996, has created the nation's largest
publicly-traded REIT, with a total capitalization of approximately $7.5
billion and equity of $3.7 billion (with $2.2 billion of the equity
publicly traded). Is this the wave of the future? Some industry observers
suggest that it is. They predict that within 10 years 40 to 50 mega-REITs
will exist, squeezing out many of the small operators. We take a different
view, arguing that there will always be room in the publicly-traded REIT
market for entrepreneurs with a history of creating value and an attractive
strategy. As in all industries, there will be an ebb and flow of capital as
real estate becomes more or less attractive to investors. During
opportunistic times, entrepreneurs and investors emerge.
Speaking of investors, how have the investors in merged companies fared
thus far? The following schedule shows the stock performance for companies
involved in significant mergers (mergers with assets over $100 million)
over the past 12 months. We calculated total return based on the stock
price preceding the announcement through the closing date or August 9,
1996, if the closing is pending.
ACQUIRER/TARGET DATE ANNOUNCED CLOSING TOTAL RETURN
--------------- -------------- --------- ------------
Highwoods Properties 4/29/96 Pending 1.5%
Crocker Realty Trust 17.8%
Simon Property Group 3/26/96 8/9/96 7.1%
DeBartolo Realty 22.5%
BRE Properties 10/11/95 3/15/96 10.3%
REIT of California 27.8%
Bradley Real Estate 9/8/95 3/15/96 (13.7%)
Tucker Properties (3.8%)
In each case, the target company shareholders fared better than the
acquirer. However, all but one merger resulted in positive returns for both
parties.
As always, we appreciate your continued confidence and support.
Sincerely,
/s/ Dean A. Sotter
Dean A. Sotter
Portfolio Manager
August 12, 1996
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 ORIGINAL COST.
3
HEITMAN REAL ESTATE FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) JUNE 30, 1996
- -----------------------------------------------------------------------------
NAREIT MARKET
CLASSIFI- VALUE
SHARES CATION (NOTE 2)
------ --------- --------
COMMON STOCK - 92.5%
Alexander Haagen Properties, Inc. ....... 152,500 Equity $ 1,944,375
Associated Estates Realty Corporation ... 120,500 Equity 2,530,500
Avalon Properties, Inc. ................. 210,872 Equity 4,586,466
Cali Realty Corporation ................. 216,700 Equity 5,254,975
Camden Property Trust ................... 96,152 Equity 2,283,610
CarrAmerica Realty Corp. ................ 165,300 Equity 3,967,200
Centerpoint Properties Corp. ............ 210,200 Equity 5,097,350
Chateau Properties, Inc. ................ 184,458 Equity 4,104,191
Chelsea GCA Realty, Inc. ................ 108,193 Equity 3,435,128
Colonial Properties Trust ............... 199,138 Equity 4,829,096
DeBartolo Realty Corp. .................. 155,200 Equity 2,502,600
Developers Diversified Realty Corp. ..... 110,930 Equity 3,535,894
Duke Realty Investments, Inc. ........... 51,700 Equity 1,563,925
Evans Withycombe Residential, Inc. ...... 42,400 Equity 885,100
Felcor Suite Hotels, Inc. ............... 163,800 Equity 4,995,900
Gables Residential Trust ................ 97,900 Equity 2,300,650
Grubb & Ellis Realty Income Trust* ...... 189,700 Mortgage 199,185
Kimco Realty Corp. ...................... 176,900 Equity 4,997,425
Liberty Property Trust .................. 207,700 Equity 4,128,038
Macerich Company (The) .................. 173,000 Equity 3,633,000
Manufactured Home Communities, Inc. ..... 14,700 Equity 282,975
Meridian Industrial Trust ............... 155,100 Equity 2,849,962
Merry Land & Investment Company, Inc. ... 127,800 Equity 2,683,800
Oasis Residential, Inc. ................. 147,200 Equity 3,220,000
Patriot American Hospitality, Inc. ...... 89,900 Equity 2,663,288
Post Properties, Inc. ................... 70,777 Equity 2,503,736
Regency Realty Corp. .................... 150,800 Equity 3,166,800
ROC Communities, Inc. ................... 186,244 Equity 4,446,575
Rouse Company ........................... 113,700 Equity 2,941,988
Security Capital Industrial Trust ....... 112,400 Equity 1,981,050
Security Capital Pacific Trust .......... 146,530 Equity 3,187,028
Simon Property Group, Inc. .............. 14,600 Equity 357,700
South West Property Trust ............... 249,066 Equity 3,331,257
Sovran Self Storage, Inc. ............... 174,800 Equity 4,632,200
Spieker Properties, Inc. ................ 134,000 Equity 3,651,500
Storage Trust Realty .................... 257,800 Equity 5,284,900
Storage USA Inc. ........................ 105,400 Equity 3,399,150
Taubman Centers, Inc. ................... 100,400 Equity 1,116,950
Vornado Realty Trust .................... 79,600 Equity 3,253,650
Weeks Corporation ....................... 47,000 Equity 1,222,000
-------------
