HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER DECEMBER 31, 1996
- ------------------------------------------------------------------------
We are pleased to report real estate securities had an outstanding year
in 1996. Buoyed by improving real estate fundamentals and an extremely
attractive investment valuation versus the broader market opportunities,
the Wilshire Real Estate Securities Index1 (the "WRESI"), the real
estate industry's primary benchmark, produced a total return of 36.9%
versus the Standard and Poor's Composite Index of 500 Stocks2 ("S&P
500") performance of 22.96% for the year ended December 31, 1996.
1996 PERFORMANCE
- ----------------
For the twelve months ended December 31, 1996, the Heitman Real Estate
Fund (the "Fund") provided its shareholders with a total return of
38.06% and 37.44% for the Heitman/PRA Institutional Class
("Institutional Class") and the Advisor Class, respectively, outpacing
the WRESI by approximately 1.2 percentage points and 0.6 percentage
points, respectively. In addition, the Fund's Institutional Class
outperformed the average return of all real estate funds, as calculated
by Lipper Analytical Services, Inc., by an impressive 7.26 percentage
points. The following table compares the Fund's performance versus the
indices and the average competitor for the period ended December 31,
1996:
AVERAGE ANNUAL TOTAL RETURNS
- ----------------------------
ADVISOR ADVISOR WILSHIRE
HEITMAN/ CLASS CLASS REAL AVERAGE
PRA NET PUBLIC ESTATE REAL
INSTITUTIONAL ASSET OFFERING SECURITIES S&P ESTATE
CLASS VALUE PRICE(1) INDEX 500 FUND(2)
- -------------------------------------------------------------------------------
3/13/89(3) - 12/31/96 10.18% n/a n/a 5.85% 15.83% 9.43%
5/15/95(4) - 12/31/96 n/a 31.02% 27.18% 28.21% 25.59% n/a
5 Years Ending 12/31/96 17.38% n/a n/a 14.37% 15.22% 9.88%
1 Year Ending 12/31/96 38.06% 37.44% 30.91% 36.87% 22.96% 30.80%
Quarter Ending 12/31/96(5) 19.39% 19.35% 13.68% 18.39% 8.34% 15.89%
(1)Reflects the deduction of the maximum 4.75% sales charges and assumes
re-investment of all dividends at net asset value.
(2)Source: Lipper Analytical Services, Inc.
(3)Inception date of Institutional Class.
(4)Inception date of Advisor Class.
(5)Represents aggregate total returns.
1 The Wilshire Real Estate Securities Index is an unmanaged index of
real estate securities.
2 The S&P 500 is an unmanaged index of publicly traded stocks.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE, SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH LESS THAN THEIR ORIGINAL COST.
<PAGE>
HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER - CONTINUED DECEMBER 31, 1996
- ------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF A $250,000 INVESTMENT IN THE
HEITMAN/PRA INSTITUTIONAL CLASS
Institutional Class WRESI S&P 500
------------------- ----- -------
3/13/89 250000 250000 250000
9/30/89 262050 266650 300750
9/30/90 193603 174122 272931
9/30/91 231491 195609 358003
9/30/92 265034 200069 397634
9/30/93 365110 265592 449326
9/30/94 346088 251250 465817
9/30/95 348338 250622 468845
12/31/95 386202 284831 645036
12/31/96 533178 389815 787875
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE ADVISOR
CLASS*
Advisor Class WRESI S&P 500
------------- ----- -------
5/15/95 9525 10000 10000
12/31/95 10269 10963 11853
12/31/96 14113 15005 14574
*The values shown for the Advisor Class shares reflect the effect of the
maximum sales load of 4.75%.
Over the longer term, we are particularly proud of our five year
performance track record. The Fund's Institutional Class has
outperformed the WRESI in four of the past five years by, on average,
3.0 percentage points per year. This is a superior level of
outperformance in our view. Of course, the WRESI is particularly hard
to outperform since its results do not bear any of the administrative or
transaction costs that the Fund incurs.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE, SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH LESS THAN THEIR ORIGINAL COST.
<PAGE>
HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER - CONTINUED DECEMBER 31, 1996
- ------------------------------------------------------------------------
It is noteworthy to point out that the Fund's Institutional Class (the
Advisor Class inception date was May 15, 1995) has also outperformed
the S&P 500 in four out of the past five years. The Institutional
Class performance over the S&P 500 index has averaged 2.16 percentage
points per annum during the five year period ended December 31, 1996.
