<PAGE> 1
HEITMAN REAL ESTATE FUND
Management Letter December 31, 1997
Last year was another good year for real estate securities. The Wilshire Real
Estate Securities Index (WRESI) returned 19.8% during 1997 and ended the year
with 123 companies in the index.(1) The 1997 return was well ahead of both the
5-year (16.9%) and 10-year (9.1%) return numbers for the WRESI. It also marked
the third consecutive year of double-digit returns for the WRESI, for the first
time since 1984-1986. The broader 176 company National Association of Real
Estate Investment Trusts (NAREIT)(2) equity index returned 20.3% for 1997. Both
measures however, lagged the broader markets. The Standard and Poor's Composite
Index of 500 stocks ("S&P 500")(3) returned 33.4%.
1997 PERFORMANCE
For the twelve months ended December 31, 1997, the Heitman Real Estate Fund (the
"Fund") provided its shareholders with a total return of 21.12% and 20.44% for
the Heitman/PRA Institutional Class ("Institutional Class") and the Advisor
Class, outpacing the WRESI by approximately 1.3 percentage points and 0.6
percentage points, respectively. The following table compares the Fund's
performance versus the indices for period ended December 31, 1997:
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Advisor Class Advisor Class Wilshire
Heitman/PRA Net Asset Public Offering Real Estate
Institutional Class Value Price (1) Securities Index S&P 500
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3/13/89(2) -- 12/31/97 11.37% n/a n/a 7.35% 17.70%
5/15/95(3) -- 12/31/97 n/a 26.90% 24.58% 24.95% 28.71%
5 Years Ending 12/31/97 18.02% n/a n/a 16.89% 20.27%
3 Years Ending 12/31/97 22.85% n/a n/a 23.06% 31.15%
1 Year Ending 12/31/97 21.12% 20.44% 14.72% 19.80% 33.36%
Quarter Ending 12/31/97(4) 2.16% 2.04% -2.80% -0.15% 2.87%
</TABLE>
- ----------
(1) Reflects the deduction of the maximum 4.75% sales charges and assumes
re-investment of all dividends at net asset value.
(2) Inception date of Institutional Class.
(3) Inception date of Advisor Class.
1 The Wilshire Real Estate Securities Index is a market capitalization
weighted index of publicly traded real estate securities including real
estate investment trusts, real estate operating companies and partnerships.
The index is used by the institutional investment community as a broad
measure of the performance of public real estate equity for asset allocation
and performance comparison.
2 NAREIT indices are market weighted indices of all tax-qualified REITs on the
New York Stock Exchange, American Stock Exchange and NASDAQ National Market
System. The NAREIT Equity Index is comprised of equity REITs only, which are
defined as REITs with 75% or greater of their gross invested book assets
invested directly or indirectly in the equity ownership of real estate.
3 The S&P 500 is an unmanaged index of publicly headed stocks.
1
<PAGE> 2
HEITMAN REAL ESTATE FUND
Management Letter -- continued December 31, 1997
COMPARISON OF CHANGE IN VALUE OF A $250,000 INVESTMENT
IN THE HEITMAN/PRA INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
3/13/89 9/30/89 9/30/90 9/30/91 9/30/92 9/30/93
<S> <C> <C> <C> <C> <C> <C>
Institutional Class ......... $250,000.00 $262,037.00 $193,592.93 $231,498.43 $265,042,55 $365,149.12
Wilshire Real Estate
Securities Index .......... 250,000.00 266,642.58 174,117.60 195,603.71 200,063.48 265,584.27
S&P 500 ..................... 250,000.00 300,750.00 272,930.62 358,003.10 397,634.04 449,326.46
<CAPTION>
9/30/94 12/31/94 12/31/95 12/31/96 12/31/97
<S> <C> <C> <C> <C> <C>
Institutional Class ......... $346,124.85 $348,374.67 $386,242.99 $533,247.08 $ 645,868.86
Wilshire Real Estate
Securities Index .......... 251,242.72 250,614.61 284,823.50 389,837.93 467,025.84
S&P 500 ..................... 465,816.75 465,770.16 640,806.59 787,935.79 1,050,791.17
</TABLE>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
IN THE ADVISOR CLASS*
<TABLE>
<CAPTION>
5/15/95 12/31/95 12/31/96 12/31/97
<S> <C> <C> <C> <C>
Advisor Class ............... $ 9,525.00 $10,268.90 $14,113.58 $16,998.40
Wilshire Real Estate
Securities Index .......... 10,000.00 10,963.00 15,005.06 17,976.06
S&P 500 ..................... 10,000.00 11,853.00 14,574.45 19.436.48
</TABLE>
* 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.