TOTAL COMMON STOCK (COST $109,555,342) .................. 122,951,117
-------------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
HEITMAN REAL ESTATE FUND
SCHEDULE OF INVESTMENTS (UNAUDITED) JUNE 30, 1996
- -----------------------------------------------------------------------------
PAR (000) OR MARKET VALUE
NUMBER OF SHARES (NOTE 2)
---------------- ------------
PREFERRED STOCKS - 0.4%
Security Capital Industrial Trust, 7%,
Convertible (COST $482,787)............ 21,100 $ 487,937
-------------
COMMERCIAL PAPER - 7.4%
International Lease Finance Corp., 5.55%,
07/01/96 ............................ $5,543 5,543,000
Philip Morris Co., Inc., 5.50%, 07/01/96. 4,346 4,346,000
-------------
TOTAL COMMERCIAL PAPER (COST $9,889,000) ..................... 9,889,000
-------------
TOTAL INVESTMENTS (COST $119,927,129) - 100.3% ............... 133,328,054
-------------
OTHER ASSETS AND LIABILITIES, NET - (0.3)%.................... (459,839)
-------------
NET ASSETS - 100.0%........................................... $132,868,215
=============
* Non-income producing security.
The accompanying notes are an integral part of the financial statements.
5
HEITMAN REAL ESTATE FUND
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) - JUNE 30, 1996
- ------------------------------------------------------------------------------
ASSETS:
Investments, at market value (identified cost
$119,927,129) (Note 3) ..................... $133,328,054
Cash ......................................... 884
Receivables:
Capital shares sold ......................... 186,127
Dividends ................................... 1,093,522
Investment securities sold .................. 285,975
Other assets ................................. 584
------------
TOTAL ASSETS .............................. 134,895,146
------------
LIABILITIES:
Payables:
Capital shares redeemed ..................... 122,535
Investment management fees (Note 4).......... 75,985
Investment securities purchased ............. 1,712,720
Accrued expenses ............................ 115,691
------------
TOTAL LIABILITIES ......................... 2,026,931
------------
NET ASSETS:
(Applicable to 14,589,534 shares of $0.001
par value beneficial interest issued and
outstanding; unlimited number of shares
authorized)................................. $132,868,215
============
Net asset value, offering price and
redemption price per Institutional
class share ($95,571,416 / 10,498,822)...... $9.10
=====
Net asset value and redemption price
per Advisor class share
($37,296,799 / 4,090,712)................... $9.12
=====
Offering price per Advisor class share
($9.12 / 0.9525)............................ $9.57
=====
SOURCE OF NET ASSETS:
Paid-in capital .............................. $120,950,016
Distributions in excess of net
investment income .......................... (82,637)
Accumulated net realized loss
on investments ............................. (1,400,089)
Net unrealized appreciation
of investments ............................. 13,400,925
------------
NET ASSETS .................................... $132,868,215
============
The accompanying notes are an integral part of the financial statements.
6
HEITMAN REAL ESTATE FUND
STATEMENT OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
- ------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (Note 2) ........................... $ 2,686,108
Interest ..................................... 271,688
------------
Total investment income .................... 2,957,796
------------
EXPENSES:
Advisory fees (Note 4)........................ $ 412,160
Administration fees (Note 4).................. 60,019
Trustees' fees and expenses (Note 5) ......... 27,824
Accounting fees (Note 4) ..................... 34,835
Professional fees ............................ 39,031
Custodian fees ............................... 18,282
Insurance .................................... 15,494
State Registration fees ...................... 20,975
Shareholder report fees ...................... 7,629
Distribution fees - Advisor Shares (Note 4)... 21,972
Shareholder Servicing fees - Advisor Shares
(Note 4).................................... 21,972
Transfer agent fees .......................... 37,864
Other ........................................ 15,675
----------
Total expenses ............................. 733,732
------------
Net investment income ..................... 2,224,064
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions.. 2,743,168
Net change in unrealized appreciation of
investments................................. 3,664,464
------------
Net realized and unrealized gain on
investments.............................. 6,407,632
------------
Net increase in net assets resulting from
operations.................................. $ 8,631,696
============
The accompanying notes are an integral part of the financial statements.