GROWTH OF THE REIT MARKET
- -------------------------
The U.S. public real estate securities market, and specifically the real
estate investment trust ("REIT") market continued to grow at an
impressive rate during 1996. Market capitalization of the WRESI
increased by nearly 60% in 1996 to $77.3 billion from $48.8 billion at
the end of 1995. As in 1995, secondary public offerings provided the
main source of growth. In contrast, initial public offerings (IPOs)
fueled the REIT market in 1993-94. With 107 companies in the WRESI, at
an average market capitalization of over $700 million, the REIT market
is now drawing serious consideration from investors around the globe,
including those who had previously dismissed the REIT market as too
small to merit attention. Public REITs continue to offer investors
access to high-quality commercial property with enhanced liquidity and
the ability to diversify portfolios by property type and geographic
region.
FACTORS AFFECTING 1996 PERFORMANCE
- ----------------------------------
A combination of several factors converged during 1996 which served as
the stimulus for the year's outstanding results. Those factors included
the following:
RECOVERING REAL ESTATE MARKETS. While the national economy has
continued to grow moderately since 1991, annual compounding of that
growth has created increased demand for apartments, office and
industrial space. The lack of capital flowing into real estate over the
past five years shut down new construction and allowed most markets to
recover from their prior excesses. During 1996, landlords suddenly
found themselves in the position of being able to raise rents and stop
having to pay excessive rental concessions in order to attract tenants.
LARGER, MORE EFFICIENT REITS. There were 117 secondary issues that
raised a total of over $10 billion in 1996. This equity issuance
outpaced 1995's then record pace of 93 issues that raised over $7
billion. This strong equity issuance over the past two years has
increased the average market capitalization for the companies providing
greater liquidity, higher diversification and fostering expense savings
through economies of scale. All of these factors serve to reduce
overall risk for the sector, support current valuations, and enhance
performance going forward.
LOWER COST OF CAPITAL. In our view, the most significant change which
occurred during 1996 was the dramatic improvement in the cost of capital
for many companies. This is significant because a low cost of capital
is perhaps the most important factor affecting earnings growth for
REITs. Factors driving the improvement in the cost of capital included
lower interest rates, reduced borrowing spreads, increased issuance of
investment grade debt and less dilutive equity offerings at high share
prices.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE, SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH LESS THAN THEIR ORIGINAL COST.
<PAGE>
HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER - CONTINUED DECEMBER 31, 1996
- ------------------------------------------------------------------------
ATTRACTIVE RELATIVE VALUATION. At the beginning of 1996, equity REITs
had an average dividend yield3 of over 8% and expected earnings growth
of approximately 9%. Compared with an average dividend yield of
approximately 2% for the S&P 500, REITs reflected good value in today's
equity market. Notwithstanding the strong performance in 1996, the
attractive relative valuation in favor of REITs remains.
Attesting to the strength of the real estate recovery, real estate
securities outperformed other sectors significantly during 1996 despite
investor preoccupation with large-cap equities. For example, the S&P
500 index, which is dominated by large-cap stocks, outperformed the
small-cap Russell 2000 Stock Index4 by over 6.4 percentage points
during 1996. Given the market's apparent aversion to small-cap stocks
in 1996, we believe that investors were drawn to REITs because of their
relative attractive valuation and improving real estate fundamentals.
FUTURE OUTLOOK
- --------------
Notwithstanding 1996's stellar total return performance, we expect real
estate securities to continue to outperform the broader market averages.
In the near term, we believe the combination of relatively cheap equity
capital and low borrowing rates may drive REIT earnings growth through
positive spread investment. In the long term, REIT earnings growth
will be driven internally as real estate markets continue to gravitate
from a tenants' market to a landlords' market. Rent concessions are
declining dramatically, occupancy rates have risen and landlords are now
generally in the position to raise rental rates. In many markets,
however, rents have not yet risen to a level whereby new development is
economically feasible. In short, we are in the sweet spot of the
current real estate recovery in which demand is increasing but new
supply is generally not being added.
We also continue to be pleased with the evolution of the individual
REITs. Most companies have continued to strengthen their balance sheets
by maintaining conservative levels of debt and reducing dividend payout
ratios, thus retaining higher levels of cash flow. Additionally, it is
our view that the management of most REITs have exercised prudence in
their investment of capital. In markets that have seen an increase in
real estate pricing or new construction, REITs have generally stopped
buying or delayed development plans. In many instances, REITs have
taken advantage of strong markets by disposing of properties at
attractive prices.
