RREEF
REAL ESTATE
SECURITIES
FUND
Annual Report
October 31, 1996
RREEF
The RREEF Funds
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President's Letter
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Dear Shareholder:
This is the second annual report for the RREEF Real Estate Securities Fund. My
associates and I welcome you to the Fund and appreciate the confidence you have
exhibited in us and our investment strategy.
The Fund has been designed to pool funds for investment in real estate
securities. The Fund is very important to RREEF and RREEF Securities and will be
run with the same approach and strategy that has made us a successful REIT
separate account manager. Our goal is to selectively invest in REIT securities
that will be strong performers given their strategies, property portfolios, and
valuation characteristics.
PORTFOLIO DIVERSIFICATION BY PROPERTY TYPE AND GEOGRAPHIC REGION
Diversification based on REIT market values of $6,976,943 as of October 31,
1996.
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BY PROPERTY TYPE BY GEOGRAPHIC REGION
Office 26% Southeast 12%
Hotels 14% Southwest 22%
Retail 7% West N. Central 2%
Storage 7% East N. Central 13%
Industrial 11% Mideast 16%
Regional Mall 8% Mountain 6%
Apartment 27% Northeast 16%
Pacific 13%
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REIT MARKET OUTLOOK
Equity REITs again posted strong total returns in the third quarter of calendar
year 1996. The Wilshire REIT Index posted a total return of 6.74 percent and the
NAREIT Equity REIT Index delivered a positive 6.87 percent return for the
quarter. This brought year to date total returns to 17.13 percent and 17.61
percent, respectively. These returns were fueled by continued strong property
markets and REITs' attractive valuation relative to equities generally. Many
income and balanced fund managers, and to a lessor extent growth managers, began
to see REITs as a good value as well as a safe haven from a potential market
correction.
1
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President's Letter (continued)
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The Fund performed well versus the Wilshire REIT Index. Good sector selection
and stock selection contributed to the strong third quarter results. During the
quarter, the portfolio was overweighted in the top four performing sectors --
office, hotel, industrial and self-storage. Additionally, we were underweighted
in three of the bottom four performing sectors.
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COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN:
RREEF Real Estate Securities Fund
Wilshire REIT Index
DATE RREEF Real Estate Willshire
Securities Fund REIT Index
-------------------------------------------------
09/21/95 10,040.00 10,065.00
01/31/96 10,672.76 10,601.09
04/30/96 10,925.91 10,730.13
07/31/96 11,466.26 11,210.99
10/31/96 12,695.52 12,266.37
RETURN FOR 12 MONTHS ENDED OCTOBER 31, 1996
RREEF Real Estate Securities Fund 29.28%
Wilshire REIT Index 25.73%
Past performance is not predictive of future performance
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Growth of the equity REIT market continues at a strong and dramatic pace. At
quarter end, the total market capitalization of the NAREIT Equity REIT Index
(less HealthCare) stood at $66.9 billion up from $54.1 billion as of December
31, 1995. Through a combination of secondary and initial public offerings (IPOs)
the REIT market will raise more equity in 1996 than in any previous year. In
fact, the amount raised should exceed $15 billion by year end. The new equity
issued in 1996 will be equal to approximately 160 percent of the entire REIT
universe just four short years ago.
The market continues to look attractive and we expect good returns from REITs.
SECTOR REVIEW
OFFICE SECTOR
RREEF Securities maintained an overweighted position in the office sector during
the quarter. The rationale remained consistent, with solid demand and limited
new supply expected to bring rent increases in several markets. Office REITs
have unparalleled access to capital, allowing increasingly complex transactions.
This will generate above-consensus earnings growth.
2
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President's Letter (continued)
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SECTOR REVIEW (CONTINUED)
APARTMENT SECTOR
Operating results for the apartment sector are in a state of divergence;
however, current share pricing reflects expectations for solid growth. RREEF
Securities had a slightly overweighted position in the apartment sector during
the quarter. However, at quarter end we had an underweighted position due to
paring back exposure in several apartment companies. Selectivity will remain
important in this sector.
RETAIL SECTOR
RREEF Securities maintained an underweighted position in the retail sector
during the quarter. This underweighted position will remain until REIT
valuations drop to a level that RREEF Securities' analysts believe to be fair
relative to net asset value and satisfactory upside potential exits. Internal
growth prospects for the near-term are not compelling and the risks associated
with external growth are high. Overall, these retail REITs have a higher risk
for capital loss than potential return.