2
<PAGE> 3
HEITMAN REAL ESTATE FUND
Management Letter -- continued December 31, 1997
The 1997 WRESI return was impressive coming on the heels of the 36.9% return
during 1996. While much of the 1996 return was due to increased earnings
multiples (multiple expansion) (an estimated two-thirds of the return), total
return for 1997 did not result primarily from multiple expansion. Rather, strong
earnings growth and dividend yield accounted for the bulk of 1997 return.
WILL 1998 SEE AN INCREASE IN PUBLIC-TO-PUBLIC MERGERS?
At the end of 1997 only four sectors in the WRESI had an average market
capitalization below $1 billion. Two of these, factory outlet and manufactured
housing represent only 8 companies and 3% of the WRESI. The other two sectors,
apartment and strip retail have 42 names and represent a combined 27.7% of the
WRESI. The smaller average company size in the apartment and strip retail
sectors has led to speculation that there will be increased merger activity in
1998, as companies strive to achieve greater size and the operational and
capital market efficiencies size supposedly entails.
A flurry of activity at the end of 1997 and thus far in 1998 would seem to
support this hypothesis. In December, three apartment mergers totalling $1.7
billion were announced. Then, in January of 1998, a retail merger valued at $835
million was announced.
Each of these four transactions represents a strong company acquiring a smaller
or weaker company. But not all mergers are of this sort. The continued movement
of real estate from the private to the public market is seen in recent
private-public mergers. On balance, we expect stronger public companies to
continue buying their weaker brethren and we expect more private-public mergers
during 1998.
1998 OUTLOOK -- SUSTAINED EARNINGS GROWTH POINTS TO ANOTHER SOLID YEAR
- - SUSTAINED EARNINGS GROWTH -- From a fundamental real estate perspective,
with few exceptions underlying REIT performance is likely to continue
strong. Both internal and external growth is contributing to solid
year-over-year per share growth of funds from operations ("FFO"). Companies
are just now reporting 4th quarter earnings, and consensus estimates suggest
year-over-year per share FFO growth will average better than 13%, the fifth
successive quarter of double digit growth. And for the most part, real
estate space markets are expected to remain either balanced or
under-supplied during 1998. As a result we expect FFO growth for 1998, to
continue above 13%. This, combined with an average dividend yield of 5.9%,
suggests the potential for attractive total returns in 1998. The greatest
risk to our forecast is slower than expected external growth if competitive
acquisition markets drive real estate yields down, diminishing the impact of
acquisitions. To date, declining interest rates and higher than expected
acquisition volumes for many companies have helped offset declines in
going-in real estate acquisition yields.
- - STRONG EXPECTED DIVIDEND GROWTH -- On an unweighted basis, the average
dividend yield in Heitman/PRA's universe is 5.9%. However, there is wide
variation in yields. For example, the factory outlet sector yields 9.9%
while our opportunistic sector yields 2.3%. During 1998, we expect dividend
growth to accelerate. From our analysis of existing payout ratios we project
average dividend growth of 10.0% in 1998. Based on current stock prices,
this would boost the dividend yield by about 60 basis points. The
opportunistic sector is expected to lead the way followed by industrial,
hotel and office, all with dividend growth in excess of 10%.
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.