The intense public scrutiny of specific REIT investment activity along
with more timely access to general market data force REITs to not "push
the envelope" in terms of their investment decisions. REIT managements
understand all too well that unsound investment decisions today may show
up in their earnings report tomorrow.
SUMMARY
- -------
Through the powerful combination of positive spread investing,
accelerating internal growth and a higher quality of earnings, we expect
REIT performance to continue to outpace the broader equity markets.
The anticipated 1997 earnings growth rate for the average REIT is
currently over 9%. That growth, combined with a projected average
dividend yield of approximately 6%, and assuming constant multiples on
3 A dividend yield is calculated by dividing a stock's annual dividend
by its share price.
4 The Russell 2000 Stock Index is a unmanaged index of the 2000
smallest capitalized stocks of the Russell 3000 Stock Index.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE, SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH LESS THAN THEIR ORIGINAL COST.
<PAGE>
HEITMAN REAL ESTATE FUND
MANAGEMENT LETTER - CONTINUED DECEMBER 31, 1996
- ------------------------------------------------------------------------
earnings, we believe could deliver REIT investors with a 12% to 15%
total return during 1997. By comparison, the 1997 consensus growth
estimates for the stocks in the S&P 500 average about 6% to 8% and
currently pay a dividend that yields less than 2%. In short, we believe
that REITs offer investors with a more favorable risk/reward balance
than do the broader equity markets. As always, we appreciate your
continued confidence and look forward to serving you in the next year.
Sincerely,
/s/ Dean A. Sotter /s/ Timothy J. Pire /s/ Randy Newsome
Dean A. Sotter Timothy J. Pire, CFA Randy Newsome
Portfolio Manager Portfolio Manager Portfolio Manager
February 21, 1997
2/28/97. ACG CAPITAL CORPORATION IS THE DISTRIBUTOR FOR THE ADVISOR
CLASS. RODNEY SQUARE DISTRIBUTORS, INC. IS THE DISTRIBUTOR FOR THE
HEITMAN/PRA INSTITUTIONAL CLASS.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE, SO THAT, WHEN REDEEMED,
SHARES MAY BE WORTH LESS THAN THEIR ORIGINAL COST.
<PAGE>
HEITMAN REAL ESTATE FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAREIT
CLASSIFICATION MARKET VALUE
SHARES (UNAUDITED) (NOTE 2)
------ ----------- --------
<S> <C> <C> <C>
COMMON STOCK - 91.6%
Alexander Haagen Properties, Inc. .............................. 201,400 Equity $ 2,970,650
Arden Realty Group, Inc. ....................................... 376,700 Equity 10,453,425
Associated Estates Realty Corp. ................................ 170,600 Equity 4,051,750
Avalon Properties, Inc. ........................................ 243,672 Equity 7,005,570
Bay Apartment Communities, Inc. ................................ 99,600 Equity 3,585,600
Brandywine Realty Trust ........................................ 27,900 Equity 544,050
Cali Realty Corporation ........................................ 329,900 Equity 10,185,663
Carramerica Realty Corp. ....................................... 175,600 Equity 5,136,300
Catellus Development Corp.* .................................... 2,300 Equity 26,162
Centerpoint Properties Corp. ................................... 212,900 Equity 6,972,475
Chateau Properties, Inc. ....................................... 134,758 Equity 3,571,087
Chelsea GCA Realty, Inc. ....................................... 165,893 Equity 5,744,045
Colonial Properties Trust ..... ................................ 134,638 Equity 4,089,629
Developers Diversified Realty Corp. ............................ 115,330 Equity 4,281,626
Essex Property Trust, Inc. ..................................... 361,400 Equity 10,616,125
Excel Realty Trust, Inc. ....................................... 287,000 Equity 7,282,625
Felcor Suite Hotels, Inc. ...................................... 198,900 Equity 7,036,088
Grubb & Ellis Realty Income Trust* ............................. 189,700 Mortgage 83,468
Homestead Village, Inc. (Warrants)* ............................ 16,387 Equity 133,144
Homestead Village, Inc. ........................................ 24,426 Equity 439,668
Kimco Realty Corp. ............................................. 219,500 Equity 7,655,063
Liberty Property Trust ......................................... 188,700 Equity 4,859,025
Meridian Industrial Trust ...................................... 335,200 Equity 7,039,200
Post Properties, Inc. ......................................... 45,177 Equity 1,818,374
Regency Realty Corp. .......................................... 189,000 Equity 4,961,250
Rouse Company ................................................. 174,900 Equity 5,553,075
Security Capital Industrial Trust ............................. 139,491 Equity 2,981,620
Security Capital Pacific Trust ................................. 201,230 Equity 4,603,136
Simon Debartolo Group Inc. ..................................... 92,536 Equity 2,868,616
South West Property Trust ...................................... 282,266 Equity 4,763,239
Sovran Self Storage, Inc. ...................................... 231,200 Equity 7,225,000