REGIONAL MALL SECTOR
Despite the uncertainty in the retail sector, the regional mall sector has
delivered attractive returns over the last 12 months. RREEF Securities had an
underweighted position in the regional mall sector with the view that if
external growth is achievable a marketweighted position would be appropriate for
the fourth quarter. RREEF Securities analysts expect attractive returns to
continue to be delivered by well-managed companies that are able to access
capital to take advantage of the possibility of external growth.
INDUSTRIAL SECTOR
RREEF Securities continued to be overweighted in the industrial sector. The
consolidation of distribution properties continued to benefit markets where
REITs were active. Strong demand, along with modest supply growth will secure
increased rents and stablize tenant improvement costs in the future.
HOTEL SECTOR
Hotel REITs are relatively new in the RREEF Securities' portfolio. The hotel
sector was added due to the exceptional fundamentals of the lodging industry,
particularly within the full-service sector. RREEF Securities increased its
allocation and had an overweighted position in the hotel sector during the
quarter. RREEF Securities analysts believe that Wall Street estimates for
full-service hotel REIT are low and do not fully reflect growth opportunities.
The focus of RREEF Securities will remain on companies with full-service hotel
portfolios in markets insulated from supply additions.
3
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President's Letter (continued)
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SECTOR REVIEW (CONTINUED)
SELF-STORAGE SECTOR
RREEF Securities had a marketweighted position in the self-storage sector during
the quarter. This sector has reached maturity with sustainable FFO growth of
approximately 10 percent. Sector pricing reflects the stable outlook and RREEF
Securities analysts believe that a market weighting is appropriate.
We take a selective approach to investing in REIT securities, as we believe you
must to be successful over the long term. We typically hold 25 to 35 securities
in an investment portfolio and on October 31, 1996, we owned 33 issues in the
fund. Our investments continue to focus on companies with growing cash flow
streams, strong management, successful strategies, conservative financial
structures and, therefore, the ability to generate strong returns.
/s/ Kim G. Redding
Kim G. Redding
President
4
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5
RREEF REAL ESTATE SECURITIES FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996
<TABLE>
<CAPTION>
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MARKET PERCENT OF
DESCRIPTION SHARES VALUE NET ASSETS
- ----------- ------ ----- ----------
<S> <C> <C> <C>
REAL ESTATE INVESTMENT TRUSTS
MULTI-FAMILY RESIDENTIAL
Ambassador Apartments, Inc. ......................................... 2,100 $ 42,525
Avalon Properties, Inc. ............................................. 5,500 127,188
Bay Apartment Communities ........................................... 6,816 204,480
Camden Property Trust ............................................... 5,200 141,700
Columbus Realty Trust ............................................... 7,200 151,200
Equity Residential Properties Trust ................................. 5,400 198,450
Evans Withycombe Residential ........................................ 6,900 145,763
Gables Residential Trust ............................................ 10,300 249,775
Mid-America Apartment Communities, Inc. ............................. 6,700 170,013
Summit Properties, Inc. ............................................. 9,600 188,400
United Dominion Realty Trust ........................................ 15,300 216,113
----------------
1,835,607 25.5%
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OFFICE
Arden Realty Group, Inc. ............................................ 13,000 294,125
Beacon Properties Corporation ....................................... 7,000 205,625
Cali Realty Corporation ............................................. 10,700 287,563
Crescent Real Estate Equities, Inc. ................................. 6,000 250,500
Highwood Properties, Inc. ........................................... 10,700 307,625
Reckson Associates Realty Corporation ............................... 8,700 309,938
Spieker Properties, Inc. ............................................ 5,000 153,750
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1,809,126 25.1%
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RETAIL
REGIONAL MALLS
CBL & Associates Properties ......................................... 9,600 226,800
Macerich Company .................................................... 15,700 345,400
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572,200 8.0%
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NEIGHBORHOOD AND COMMUNITY SHOPPING CENTERS
Alexander Haagen Properties, Inc. ................................... 9,200 135,700
Developers Diversified Realty Corporation ........................... 6,400 215,200
Vornado Realty Trust ................................................ 3,100 133,300
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484,200 6.7%
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1,056,400 14.7%
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</TABLE>
See accompanying notes to the financial statements.