3
<PAGE> 4
HEITMAN REAL ESTATE FUND
Management Letter -- continued December 31, 1997
- - ATTRACTIVE ALTERNATIVE TO A PRICEY BROADER MARKET -- When compared to the
broader market, REITs do not look over-valued. With a forward P/E multiple
of more than 21x, the S&P 500 remains expensive by historic standards. At
year-end 1997, REITs as measured by the spread in relative multiple were the
cheapest they had been versus the S&P since 1993. At the same time, REITs
are expected to maintain their 1997 per share earnings growth through 1998
while slower earnings growth and downward revisions throughout 1998 are
anticipated for the broader market. Add in a dividend yield that is more
than twice the S&P 500 yield and REITs look to be headed for a strong year
relative to the S&P Index. We would not be surprised to see the WRESI
outperform the S&P in 1998.
Given current multiples and the turbulence in the broader market, few are
predicting a significant multiple expansion for REITs. However, underlying real
estate and company fundamentals suggest that a major REIT correction in 1998
that is intrinsic to the REIT sector is unlikely. From a pure earnings and
dividend growth perspective it is reasonable to expect a return of just under
20%. But as 1998 progresses there could be multiple contraction, particularly
within the high-multiple office and opportunistic groups, as investors begin to
factor in potentially slower FFO growth for 1999. On balance it seems probable
that REITs should return around 15% in 1998. The biggest short-run risk to the
REIT sector remains the valuation of the broader market. Another correction in
the broader market cannot help but spill over into the REIT sector, providing
yet another empirical test of the notion that REITs act as defensive stocks.
Dean A. Sotter Timothy J. Pire, CFA Randy Newsome
Portfolio Manager Portfolio Manager Portfolio Manager
August 11, 1997
- ----------
8/97. Rodney Square Distributors, Inc. is the distributor for the Heitman/PRA
Institutional Class. ACG Capital Corporation is the distributor for the Advisor
Class.
4
<PAGE> 5
HEITMAN REAL ESTATE FUND
Schedule of Investments December 31, 1997
<TABLE>
<CAPTION>
NAREIT
Classification Market Value
Shares (Unaudited) (Note 2)
------ -------------- ------------
<S> <C> <C> <C>
COMMON STOCK -- 87.6%
Alexander Haagen Properties, Inc................ 388,400 Equity $ 6,772,725
Arden Realty Group, Inc......................... 115,000 Equity 3,536,250
Avalon Properties, Inc.......................... 39,372 Equity 1,218,071
Bedford Property Investors, Inc................. 113,900 Equity 2,491,563
Boston Properties, Inc.......................... 226,200 Equity 7,478,738
Brandywine Realty Trust ........................ 87,400 Equity 2,195,925
BRE Properties, Inc. - Class A.................. 75,800 Equity 2,131,875
Cadillac Fairview Corp.......................... 39,900 Equity 937,650
CCA Prison Realty Trust*........................ 30,400 Equity 1,356,600
Centerpoint Properties Trust.................... 104,300 Equity 3,663,538
Chelsea GCA Realty, Inc......................... 88,493 Equity 3,379,326
Crescent Real Estate Equities Co................ 60,700 Equity 2,390,063
Developers Diversified Realty Corp.............. 127,930 Equity 4,893,323
Eastgroup Properties............................ 50,100 Equity 1,083,413
Essex Property Trust, Inc....................... 313,200 Equity 10,962,000
Excel Realty Trust, Inc......................... 251,800 Equity 7,931,700
First Union Real Estate......................... 441,150 Equity 7,168,687
First Washington Realty Trust................... 149,300 Equity 4,105,750
Florida Panthers Holding, Inc................... 93,800 Equity 1,618,050
Great Lakes REIT, Inc........................... 84,000 Equity 1,632,750
Grubb & Ellis Realty Income Trust*.............. 189,700 Mortgage 3,415
Kilroy Realty Corp.............................. 410,000 Equity 11,787,500
Kimco Realty Corp............................... 67,800 Equity 2,389,950
Mack-Cali Realty Corp........................... 284,400 Equity 11,660,400
Meridian Industrial Trust....................... 305,000 Equity 7,777,500
Pan Pacific Retail Properties, Inc.............. 180,600 Equity 3,860,325
Parkway Properties Inc.......................... 147,200 Equity 5,050,800
Public Storage Inc.............................. 157,100 Equity 4,614,812
Regency Realty Corp............................. 52,400 Equity 1,450,825
Rouse Co........................................ 195,900 Equity 6,415,725
Security Capital Atlantic, Inc.................. 109,800 Equity 2,319,525