7
HEITMAN REAL ESTATE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
FOR THE SIX-MONTH FOR THE FISCAL
PERIOD ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31,
(UNAUDITED) 1995
------------- ------------
OPERATIONS:
Net investment income (Note 2).............. $ 2,224,064 $ 3,839,479
Net realized gain (loss) from
security transactions..................... 2,743,168 (1,952,399)
Net change in unrealized
appreciation of investments............... 3,664,464 7,936,118
------------ ------------
Net increase in net assets
resulting from operations ............... 8,631,696 9,823,198
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS -
INSTITUTIONAL SHARES (NOTE 2):
From net investment income
($0.17 and $0.33 per share,
respectively)............................. (1,874,902) (3,778,062)
From net capital gains ($0.00
and $0.00 per share, respectively)........ 0 (37,013)
From tax return of capital ($0.07
and $0.18 per share, respectively)........ (797,696) (2,081,064)
DISTRIBUTIONS TO SHAREHOLDERS -
ADVISOR SHARES (NOTE 2):
From net investment income ($0.16 and
$0.23 per share, respectively)............ (431,799) (69,725)
From net capital gains ($0.00 and
$0.00 per share, respectively)............ 0 (683)
From tax return of capital ($0.07 and
$0.13 per share, respectively) ........... (183,714) (38,406)
------------ ------------
Total distributions paid to shareholders... (3,288,111) (6,004,953)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Receipt from Institutional Shares sold...... 17,875,233 16,694,861
Receipt from Institutional Shares issued
on reinvestment of distributions.......... 1,237,595 3,002,158
Institutional Shares redeemed .............. (23,534,268) (33,136,352)
Receipt from Advisor Shares sold............ 33,941,113 10,634,266
Receipt from Advisor Shares issued
on reinvestment of distributions ......... 586,092 72,560
Advisor Shares redeemed..................... (3,793,084) (5,442,423)
------------ ------------
Increase (decrease) in net assets
resulting from capitaL share
transactions(a)........................... 26,312,681 (8,174,930)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS .. 31,656,266 (4,356,685)
NET ASSETS:
Beginning of period ........................ 101,211,949 105,568,634
------------ ------------
End of period............................... $132,868,215 $101,211,949
============ ============
(a)TRANSACTIONS IN SHARES OF BENEFICIAL
INTEREST WERE:
Institutional Shares sold................... 2,010,299 2,056,156
Institutional Shares issued on
reinvestment of distributions............. 139,276 368,561
Institutional Shares redeemed............... (2,708,669) (4,093,559)
Advisor Shares sold ........................ 3,817,616 1,276,166
Advisor Shares issued on reinvestment
of distributions.......................... 65,180 8,519
Advisor Shares redeemed..................... (428,603) (648,167)
------------ ------------
Net increase (decrease) in shares 2,895,099 (1,032,324)
Shares outstanding - Beginning
balance................................... 11,694,435 12,726,759
------------ ------------
Shares outstanding - Ending balance......... 14,589,534 11,694,435
============ ============
The accompanying notes are an integral part of the financial statements.
8
HEITMAN REAL ESTATE FUND
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
The tables below set forth financial data for a share of beneficial interest
outstanding throughout each fiscal period presented.