6
RREEF REAL ESTATE SECURITIES FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996
<TABLE>
<CAPTION>
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MARKET PERCENT OF
DESCRIPTION SHARES VALUE NET ASSETS
- ----------- ------ ----- ----------
<S> <C> <C> <C>
HOTELS
Felcor Suite Hotels, Inc. ........................................... 3,900 $ 127,725
Innkeepers USA Trust ................................................ 11,200 131,600
Patriot American Hospitality ........................................ 8,700 305,585
RFS Hotel Investors, Inc. ........................................... 3,400 55,250
Starwood Lodging Trust .............................................. 8,400 378,000
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998,160 13.8%
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INDUSTRIAL
Centerpoint Properties Corporation .................................. 10,200 280,500
Duke Realty Investments, Inc. ....................................... 9,200 317,400
Security Capital Industrial Trust ................................... 10,600 192,125
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790,025 10.9%
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STORAGE
Public Storage, Inc. ................................................ 14,100 324,300
Storage USA, Inc. ................................................... 4,700 163,325
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487,625 6.8%
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TOTAL INVESTMENTS (Cost $6,233,686*) 6,976,943 96.8%
Excess of Other Assets over Liabilities 232,413 3.2%
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NET ASSETS $ 7,209,356 100.0%
================ ================
* Aggregate Cost for Federal tax purposes.
</TABLE>
See accompanying notes to the financial statements.
7
RREEF REAL ESTATE SECURITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
<TABLE>
<CAPTION>
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<S> <C>
ASSETS:
Investments, at value (cost $6,233,686) $ 6,976,943
Cash 73,465
Receivable for investments sold 211,335
Dividends and interest receivable 27,498
Net receivable from Adviser 62,829
Unamortized organizational expenses 76,105
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Total assets 7,428,175
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LIABILITIES:
Payable for investments purchased 159,881
Accrued expenses 58,938
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Total liabilities 218,819
----------------
NET ASSETS (equivalent to $12.29 per share based on 586,383
shares outstanding, unlimited shares authorized)* $ 7,209,356
================
NET ASSETS CONSIST OF:
Paid-in capital $ 6,177,848
Undistributed net investment income 87,808
Accumulated net realized gain 200,443
Net unrealized appreciation of investments 743,257
================
NET ASSETS $ 7,209,356
================
* Shares of the Fund are sold and redeemed at net asset value.
</TABLE>
See accompanying notes to the financial statements.
8
RREEF REAL ESTATE SECURITIES FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
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<S> <C>
INVESTMENT INCOME:
Dividends $ 325,767
Interest 13,162
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Total income 338,929
----------------
EXPENSES:
Management fees 37,182
Custodian, transfer agent and administration fees 165,142
Insurance 40,020
Audit and tax fees 25,000
Legal fees 25,000
Amortization of organizational expense 19,577
Directors fees 17,589
Other 8,958
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Total expenses 338,468
Less: fees waived and expenses reimbursed by Adviser (288,760)
Less: fees offset by Custodian (131)
----------------
Net expenses 49,577
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Net investment income 289,352
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REALIZED AND UNREALIZED GAINS:
Net realized gain on investments 198,658
Net change in unrealized appreciation on investments 825,847
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Net realized and unrealized gain on investments 1,024,505
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,313,857
================
</TABLE>
See accompanying notes to the financial statements.
9
RREEF REAL ESTATE SECURITIES FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
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YEAR ENDED PERIOD ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995 *
---------------- ---------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 289,352 $ 19,789
Net realized gain on investments 198,658 ----
Change in net unrealized appreciation (depreciation) on investments 825,847 (82,590)
---------------- ---------------------
Net increase (decrease) in net assets resulting from operations 1,313,857 (62,801)
Distributions to shareholders from:
Net investment income (155,292) ----
Net increase in net assets resulting
from Fund share transactions 3,067,828 2,945,754
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Total increase in net assets 4,226,393 2,882,953
NET ASSETS:
Beginning of period 2,982,963 100,010
---------------- ---------------------
End of period (including undistributed net investment
income of $153,849 and $19,789 respectively) $ 7,209,356 $ 2,982,963
================ =====================
</TABLE>
* The Fund commenced operations on September 21, 1995.