Security Capital Pacific Trust.................. 311,620 Equity 7,556,785
Servico, Inc.................................... 526,100 Equity 8,877,937
Sovran Self Storage, Inc........................ 120,400 Equity 3,905,475
Spieker Properties, Inc......................... 96,000 Equity 4,116,000
Storage Trust Realty............................ 188,400 Equity 4,957,275
Storage USA, Inc................................ 14,700 Equity 587,081
Summit Properties, Inc.......................... 105,300 Equity 2,224,462
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
HEIMAN REAL ESTATE FUND
Schedule of Investments - continued December 31, 1997
<TABLE>
<CAPTION>
NAREIT
Par ($000) or Classification Market Value
Number of Shares (Unaudited) (Note 2)
---------------- -------------- ------------
<S> <C> <C> <C>
Trizec Hahn Corp................................... 690,200 Equity $ 16,004,012
Vornado Realty Trust............................... 141,200 Equity 6,627,575
Weeks Corp......................................... 109,200 Equity 3,494,400
------------
TOTAL COMMON STOCK (COST $155,974,667) ........................................ 192,629,776
------------
PREFERRED STOCKS -- 6.8%
Equity Office, Series-A ........................... 106,000 Equity 2,835,500
Health Care Property Investors, Inc., 7.875%....... 147,500 Equity 3,724,375
Highwoods Properties, Inc., 8.00%.................. 126,200 Equity 3,139,225
Security Capital Industrial Trust, 8.54%, Ser. C... 25,370 Equity 1,431,819
Taubman Center, Inc., 8.30%, Ser. A................ 158,300 Equity 3,888,244
------------
TOTAL PREFERRED STOCKS (COST $14,769,835) ..................................... 15,019,163
------------
COMMERCIAL PAPER -- 3.1%
International Lease Finance Corp., 6.45%,
01/02/98 (Cost $6,926,759).................... $6,928 6,926,759
------------
TOTAL INVESTMENTS (COST $177,671,261) -- 97.5%................................. 214,575,698
OTHER ASSETS AND LIABILITIES, NET -- 2.5%...................................... 5,392,140
------------
NET ASSETS -- 100.0%........................................................... $219,967,838
============
</TABLE>
* Non-income producing security.
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
HEITMAN REAL ESTATE FUND
Statement Of Assets And Liabilities DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (identified cost $177,671,261)(Note 3)... $ 214,575,698
Cash ................................................................. 556
Receivables:
Capital shares sold ............................................... 2,938,868
Dividends ......................................................... 1,225,486
Investment securities sold ........................................ 2,465,531
Other assets ......................................................... 18,725
-------------
TOTAL ASSETS ....................................................... 221,224,864
-------------
LIABILITIES:
Payables:
Capital shares redeemed ........................................... 571,046
Investment management fees (Note 4) ............................... 126,790
Investment securities purchased ................................... 366,092
Accrued expenses ..................................................... 193,098
-------------
TOTAL LIABILITIES .................................................. 1,257,026
-------------
NET ASSETS:
(Applicable to 20,957,779 shares of $0.001 par value
beneficial interest issued and outstanding; unlimited
number of shares authorized) ......................................... $ 219,967,838
=============
Net asset value, offering price and redemption price per
Institutional class share ($134,745,718 divided by 12,843,243) ..... $ 10.49
=============
Net asset value and redemption price per
Advisor class share ($85,222,120 divided by 8,114,536) ............. $ 10.50
=============
Offering price per Advisor class share ($10.50 divided by .9525) ..... $ 11.02
=============
COMPONENTS OF NET ASSETS:
Paid-in capital ...................................................... $ 183,254,080
Distributions in excess of net realized gain on investments .......... (190,679)
Net unrealized appreciation of investments ........................... 36,904,437
-------------
NET ASSETS .............................................................. $ 219,967,838
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
HEITMAN REAL ESTATE FUND
- ------------------------
Statement of Operations for the Year Ended December 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (Note 2) ..................................... $ 9,158,194
Interest................................................ 861,952