Spieker Properties, Inc. ....................................... 179,500 Equity 6,462,000
Starwood Lodging Trust ......................................... 74,200 Equity 4,090,275
Storage Trust Realty ........................................... 280,000 Equity 7,560,000
Storage USA Inc. ............................................... 46,000 Equity 1,730,750
Tanger Factory Outlet Center, Inc. ............................. 98,800 Equity 2,679,950
Trizec Hahn Corp. .............................................. 702,600 Equity 15,457,200
Vornado Realty Trust ........................................... 93,900 Equity 4,929,750
-----------
TOTAL COMMON STOCK (COST $146,843,055) ............................................... 191,446,673
-----------
PAR ($000) OR MARKET VALUE
NUMBER OF SHARES (NOTE 2)
---------------- --------
PREFERRED STOCK - 0.4%
Security Capital Industrial Trust, 7.00%,
Convertible (COST $797,600).................................... 33,600 $ 915,600
-----------
U.S. GOVERNMENT AGENCY OBLIGATION - 9.0%
Federal Home Loan Banks Discount Notes, 5.00%,
due 01/02/97 (COST $18,777,392)................................ $18,780 18,777,392
-----------
TOTAL INVESTMENTS (COST $166,418,047) - 101.0%................................................ 211,139,665
-----------
OTHER ASSETS AND LIABILITIES, NET -(1.0)%..................................................... (2,059,999)
-----------
NET ASSETS -100.0%............................................................................ $209,079,666
------------
* Non-income priducing security.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HEITMEN REAL ESTATE FUND
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at market value
(identified cost $166,418,047) (Note 3)................................. $ 211,139,665
Cash...................................................................... 4,800
Receivables:
Capital shares sold...................................................... 1,212,839
Dividends................................................................ 1,271,793
Other assets.............................................................. 17,624
-------------
TOTAL ASSETS........................................................... 213,646,721
-------------
LIABILITIES:
Payables:
Capital shares redeemed.................................................. 108,851
Investment management fees (Note 4)...................................... 114,760
Investment securities purchased.......................................... 4,113,815
Accrued expenses......................................................... 229,629
-------------
TOTAL LIABILITIES...................................................... 4,567,055
-------------
NET ASSETS:
(Applicable to 19,058,912 shares of $0.001 par value
beneficial interest issued and outstanding; unlimited
number of shares authorized)............................................. $ 209,079,666
=============
Net asset value, offering price and redemption price per
Institutional class share ($129,275,157 / 11,790,030).................. $10.96
======
Net asset value and redemption price per
Advisor class share ($79,804,509 / 7,268,882).......................... $10.98
======
Offering price per Advisor class share ($10.98 / 0.9525).................. $11.53
======
COMPONENTS OF NET ASSETS:
Paid-in capital........................................................... $ 164,539,659
Distributions in excess of net realized gain on investments............... (181,611)
Net unrealized appreciation of investments................................ 44,721,618
-------------
NET ASSETS................................................................. $ 209,079,666
=============
</TABLE>
<PAGE>
HEITMAN REAL ESTATE FUND
STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (Note 2)........................................................ $ 6,796,180
Interest.................................................................. 622,678
-------------
Total investment income.................................................. 7,418,858
-------------
EXPENSES:
Advisory fees (Note 4).................................................... $ 992,968
Administration fees (Note 4).............................................. 141,640
Trustees' fees and expenses (Note 5)...................................... 71,359
Accounting fees (Note 4).................................................. 73,582
Professional fees......................................................... 134,268
Custodian fees............................................................ 42,889
Insurance................................................................. 41,875
Federal Registration fees................................................. 16,407
State Registration fees................................................... 24,520
Shareholder report fees................................................... 31,966
Distribution fees - Advisor Shares (Note 4)............................... 89,289
Shareholder Servicing fees - Advisor Shares (Note 4)...................... 89,289
Transfer agent fees....................................................... 87,449
Other..................................................................... 30,583
-------------