See accompanying notes to the financial statements.
10
RREEF REAL ESTATE SECURITIES FUND
FINANCIAL HIGHLIGHTS
(FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
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YEAR ENDED PERIOD ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995 *
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<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.82 $ 10.00
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Income from investment operations:
Net investment income 0.55 0.07
Net realized and unrealized gain/loss on investments 2.27 (0.25)
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Total from investment operations 2.82 (0.18)
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Less distributions to shareholders from:
Net investment income (0.35) -
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NET ASSET VALUE, END OF PERIOD $ 12.29 $ 9.82
============ ==========
AGGREGATE TOTAL RETURN 29.28% (1.80%)
RATIOS/SUPPLEMENTAL DATA:
Net expenses as a percentage of
average net assets 1.00% 1.50%**
Net investment income as a percentage of
average net assets 5.84% 6.66%**
Portfolio turnover rate 86% 0%
Average broker commission rate $ 0.0545 ----
Net assets, end of period (000's) $ 7,209 $ 2,983
The Adviser has voluntarily agreed to waive its management fee and
reimburse certain expenses incurred by the Fund. The Custodian has
waived part of its fees for balance credits given to the Fund.
Without these waivers of fees and reimbursement of expenses, the
ratios of net expenses and net investment income as a percentage of
average net assets would have been:
Net expenses as a percentage of
average net assets 6.83% 14.83%**
Net investment income as a percentage of
average net assets 0.01% (6.67%)**
-------------------------------------
* The Fund commenced operations on September 21, 1995.
** Annualized
</TABLE>
See accompanying notes to the financial statements.
11
RREEF REAL ESTATE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
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1. SIGNIFICANT ACCOUNTING POLICIES
RREEF Real Estate Securities Fund (the "Fund") is a series of RREEF
Securities Fund, Inc. (the "Company"). The Fund is registered under the
Investment Company Act of 1940, as amended, as an open end, non-diversified
management investment company. The Company was organized in Maryland on
March 15, 1995 and commenced operations on September 21, 1995. The
following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
PORTFOLIO VALUATION
Equity securities listed or regularly traded on a securities exchange
(including NASDAQ) are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on more than one
exchange is valued according to the broadest and most representative market
as determined by RREEF Real Estate Securities Advisers L.P. (the
"Adviser"). Other equity securities and those listed securities that are
not traded on a particular day are valued at the mean between the latest
bid and asked prices. Debt securities are generally traded in the
over-the-counter market and are valued at a price deemed best to reflect
fair value as quoted by dealers who make markets in these securities or by
an independent pricing service. Short-term debt obligations and money
market securities maturing in sixty days or less are valued at amortized
cost which approximates value. Securities for which the above valuation
procedures are inappropriate or are deemed not to reflect fair value are
stated at fair value as determined in good faith by or under the
supervision of the officers of the Fund as authorized by the Board of
Directors.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks and
broker/dealers whereby the Fund acquires a security for cash and obtains a
simultaneous commitment from the seller to repurchase the security at an
agreed upon price and date. The Fund, through its custodian, takes
possession of securities collateralizing the repurchase agreement. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The collateral is marked to
market daily to ensure that the market value including accrued interest of
the underlying assets remains sufficient to protect the Fund in the event
of default by the seller. In connection with transactions in repurchase
agreements, if the seller defaults and the value of the collateral declines
or if the seller enters insolvency proceedings, realization of collateral
by the Fund may be delayed or limited. The Fund may enter into repurchase
agreements only with dealers or banks determined by the Adviser to present
minimal credit risks pursuant to procedures established by the Board of
Directors to evaluate creditworthiness.
12
RREEF REAL ESTATE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
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TAXES
The Fund intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code, as amended (the "Code").
The Fund intends to distribute to shareholders all of its taxable income,
including any net realized gain on investments not offset by loss
carryovers, to shareholders within the prescribed time periods.
Accordingly, no provision for federal income or excise tax is provided.