------------
Total investment income ............................... 10,020,146
------------
EXPENSES:
Advisory fees (Note 4) ................................. $ 1,489,121
Administration fees (Note 4) ........................... 213,711
Trustees' fees and expenses (Note 5) ................... 84,743
Accounting fees (Note 4) ............................... 97,906
Professional fees ...................................... 127,775
Custodian fees ......................................... 54,230
Insurance .............................................. 48,391
State Registration fees ................................ 20,297
Shareholder report fees ................................ 30,481
Distribution fees -- Advisor Shares (Note 4) ........... 190,631
Shareholder Servicing fees -- Advisor Shares (Note 4)... 190,631
Transfer agent fees .................................... 155,943
Other .................................................. 19,060
------------
Total expenses ......................................... 2,722,920
------------
Net investment income .............................. 7,297,226
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from security transactions ........... 41,132,067
Net change in unrealized depreciation of investments (7,817,181)
------------
Net realized and unrealized gain on investments ........ 33,314,886
------------
Net increase in net assets resulting from operations ...... $ 40,612,112
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 9
HEITMAN REAL ESTATE FUND
- ------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Fiscal For the Fiscal
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income (Note 2) .............................................. $ 7,297,226 $ 5,550,774
Net realized gain from security transactions ................................ 41,132,067 11,165,013
Net change in unrealized appreciation (depreciation) of investments ......... (7,817,181) 34,985,157
------------- -------------
Net increase in net assets resulting from operations ...................... 40,612,112 51,700,944
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS -- INSTITUTIONAL SHARES (NOTE 2):
From net investment income ($0.40 and $0.37 per share, respectively) ........ (4,846,923) (4,155,578)
In excess of net investment income ($0.05 and $0.10 per share,
repectively) .............................................................. (579,274) (1,094,050)
From net capital gains ($2.24 and $0.41 per share, respectively) ............ (26,273,187) (4,677,017)
DISTRIBUTIONS TO SHAREHOLDERS -- ADVISOR SHARES (NOTE 2):
From net investment income ($0.35 and $0.31 per share, respectively) ........ (2,450,303) (1,395,196)
In excess of net investment income ($0.04 and $0.12) per share
repectively) .............................................................. (292,845) (529,580)
From net capital gains ($2.24 and $0.41 per share, respectively) ............ (15,427,731) (2,751,674)
------------- -------------
Total distributions paid to shareholders ................................ (49,870,263) (14,603,095)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
Receipt from Institutional Shares sold ...................................... 37,287,687 45,944,221
Receipt from Institutional Shares issued on reinvestment of distributions ... 12,987,988 3,754,881
Institutional Shares redeemed ............................................... (39,743,768) (41,272,537)
Receipt from Advisor Shares sold ............................................ 66,177,339 67,072,455
Receipt from Advisor Shares issued on reinvestment of distributions ......... 16,880,394 4,469,947
Advisor Shares redeemed ..................................................... (73,443,317) (9,199,099)
------------- -------------
Increase in net assets resulting from capital share
transactions(a).......................................................... 20,146,323 70,769,868
------------- -------------
TOTAL INCREASE IN NET ASSETS ............................................ 10,888,172 107,867,717
NET ASSETS:
Beginning of year ........................................................... 209,079,666 101,211,949
------------- -------------
End of year ................................................................. $ 219,967,838 $ 209,079,666
============= =============
aTRANSACTIONS IN SHARES OF BENEFICIAL INTEREST WERE:
Institutional Shares sold ................................................... 3,286,040 4,898,411
Institutional Shares issued on reinvestment of distributions ................ 1,240,228
376,263
