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REALTY
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SHARES
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PORTFOLIO
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QUARTERLY REPORT
JUNE 30, 2000
ADVISED BY:
CLARION [BULLET] CRA
S E C U R I T I E S
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Letter to Our Shareholders
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We present the attached report for the portfolio managed on your behalf by
Clarion o CRA Securities for the quarter ended June 30, 2000. The report
includes our assessment of factors influencing the performance of real estate
securities during the second quarter and our outlook for the next quarter. We
would be happy to answer any questions you may have about it.
PERFORMANCE:
------------
The following table presents performance for the portfolio relative to several
indices. The portfolio outperformed the real estate securities indices for the
month of June, the quarter, year-to-date, the trailing twelve months, and since
inception.
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SINCE
JUNE TRAILING YEAR TO ONE INCEPTION1
2000 3 MO. DATE YEAR 01/01/97
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CRA Realty Shares Portfolio 4.32 13.14 16.21 6.49 4.52
Wilshire R.E. Securities 3.37 12.07 15.21 4.46 2.85
NAREIT - Equity REITs 2.57 10.54 13.19 3.03 1.98
S&P 500 (Large Co. Stocks) 2.47 -2.66 -0.43 7.24 23.05
Russell 2000 (Small Co. Stocks) 8.72 -3.78 3.03 14.33 12.06
Lehman Gov't/Corp. Bonds 2.04 1.45 4.16 4.29 5.96
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1 Annualized
Real estate securities delivered double-digit returns for the quarter as other
stocks fell. During the second quarter, the S&P 500 index fell 2.6%, and the
Russell 2000 index of smaller company stocks fell 4%. The NASDAQ index of
technology stocks, despite a June bounce, fell 13% for the quarter.
Is The REIT Rally Over?
-----------------------
The real estate indices are up 14% - 15% so far in 2000, matching the returns
expected for the entire year by many analysts at the start of the year.
Naturally, some investors are asking whether REITs will fade as they did in the
second half of 1999. For several reasons outlined below, we think REITs will
continue to deliver positive returns from here.
o PRICE MULTIPLE IS STILL LOW: In our annual review and outlook, we examined the
dramatic multiple contraction that has occurred over the last two years. From
1997 to 1999, REITs experienced a dramatic multiple contraction of over 40%,
from 12.4 times to 7.3 times forward earnings (measured as FFO). Thus far in
2000, the multiple has expanded 7% - 8% to approximately 8 times forward
earnings, which is still far below the long term average multiple of 13.3 and
the recession low multiple of 10.4 seen in late 1990.
o DIVIDEND AND EARNINGS YIELDS STILL HIGH: The average dividend yield is still
over 7.5%, which compares favorably to the 6.0% yield on 1-year Treasury notes.
The average cash flow earnings yield is 12.5%. The spread or difference between
the REIT earnings yield and the 10-year Treasury note yield of 6.5% is more than
double the average spread observed in the 1990's of approximately 3.0%.
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o REAL ESTATE IS STILL CHEAPER ON WALL STREET: The average company's stock price
still represents about a 12% discount to CRA's estimate of the Net Asset Value
(NAV) or estimated private market value of its properties per share after
adjusting for debt and other assets and liabilities. Typically, REITs over the
last 10 - 15 years have traded at or slightly above NAV.
o REAL ESTATE FUNDAMENTALS REMAIN SOLID: Given a still expanding economy and
moderating new construction starts in virtually all property types, the outlook
for real estate markets is still very good. Higher interest rates have
contributed to a decline in new construction starts.
o NO STOCK OFFERINGS YET IN 2000!: Contributing to the poor performance of REITs
in 1998-99 was the glut of stock created by the huge surge of equity offerings
in 1997 and early 1998. As shown in the graph below, there have been no
offerings this year which, coupled with the plethora of active company stock
buy-back programs, has helped shrink the oversupply of REIT shares.