DISTRIBUTIONS TO SHAREHOLDERS
The Fund intends to declare distributions from net investment income, if
any, semi-annually. The Fund intends to distribute capital gains, if any,
annually.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
losses deferred due to wash sales, excise tax regulations and utilization
of capital loss carryovers. Permanent differences relating to shareholder
distributions will result in reclassifications to paid-in capital. During
the year ended October 31, 1996, the Fund reclassified amounts to reflect
an increase to paid-in capital of $64,256, a decrease to undistributed net
investment income of $66,041 and an increase to accumulated net realized
gain of $1,785.
INVESTMENT TRANSACTIONS AND INCOME
Security transactions are accounted for on the trade date. Dividend income
and distributions to shareholders are recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. In determining the net
realized gain or loss on securities sold, the cost of securities is
determined on the identified cost basis.
DEFERRED ORGANIZATION EXPENSES
Costs incurred by the Fund in connection with its organization have been
deferred and are being amortized on a straight-line basis over a five year
period beginning on the commencement of operations. In the event that any
of the initial shares of the Fund are redeemed during such amortization
period, the Fund will be reimbursed for any unamortized costs in the same
proportion as the number of shares redeemed bears to the number of initial
shares outstanding at the time of redemption.
INVESTMENT RISK
There are certain additional risks involved in investing in Real Estate
Investment Trusts ("REITs") than a more diversified portfolio of
investments. The Fund may be subject to certain risks similar to those
associated with direct ownership of real estate including: local or
regional economic conditions, changes in zoning laws, credit risk, and
interest rate risk.
13
RREEF REAL ESTATE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
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2. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser, for management and investment advisory services,
a fee at an annual rate of 0.75% of daily net assets of the Fund up to $100
million and 0.65% on daily net assets in excess of $100 million. The
Adviser has currently agreed to waive its fee and additionally reimburse
the Fund to the extent the Fund's annual expenses (including management fee
but excluding taxes, interest, extraordinary expenses and brokerage
commissions or transaction costs) exceed 1.00% of average daily net assets.
Certain Officers and Directors of the Fund are also Officers or Directors
of the Adviser, or Investors Bank and Trust Company ("Investors Bank").
Officers and Directors of the Adviser and Investors Bank do not receive any
compensation from the Fund for serving as Director or Officer of the Fund.
The fund has entered into an expense offset arrangement as part of its
Custody agreement with Investors Bank. Under this arrangement, the Fund's
custody fees are reduced when the Fund maintains cash on deposit at
Investors Bank.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from the sale of securities, excluding
short-term investments, for the year ended October 31, 1996 was $7,125,536
and $4,040,686, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis,
are as follows:
Aggregate cost $ 6,233,686
------------
Gross unrealized appreciation $ 744,783
Gross unrealized depreciation (1,526)
------------
Net unrealized appreciation $ 743,257
------------
14
RREEF REAL ESTATE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. SHARE TRANSACTIONS
The Articles of Incorporation of the Company permits the Directors to issue
two billion shares of capital stock (par value $.001 per share), 500
million of which are classified as shares of the Fund. Transactions in Fund
shares during the periods indicated were as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
October 31, 1996 October 31, 1995*
--------------------------------------------------------
Dollars Shares Dollars Shares
------- ------ ------- ------
<S> <C> <C> <C> <C>
Shares sold $2,954,839 272,098 $2,945,754 293,768
Shares issued to shareholders in
reinvestment of distributions 116,612 10,855 ---- ----
Shares repurchased (3,623) (339) ---- ----
NET INCREASE $3,067,828 282,614 $2,945,754 293,768
========== ======= ========== =======
</TABLE>
* The Fund commenced operations on September 21, 1995.
5. PRINCIPAL SHAREHOLDERS
Five shareholders, each owning greater than 10% of the outstanding shares
of the Fund, cumulatively own 92% of the outstanding shares.
15
Independent Auditors' Report
To the Directors and Shareholders of RREEF Real Estate Securities Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of RREEF Real Estate Securities Fund (a series of
RREEF Securities Fund, Inc.) as of October 31, 1996, the related statement of
operations for the year then ended and the statement of changes in net assets
and the financial highlights for the year then ended and for the period
September 21, 1995 (commencement of operations) through October 31, 1995. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of the securities owned at October 31, 1996 by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of RREEF Real Estate
Securities Fund at October 31, 1996, the results of its operations, the changes
in its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 27, 1996
16
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RREEF Funds
875 North Michigan Avenue, 41st floor
Chicago, IL 60611-1901
312-266-9600