Institutional Shares redeemed ............................................... (3,473,055) (4,542,560)
Advisor Shares sold ......................................................... 5,824,983 7,164,380
Advisor Shares issued on reinvestment of distributions ...................... 1,613,411 429,486
Advisor Shares redeemed ..................................................... (6,592,740) (961,503)
------------- -------------
Net increase in shares ..................................................... 1,898,867 7,364,477
Shares outstanding -- Beginning balance ..................................... 19,058,912 11,694,435
------------- -------------
Shares outstanding -- Ending balance ........................................ 20,957,779 19,058,912
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE> 10
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 Three-Month For the
Fiscal Years Period Ended Fiscal Years
Ended Dec. 31, Dec. 31, Ended Sept. 30,
-------------------------------------- ------------ ----------------------
1997 1996 1995 1994 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... $ 10.96 $ 8.65 $ 8.30 $ 9.23 $ 10.95 $ 8.29
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) ................ 0.40 0.37 0.33 0.10 0.32 0.40
Net realized and unrealized gain (loss)
on investments ........................ 1.82 2.82 0.53 (0.05) (0.92) 2.67
-------- -------- -------- -------- -------- --------
Total from investment operations ... 2.22 3.19 0.86 0.05 (0.60) 3.07
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS
From net investment income(a) ........... (0.40) (0.37) (0.33) (0.10) (0.31) (0.41)
In excess of net investment income ...... (0.05) (0.10) 0.00 0.00 0.00 0.00
From net realized gain on investments ... (2.24) (0.41) 0.00 (0.77) (0.67) 0.00
From tax return of capital(b) ........... (0.00) 0.00 (0.18) (0.11) (0.14) 0.00
-------- -------- -------- -------- -------- --------
Total distributions ................ (2.69) (0.88) (0.51) (0.98) (1.12) (0.41)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD ............. $ 10.49 $ 10.96 $ 8.65 $ 8.30 $ 9.23 $ 10.95
======== ======== ======== ======== ======== ========
Total Return ............................... 21.12% 38.06% 10.87% 0.65% (5.22)% 37.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) .... $134,746 $129,275 $ 95,692 $105,569 $116,268 $141,672
Ratio of expenses to average
net assets ........................... 1.09% 1.23% 1.29% 1.28%* 1.22% 1.24%
Ratio of net investment income to
average net assets(a) ................. 3.57% 4.09% 3.97% 4.35%* 2.87% 4.37%
Portfolio Turnover ...................... 89.51% 59.88% 65.33% 37.55%* 90.11% 61.47%
Average commission rate paid(c) ............ $ 0.0425 $ 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 year
ended September 30, 1993 has not been restated.
(c) Required disclosure for fiscal years beginning after September 1, 1995
pursuant to SEC regulations.
10
<PAGE> 11
HEITMAN REAL ESTATE FUND
Financial Highlights -- continued
The table below sets forth financial data for a share of beneficial interest
outstanding throughout each fiscal period presented.
ADVISOR SHARES
<TABLE>
<CAPTION>
For the Period
For the Fiscal For the Fiscal May 15, 1995+
Year Ended Year Ended through
December 31, 1997 December 31,1996 December 31, 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... $ 10.98 $ 8.67 $ 8.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income(a) ................ 0.35 0.31 0.23
Net realized and unrealized gain
on investments ........................ 1.80 2.84 0.80
-------- -------- --------
Total from investment operations ... 2.15 3.15 1.03
-------- -------- --------
DISTRIBUTIONS
From net investment income(a) ........... (0.35) (0.31) (0.23)
In excess of net investment income ...... (0.04) (0.12) 0.00
From net realized gain on
investments ........................... (2.24) (0.41) 0.00
From tax return of capital(b) ........... (0.00) (0.00) (0.13)
-------- -------- --------
Total distributions ................ (2.63) (0.84) (0.36)
-------- -------- --------
NET ASSET VALUE, END OF PERIOD ............. $ 10.50 $ 10.98 $ 8.67
======== ======== ========
Total Return(c) ............................ 20.44% 37.44% 13.19%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) .... $ 85,222 $ 79,805 $ 5,520
Ratio of expenses to average net assets . 1.59% 1.73% 1.99%(*)(d)
Ratio of net investment income to
average net assets(a) ................. 3.14% 3.91% 4.27%(*)(d)
Portfolio Turnover ...................... 89.51% 59.88% 65.33%(*)
Average commission rate paid(e) ......... $ 0.0425 $ 0.0504 --
</TABLE>
- ----------
* Annualized.