REIT EQUITY OFFERINGS
1993 - 2000
[bar chart omitted]
plot points follows:
1993 $12.7
1994 $10.2
1995 $6.2
1996 $9.3
1997 $22.0
1998 $12.2
1999 $4.4
2000 ytd* $0.0
Source: Merrill Lynch (includes common stock, unit investment trusts, and
convertible preferred stock offerings)
* As of June 30, 2000
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LANDSCAPE CHANGES
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More than anytime before in the last three years, the dispersion of pricing
multiples within the REIT group has widened. During 1998-99, there was very
little separation between the best and worst companies. As shown in the
following chart, this has begun to change:
HIGH MEDIUM LOW SPREAD OF
PROPERTY TYPE MULTIPLE MULTIPLE MULTIPLE HIGH/LOW (%)
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HealthCare 8.5 6.0 2.3 73%
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Shopping Centers 11.0 9.1 4.6 58
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Office 14.7 10.6 6.2 58
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Malls 10.7 8.4 5.4 49
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Hotels 9.2 6.6 4.9 47
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Apartments 12.5 11.1 8.7 30
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Industrial 13.7 11.1 9.5 30
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Storage 9.9 9.2 7.7 22
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Manufactured Homes 11.6 11.5 11.4 2
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As we predicted, the increased separation has given rise to an increase in
mergers and acquisitions and going-private transactions. In May, Bradley Real
Estate announced it was selling itself to a private REIT at a price
approximately equal to estimated NAV and a 15% - 20% premium to where the stock
had been trading. Pacific Gulf Properties announced in June that it was selling
the bulk of its properties (industrial and apartment holdings) and would make a
special dividend distribution with the proceeds later this year. The
distribution, estimated to be $26 - $28 per share, represents a 15% - 20%
premium to where the stock had traded. Finally, in the last week of June,
Mack-Cali and Prentiss Properties announced a proposed merger whereby the
complementary portfolios and management teams of these two medium-sized office
and industrial REITs would be potentially combined to form a nearly $6 billion
national company. Though the initial reaction from analysts and investors was
negative because Mack-Cali used its discounted stock to pay close to NAV for
Prentiss, CRA believes that this combination creates a larger platform for
growth than either of the companies had as independents. As long as large
multiple spreads persist, we expect to see more of these types of transactions.
Despite conventional wisdom to the contrary, we continue to see wide deviation
in performance across property types as shown in the following table.
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WILSHIRE REAL ESTATE SECURITIES INDEX
PERFORMANCE BY PROPERTY TYPE AS OF 6/30/00
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2ND YEAR-TO- 2000
PROPERTY TYPE QUARTER DATE RANK
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Hotels 18.9% 25.1% 1
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Office 12.8 17.9 2
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Apartments 12.8 14.8 4
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Diversified 12.6 16.4 3
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Mfr. Homes 12.0 8.1 8
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Industrial 11.2 13.9 5
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Shopping Centers 10.0 9.9 7
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Outlet Centers 8.8 -9.0 10
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Storage 5.7 4.9 9
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Malls 5.5 11.2 6
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Total Index 12.1% 15.2%
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Our overweighted positions in office and apartments and underweighting in
storage and malls helped the portfolio's relative performance during the
quarter. The decision to increase the weighting in hotels earlier this year was
also timely.
For the reasons described in this report, we continue to have a very positive
and constructive view of the return potential for an actively managed portfolio
of real estate company stocks. Though it continues to be impossible to predict
the market in the short run, we believe that the combination of a 7% - 8%
dividend yield and projected yearly earnings growth of 7% - 8% for the next 12
to 36 months creates a reasonable basis to expect annual returns in the low- to
mid-teens.
As always, we appreciate your continued faith and confidence.
Sincerely,
Clarion CRA Securities
/s/ T. RITSON FERGUSON /s/ KENNETH D. CAMPBELL
T. Ritson Ferguson Kenneth D. Campbell
Co-Portfolio Manager Co-Portfolio Manager
*The performance data quoted herein represents past performance and the return
and value of an investment in the Fund will fluctuate so that shares, when
redeemed, may be worth less than their original cost. This information must be
preceded or accompanied by a current prospectus. Investors should read the
prospectus carefully before investing or sending money. The CRA Realty Shares
Portfolio, a portfolio of the Advisors' Inner Circle Fund, is distributed by
SEI Investments Distributions Co., Oaks, PA 19456.