Total expenses......................................................... 1,868,084
-------------
Net investment income................................................ 5,550,774
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions.............................. 11,165,013
Net change in unrealized appreciation of investments...................... 34,985,157
-------------
Net realized and unrealized gain on investments........................ 46,150,170
-------------
Net increase in net assets resulting from operations...................... $ 51,700,944
=============
</TABLE>
<PAGE>
HEITMAN REAL ESTATE FUND
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Fiscal For the Fiscal
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income (Note 2)............................................ $ 5,550,774 $ 3,839,479
Net realized gain (loss) from security transactions....................... 11,165,013 (1,952,399)
Net change in unrealized appreciation of investments...................... 34,985,157 7,936,118
-------------- -------------
Net increase in net assets resulting from operations..................... 51,700,944 9,823,198
-------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS - INSTITUTIONAL SHARES (NOTE 2):
From net investment income ($0.37 and $0.33 per share, respectively)...... (4,155,578) (3,778,062)
In excess of net investment income ($0.10 and $0.00 per share,
respectively)............................................................ (1,094,050) -
From net capital gains ($0.41 and $0.00 per share, respectively).......... (4,677,017) (37,013)
From tax return of capital ($0.00 and $0.18 per share, respectively)...... - (2,081,064)
DISTRIBUTIONS TO SHAREHOLDERS - ADVISOR SHARES (NOTE 2):
From net investment income ($0.31 and $0.23 per share, respectively)...... (1,395,196) (69,725)
In excess of net investment income ($0.12 and $0.00 per share,
respectively)............................................................ (529,580) -
From net capital gains ($0.41 and $0.00 per share, respectively).......... (2,751,674) (683)
From tax return of capital ($0.00 and 0.13 per share, respectively)....... - (38,406)
-------------- -------------
Total distributions paid to shareholders................................. (14,603,095) (6,004,953)
-------------- -------------
CAPITAL SHARE TRANSACTIONS:
Receipt from Institutional Shares sold.................................... 45,944,221 16,694,861
Receipt from Institutional Shares issued on reinvestment of distributions. 3,754,881 3,002,158
Institutional Shares redeemed............................................. (41,272,537) (33,136,352)
Receipt from Advisor Shares sold.......................................... 67,072,455 10,634,266
Receipt from Advisor Shares issued on reinvestment of distributions....... 4,469,947 72,560
Advisor Shares redeemed................................................... (9,199,099) (5,442,423)
-------------- -------------
Increase (decrease) in net assets resulting from capital share
transactions (a)......................................................... 70,769,868 (8,174,930)
-------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS................................ 107,867,717 (4,356,685)
NET ASSETS:
Beginning of year......................................................... 101,211,949 105,568,634
-------------- -------------
End of year............................................................... $ 209,079,666 $ 101,211,949
============== =============
(a)TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST WERE:
Institutional Shares sold................................................. 4,898,411 2,056,156
Institutional Shares issued on reinvestment of distributions.............. 376,263 368,561
Institutional Shares redeemed............................................. (4,542,560) (4,093,559)
Advisor Shares sold....................................................... 7,164,380 1,276,166
Advisor Shares issued on reinvestment of distributions.................... 429,486 8,519
Advisor Shares redeemed................................................... (961,503) (648,167)
-------------- -------------
Net increase (decrease) in shares......................................... 7,364,477 (1,032,324)
Shares outstanding - Beginning balance.................................... 11,694,435 12,726,759
-------------- -------------
Shares outstanding - Ending balance....................................... 19,058,912 11,694,435
============== =============
</TABLE>
<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
<TABLE>
<CAPTION>
For the For the
Fiscal Years Three-Month
Ended Period Ended For the Fiscal Years
December 31, Dec. 31, Ended September 30,
-------------- ------------------------
1996 1995 1994 1994 1993 1992
----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............. $8.65 $8.30 $9.23 $10.95 $8.29 $7.66
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)....................... 0.37 0.33 0.10 0.32 0.40 0.45
Net realized and unrealized gain (loss)
on investments................................. 2.82 0.53 (0.05) (0.92) 2.67 0.63
------ ------ ------ ------ ------ ------
Total from investment operations............. 3.19 0.86 0.05 (0.60) 3.07 1.08
------ ------ ------ ------ ------ ------