+ Commencement of Operations.
(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 dividends received from the REITs. Such distributions may
include a portion which may be a return of capital.
(c) This result does not include the sales charge. If the charge had been
included, the return would have been lower. The total return 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.
11
<PAGE> 12
HEITMAN REAL ESTATE FUND
Notes to Financial Statements December 31, 1997
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 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 and November 5, 1996, the Fund received
12
<PAGE> 13
HEITMAN REAL ESTATE FUND
Notes to Financial Statements -- continued December 31, 1997
distributions from GRIT in the amount of $369,915 and $110,026, respectively,
representing $1.95 and $0.67, respectively, 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 $0.018
per share. At December 31, 1997, the Fund owned 189,700 shares of the GRIT
liquidating trust for a value of $3,415.
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.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund records dividends and distributions to its shareholders on the
ex-dividend date.
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. The amounts of
dividends from net investment income and of distributions from net realized
gains are determined in accordance with Federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the composition of net assets based on their Federal tax-basis treatment;
temporary differences do not require reclassification. At December 31, 1997,
$872,119 of distributions in excess of net investment income and $559,783 of
distributions in excess of net realized gain were reclassified to paid-in
capital. Distributions to shareholders which exceed net investment income and
net realized gain for financial reporting purposes but not for tax purposes are
reported as distributions in excess of net investment income and net realized
gain. To the extent they exceed net investment income and net realized gain for
tax purposes, they are reported as distributions of capital.
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.
13
<PAGE> 14
HEITMAN REAL ESTATE FUND
Notes to Financial Statements -- continued December 31, 1997
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 AND INCOME ALLOCATIONS
All expenses of the Fund (other than expenses incurred under the Distribution
Plan and the Shareholder Servicing Plan), income and realized and unrealized
gain and losses 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, 1997, the cost of purchases and the
proceeds from sales of investment securities (excluding short-term investments)
aggregated $178,581,679 and $195,485,981, respectively. Cost for federal income
tax purposes is $177,861,942 and unrealized appreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation.......... $37,343,946
Gross unrealized depreciation.......... (630,190)
-----------
Net unrealized appreciation......... $36,713,756
===========
</TABLE>
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.
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, 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.
14
<PAGE> 15
HEITMAN REAL ESTATE FUND
Notes to Financial Statements -- continued December 31, 1997
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.
NOTE 6 -- SUBSEQUENT EVENTS
On January 6, 1998, the Trust, on behalf of the Fund, entered into an Agreement
and Plan of Reorganization (the "Agreement") with UAM Funds Trust, on behalf of
the Heitman/PRA Real Estate Portfolio (the "UAM Portfolio"). The Agreement
provides for (i) the transfer of all the assets of the Fund to the UAM Portfolio
in exchange for shares of the UAM Portfolio and the assumption by the UAM
Portfolio of the liabilities of the Fund and (ii) the distribution of shares of
the UAM Portfolio to the then-existing shareholders of the Fund in liquidation
of the Fund (the "Reorganization"). If shareholder approval is obtained and
other conditions are satisfied, the reorganization will be completed as soon as
possible thereafter.