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Schedule of Investments
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June 30, 2000 (Unaudited)
NUMBER
OF SHARES VALUE
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EQUITIES (98.18%)
INDUSTRIAL (6.74%)
AMB Property Corp. 111,700 $ 2,548,156
Mission West Properties Inc. 94,400 991,200
Prologis Trust 35,400 754,463
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4,293,819
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INDUSTRIAL/OFFICE MIX (9.43%)
Duke-Weeks Realty Corp. 141,100 3,157,112
Liberty Property Trust 110,000 2,853,125
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6,010,237
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OFFICE (33.18%)
Arden Realty Inc. 96,100 2,258,350
Brandywine Realty Trust 96,900 1,853,212
CarrAmerica Realty Trust 115,500 3,060,750
Equity Office Properties Trust 124,657 3,435,859
Highwoods Properties Inc. 100,300 2,407,200
Kilroy Realty Corp. 90,200 2,339,562
Prentiss Properties Trust 129,400 3,105,600
Spieker Properties 58,400 2,686,400
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21,146,933
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SCHEDULE OF INVESTMENTS -- (CONTINUED)
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JUNE 30, 2000 (UNAUDITED)
NUMBER
OF SHARES VALUE
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RESIDENTIAL: APARTMENTS (26.05%)
Apartment Investment & Management Co. 60,900 $ 2,633,925
AvalonBay Communities Inc. 77,168 3,221,764
BRE Properties 78,100 2,255,137
Camden Property Trust 75,100 2,206,063
Equity Residential Properties Trust 76,500 3,519,000
Post Properties Inc. 62,800 2,763,200
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16,599,089
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RESIDENTIAL: HOTELS (5.71%)
Host Marriott Corp. 102,400 960,000
Starwood Hotels & Resorts Worldwide* 82,157 2,675,237
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3,635,237
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RETAIL: MALLS (6.78%)
General Growth Properties Inc. 52,300 1,660,525
Simon Property Group Inc. 60,228 1,336,309
Urban Shopping Centers 39,300 1,323,919
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4,320,753
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RETAIL: SHOPPING CENTERS (10.29%)
Bradley Real Estate Inc. 55,800 1,189,238
Developers Diversified Realty Corp. 82,000 1,224,875
Kimco Realty Corp. 45,700 1,873,700
Regency Realty Corp. 95,600 2,270,500
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6,558,313
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TOTAL EQUITIES (Cost $55,388,504) 62,564,381
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* REAL ESTATE OPERATING COMPANY (REOC)
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SCHEDULE OF INVESTMENTS -- (CONCLUDED)
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JUNE 30, 2000 (UNAUDITED)
PAR VALUE
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REPURCHASE AGREEMENT (2.49%)
Morgan Stanley Tri-Party Repo, 6.25%,
dated 6/30/00, matures 07/03/00,
repurchase price $1,589,052 (collateralized
by a U.S. Treasury Instrument, par value
$1,604,446, matures 01/15/10, market
value $1,634,766) $1,589,052 $ 1,589,052
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TOTAL REPURCHASE AGREEMENT (Cost $1,589,052) 1,589,052
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TOTAL INVESTMENTS (COST $56,977,556) (100.67%) 64,153,433
========= ===========
OTHER ASSETS AND LIABILITIES (-0.67%) (426,812)
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NET ASSETS (Equivalent to $9.36 per
share based on 6,807,843 shares of
capital stock outstanding) (100.0%) $63,726,621
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FINANCIAL HIGHLIGHTS*
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Net Asset Value
Total Net Assets Per Share
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NET ASSET VALUE:
Beginning of Period: 3/31/00 $54,394,693 $8.40
Net Investment Income $923,500 $0.14
Net Realized and Unrealized Gain
on Investments 6,459,143 0.96
Distributions from Net Investment
Income (978,968) (0.14)
Capital Stock Shares
Sold 3,839,265
Distributions Reinvested 688,410
Redeemed (1,599,422)
Net Increase in Net Asset Value 9,331,928 0.96
End of Period: 6/30/00 $63,726,621 $9.36
* Financial information included in this report has been taken from the records
of the Fund without examination by independent accountants.
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Notes
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FUND:
THE ADVISORS' INNER CIRCLE FUND
PORTFOLIO:
CRA REALTY SHARES PORTFOLIO
ADVISER:
CLARION CRA SECURITIES
DISTRIBUTOR:
SEI INVESTMENTS DISTRIBUTION CO.
ADMINISTRATOR:
SEI INVESTMENTS MUTUAL FUNDS SERVICES
TRANSFER AGENT:
DST SYSTEMS, INC.
LEGAL COUNSEL:
MORGAN, LEWIS & BOCKIUS LLP
INDEPENDENT PUBLIC ACCOUNTANTS:
ARTHUR ANDERSEN LLP
FOR MORE INFORMATION ON THE FUND, PLEASE CALL 1 (888)712-1103.
JUNE 30, 2000
CRA-M-006-14
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