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
FOR THE FOR THE FOR THE
SIX-MONTH FISCAL YEAR THREE-MONTH
PERIOD ENDED ENDED PERIOD ENDED FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
JUNE 30, 1996 DEC. 31, DEC. 31, ----------------------------------------
(UNAUDITED) 1995 1994 1994 1993 1992 1991
----------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $8.65 $8.30 $9.23 $10.95 $8.29 $7.66 $6.99
----- ----- ----- ------ ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... 0.17a 0.33a 0.10a 0.32a 0.40 0.45 0.49
Net realized and unrealized gain
(loss)on investments................... 0.52 0.53 (0.05) (0.92) 2.67 0.63 0.67
----- ----- ----- ----- ----- ----- -----
Total from investment operations...... 0.69 0.86 0.05 (0.60) 3.07 1.08 1.16
----- ----- ----- ----- ----- ----- -----
DISTRIBUTIONS
From net investment income.............. (0.17)a (0.33)a (0.10)a (0.31)a (0.41) (0.45) (0.49)
From net realized gain on investments... 0.00 0.00 (0.77) (0.67) 0.00 0.00 0.00
From tax return of capital.............. (0.07) (0.18)b (0.11)b (0.14)b 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- -----
Total distributions................... (0.24) (0.51) (0.98) (1.12) (0.41) (0.45) (0.49)
----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD........... $9.10 $8.65 $8.30 $9.23 $10.95 $8.29 $7.66
===== ===== ===== ===== ====== ===== =====
Total Return............................. 8.06%c 10.87% 0.65%c (5.22)% 37.76% 14.49% 19.56%
Ratios/Supplemental Data
Net assets, end of period (in 000's)... $95,571 $95,692 $10 5,569 $116,268 $141,672 $66,521 $54,880
Ratio of expenses to average net assets. 1.24%* 1.29% 1.28%* 1.22% 1.24% 1.37% 1.25%
Ratio of net investment income to
average net assets.................... 3.97%*a 3.97%a 4.35%*a 2.87%a 4.37% 5.75% 7.36%
Average commission rate paid............ $0.0450 - - - - - -
Portfolio turnover rate................. 46.52%* 65.33% 37.55%* 90.11% 61.47% 28.05% 16.24%
</TABLE>
_______________________
* 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, 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 figures for the fiscal periods ended June 30, 1996
and December 31, 1994 have not been annualized.
9
HEITMAN REAL ESTATE FUND
FINANCIAL HIGHLIGHTS - CONTINUED
- -------------------------------------------------------------------------------
ADVISOR SHARES
FOR THE PERIOD
FOR THE SIX-MONTH MAY 15, 1995
PERIOD ENDED (COMMENCEMENT OF
JUNE 30, 1996 OPERATIONS)THROUGH
(UNAUDITED) DECEMBER 31, 1995
------------- -------------------
NET ASSET VALUE, BEGINNING OF PERIOD......... $8.67 $8.00
----- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income....................... 0.14a 0.23a
Net realized and unrealized gain
on investments............................ 0.54 0.80
----- -----
Total from investment operations........ 0.68 1.03
----- -----
DISTRIBUTIONS
From net investment income.................. (0.16)a (0.23)a
From net realized gain on investments....... 0.00 0.00
From tax return of capital.................. (0.07)b (0.13)b
----- -----
Total distributions..................... (0.23) (0.36)
----- -----
NET ASSET VALUE, END OF PERIOD............... $9.12 $8.67
===== =====
Total Return................................. 7.85%c 13.19%c
Ratios/Supplemental Data
Net assets, end of period (in 000's)........ $37,297 $5,520
Ratio of expenses to average net assets .... 1.74%* 1.99%*d
Ratio of net investment income to
average net assets........................ 4.08%*a 4.27%*ad
Average commision rate paid................. $0.0450 -
Portfolio turnover rate..................... 46.52%* 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 These results do not include the sales charge. If the charge had been
included, the returns would have been lower. The total returns for
the fiscal periods presented have not been annualized.
d For the fiscal period ended December 31, 1995, the Advisor 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.
10
HEITMAN REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1996
- ---------------------------------------------------------------------------
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. 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 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.
11
HEITMAN REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)- CONTINUED JUNE 30, 1996
- ---------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 June 30, 1996, 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.
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
12
HEITMAN REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)- CONTINUED JUNE 30, 1996
- ---------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 expenses incurred under the
Distribution Plan and 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 six-month period ended June 30, 1996, the cost of purchases and the
proceeds from sales of investment securities (excluding short-term
investments) aggregated $47,738,308 and $24,559,900, respectively. Cost
for federal income tax purposes is $119,927,129 and unrealized appreciation
consists of:
Gross unrealized appreciation $13,708,421
Gross unrealized depreciation (307,496)
-----------
Net unrealized appreciation $13,400,925
===========
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.
13
HEITMAN REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)- CONTINUED JUNE 30, 1996
- ---------------------------------------------------------------------------
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 six-month
period ended June 30, 1996, fees paid to the Distributor amounted to
$21,972.
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 six-month period ended June 30, 1996, fees paid to Service
Organizations amounted to $21,972.
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.
14
<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
RANDY NEWSOME, ASSISTANT 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
SEMI-ANNUAL REPORT
JUNE 30, 1996
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
HF08 8/96 [GRAPHIC]