DISTRIBUTIONS
From net investment income (a).................. (0.37) (0.33) (0.10) (0.31) (0.41) (0.45)
In excess of net investment income.............. (0.10) 0.00 0.00 0.00 0.00 0.00
From net realized gain on investments........... (0.41) 0.00 (0.77) (0.67) 0.00 0.00
From tax return of capital (b).................. 0.00 (0.18) (0.11) (0.14) 0.00 0.00
------ ------ ------ ------ ------ ------
Total distributions.......................... (0.88) (0.51) (0.98) (1.12) (0.41) (0.45)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD................... $10.96 $8.65 $8.30 $9.23 $10.95 $8.29
====== ====== ====== ====== ====== ======
Total Return..................................... 38.06% 10.87% 0.65%c (5.22)% 37.76% 14.49%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)............ $129,275 $95,692 $105,569 $116,268 $141,672 $66,521
Ratio of expenses to average net assets......... 1.23% 1.29% 1.28%* 1.22% 1.24% 1.37%
Ratio of net investment income to
average net assets (a)......................... 4.09% 3.97% 4.35%* 2.87% 4.37% 5.75%
Portfolio Turnover.............................. 59.88% 65.33% 37.55%* 90.11% 61.47% 28.05%
Average commission rate paid (d)................ $0.0504 - - - - -
</TABLE>
- ---------------------
* Annualized.
a Distributions from REIT investments generally include a return of
capital. For financial reporting purposes, through September 30, 1993,
the Fund recorded all distributions received, including the returns of
capital, as net investment income.
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, 1992 and 1993 have not been restated.
c Not annualized.
d Required disclosure for fiscal years beginning after September 1, 1995
pursuant to SEC regulations.
<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 periods presented.
ADVISOR SHARES
For the Period
May 15, 1995
(Commencement
For the Fiscal of Operations)
Year Ended through
December 31, 1996 December 31, 1995
----------------- -----------------
NET ASSET VALUE, BEGINNING OF PERIOD....... $8.67 $8.00
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (a)................. 0.31 0.23
Net realized and unrealized gain
on investments........................... 2.84 0.80
------ ------
Total from investment operations....... 3.15 1.03
------ ------
DISTRIBUTIONS
From net investment income (a)............ (0.31) (0.23)
In excess of net investment income........ (0.12) 0.00
From net realized gain on investments..... (0.41) 0.00
From tax return of capital (b)............ 0.00 (0.13)
------ ------
Total distributions.................... (0.84) (0.36)
------ ------
NET ASSET VALUE, END OF PERIOD............. $10.98 $8.67
====== ======
Total Return (c)........................... 37.44% 13.19%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)...... $79,805 $5,520
Ratio of expenses to average net assets... 1.73% 1.99%* d
Ratio of net investment income to
average net assets (a)................... 3.91% 4.27%* d
Portfolio Turnover........................ 59.88% 65.33%*
Average commission rate paid (e).......... $0.0504 -
- ------------------------
* Annualized.
a Distributions from REIT investments generally 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 distributions 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 return figure for
the fiscal period ended December 31, 1995 has not been annualized.
d During 1995, the Advisor agreed to reimburse a portion of the Advisor
Shares' expenses. Without reimbursement, the expense ratio would have
been 5.34% and the ratio of net investment income to average net assets
would have been 0.92%.
e Required disclosure for fiscal years beginning after September 1, 1995
pursuant to SEC regulations.
<PAGE>
HEITMAN REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 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 which was amended and restated on February 28, 1995 (the
"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. 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 shareholder reports, registration fees, administrative, and
accounting fees. Institutional Shares were offered for sale on March 13,
1989 and Advisor Shares were offered for sale on May 15, 1995.
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.
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 distributions 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.
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 NASDAQ National Market System, or, if the
security is not reported on the NASDAQ National Market System, at the
last reported bid on such day. Otherwise, the investment security is
valued by such method as the Trustees shall determine in good faith to
reflect its fair value.
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. 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 remainder of the
liquidating trust should be valued at $0.44 per share. At December 31,
1996, the Fund owned 189,700 shares of the GRIT liquidating trust for a
value of $83,468.
INCOME TAXES
- ------------
The Fund intends to continue to qualify 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. The
amount of capital loss carryforward utilized during the fiscal year
ended December 31, 1996 was approximately $3,735,000.