15
<PAGE> 16
- -------------------------
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, 1997, and the results of its operations for the year
then ended, the changes in its net assets and the financial highlights for each
of the two years in the period 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 audits. We conducted our audits 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 audits, which included
confirmation of securities at December 31, 1997 by correspondence with the
custodian and, where appropriate, the application of alternative auditing
procedures for unsettled security transactions, provide 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 23, 1998
16
<PAGE> 17
- -------------------------
HEITMAN REAL ESTATE FUND
- -------------------------
Dividend Notices (Unaudited) December 31, 1997
- --------------------------------------------------------------------------------
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, 1997 through
December 31, 1997:
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS SHARES
Ordinary Income
Distributions Per Share
--------------------------
From From Return of Capital
Date Total Dividend Investment Short Term Capital Gains
Paid Per Share Income Capital Gains Per Share Per Share
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
03/31/97 $0.1061 $0.1048 $0.0000 $0.000 $0.0013
06/30/97 $0.1150 $0.1136 $0.0000 $0.000 $0.0014
09/30/97 $0.1048 $0.1036 $0.0000 $0.000 $0.0012
12/08/97 $2.2380 $0.0000 $0.9776 $0.000 $1.2604
12/23/97 $0.1223 $0.1208 $0.0000 $0.000 $0.0015
</TABLE>
<TABLE>
<CAPTION>
ADVISOR CLASS SHARES
Ordinary Income
Distributions Per Share
--------------------------
From From Return of Capital
Date Total Dividend Investment Short Term Capital Gains
Paid Per Share Income Capital Gains Per Share Per Share
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
03/31/97 $0.0921 $0.0908 $0.0000 $0.0000 $0.0013
06/30/97 $0.1020 $0.1006 $0.0000 $0.0000 $0.0014
09/30/97 $0.0900 $0.0888 $0.0000 $0.0000 $0.0012
12/08/97 $2.2380 $0.0000 $0.9776 $0.0000 $1.2604
12/23/97 $0.1095 $0.1080 $0.0000 $0.0000 $0.0015
</TABLE>
Pursuant to Section 852 of the Internal Revenue Code, the Heitman Real Estate
Fund designates $23,530,721 as long term capital gain distributions for the
fisal year ended December 31, 1997. Of this total Capital Gain Dividend Amount,
the Fund made a 28 Percent Rate Gain distribution of $16,063,813, a 20 Percent
Rate Gain distribution of $7,434,210, and an Unrecaptured Section 1250 Gain of
$32,698.
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 1997
and should be used to complete your 1997 tax return.
17
<PAGE> 18
This page intentionally left blank.
18
<PAGE> 19
HEITMAN REAL ESTATE FUND
ANNUAL REPORT
December 31, 1997
INVESTMENT ADVISORS
HEITMAN/PRA SECURITIES ADVISORS, INC.
180 NORTH LASALLE STREET, SUITE 3600
CHICAGO, IL 60601
OFFICERS
WILLIAM L. RAMSEYER, CHAIRMAN
DEAN A. SOTTER, PRESIDENT AND TREASURER
TIMOTHY PIRE, SECRETARY
RANDY NEWSOME, ASSISTANT SECRETARY
BOARD OF TRUSTEES
ROBERT W. BEENEY
DONALD L. FOOTE
JOHN F. GOYDAS
WILLIAM L. RAMSEYER
MAURICE WIENER
DISTRIBUTOR -- Heitman/PRA Institutional Class
RODNEY SQUARE DISTRIBUTORS, INC.
RODNEY SQUARE NORTH
1100 N. MARKET STREET
WILMINGTON, DE 19890
DISTRIBUTOR -- Advisor Class
ACG CAPITAL CORPORATION
1661 TICE VALLEY BOULEVARD #200
WALNUT CREEK, CA 94595
(800) 888-REIT
CUSTODIAN
WILMINGTON TRUST COMPANY
RODNEY SQUARE NORTH
1100 N. MARKET STREET
WILMINGTON, DE 19890
TRANSFER AGENT AND ADMINISTRATOR
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
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