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 affect 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 fiscal year ended December 31, 1996, the cost of purchases and
the proceeds from sales of investment securities (excluding short-term
investments) aggregated $131,165,704 and $77,468,388, respectively.
Cost for federal income tax purposes is $166,599,658 and unrealized
appreciation consists of:
Gross unrealized appreciation $45,002,458
Gross unrealized depreciation (462,451)
-----------
Net unrealized appreciation $44,540,007
===========
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 plus (ii) 1.50%
of the Fund's average net assets in excess of $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.
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,
provides accounting, administration and transfer agent services. For
accounting services provided through November 13, 1996, Rodney Square
received 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 through November 13, 1996,
Rodney Square also received 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.
Effective November 14, 1996 the Board of Trustees agreed to a change in
the accounting services fee. Under the new agreement the Fund pays an
annual fee of $75,000, plus an amount equal to 0.02% of the Fund's
average daily net assets in excess of $100 million, plus any out-of-
pocket expenses. 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.
The Fund has adopted a Distribution Plan for the Advisor Shares in
accordance with Rule 12b-1 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.
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.
NOTE 5 - REMUNERATION OF TRUSTEES
Certain officers and trustees of the Fund are also officers and/or
affiliates of the Advisor or certain shareholders.
<PAGE>
HEITMAN REAL ESTATE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------------------
To the Trustees and Shareholders of Heitman Real Estate Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Heitman Real Estate Fund, Inc. (the "Fund") at December 31, 1996, and
the results of its operations, the changes in its net assets and the
financial highlights for the year then ended, in conformity with
generally accepted accounting principles. These financial statements
and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audit, which included confirmation of
securities at December 31, 1996 by correspondence with the custodian
and, where appropriate, the application of alternative auditing
procedures for unsettled security transactions, provides a reasonable
basis for the opinion expressed above. The financial statements of the
Fund for the fiscal periods presented prior to the year ended December
31, 1996 were audited by other independent accountants whose report
dated February 26, 1996 expressed an unqualified opinion on those
statements.
PRICE WATERHOUSE LLP
Philadelphia, PA
February 14, 1997
<PAGE>
DIVIDEND NOTICES (UNAUDITED) DECEMBER 31, 1996
- ------------------------------------------------------------------------------
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,
1996 through December 31, 1996:
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
- --------------------------------------------------------------------------
03/29/96 $0.124 $0.120 $0.000 $0.000 $0.004
06/28/96 $0.117 $0.113 $0.000 $0.000 $0.004
09/30/96 $0.117 $0.113 $0.000 $0.000 $0.004
12/31/96 $0.520 $0.125 $0.015 $0.000 $0.380
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
- --------------------------------------------------------------------------
03/29/96 $0.116 $0.112 $0.000 $0.000 $0.004
06/28/96 $0.109 $0.105 $0.000 $0.000 $0.004
09/30/96 $0.107 $0.103 $0.000 $0.000 $0.004
12/31/96 $0.508 $0.113 $0.015 $0.000 $0.380
Pursuant to Section 852 of the Internal Revenue Code, the Heitman Real
Estate Fund designates $7,161,267 as long term capital gain
distributions for the fiscal year ended December 31, 1996.
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 1996 and should be used to complete your 1996 tax
return.
<PAGE>
[Outside cover -- divided into two sections]
[Left Section]
INVESTMENT ADVISOR
HEITMAN/PRA SECURITIES ADVISORS, INC.
180 NORTH LASALLE STREET, SUITE 3600
CHICAGO, IL 60601
OFFICERS
WILLIAM L. RAMSEYER, PRESIDENT
DEAN A. SOTTER, VICE PRESIDENT AND TREASURER
NANCY B. LYNN, SECRETARY
RANDY NEWSOME, ASSISTANT SECRETARYY
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
GEROGE 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 CAPTIAL CORPORATION
1661 TICE VALLEY BOULEVARD #200
WALNUT CREEK, CA 94595
(800) 888-REIT
CUSTODIAN
WILMINGTON TRUST COMPANY
RODNEY SQUARE NORTH
1100 N. MARKET STREET
WILMINGTON, DE 19890
TRANSFER AGENT AND ADMINISTRATOR
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 2/97
[Right Section]
HEITMAN REAL ESTATE FUND
ANNUAL REPORT
DECEMBER 31, 1996
[GRAPHIC] Heitman Logo
