UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR/A
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21206
AEW Real Estate Income Fund
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(Exact name of registrant as specified in charter)
399 Boylston Street, Boston, Massachusetts 02116
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(Address of principal executive offices) (Zip code)
Coleen Downs Dinneen, Esq.
IXIS Asset Management Advisors, L.P.
399 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agent for service)
Registrant's telephone number, including area code: (617) 449-2810
Date of fiscal year end: January 31, 2005
Date of reporting period: January 31, 2005
This Form N-CSR/A amends and restates the Registrant's Form N-CSR filed on April
7, 2005 (Accession No. 0001193125-05-071967) (the "Original N-CSR"). The only
items that have changed from the Original N-CSR are Items 1, 5, 11 and 12. No
other items have been revised or updated to reflect any events that may have
occurred since the date of the Original N-CSR.
Item 1. Reports to Stockholders.
Portions of the financial statements included in the Registrant's annual report
for the period ended January 31, 2005 (the "Report") have been restated, as
provided in the supplement to the Registrant's annual report included herein.
The original annual report is also included herein. A copy of the supplement and
the original report will be mailed to shareholders upon request and is available
on AEW's website at www.ixisadvisors.com/aew_rif.
AEW Real Estate Income Fund
Supplement to AEW Real Estate Income Fund Annual Report for the period ended
January 31, 2005
The information presented in the Statement of Operations, Statement of Changes
in Net Assets and Financial Highlights for the year ended January 31, 2005 has
been restated to reflect the reclassification of certain distributions paid from
net investment income to distributions paid from capital gains. These
reclassifications had no effect on total distributions paid or net assets. The
amounts as originally reported and the restated amounts are as follows:
Statement of Operations Original Restated
------------ -------------
Less Distributions to Preferred Shareholders:
Net investment income $ (454,181) $ (316,968)
Net realized short-term gain on investments - (1,132)
Net realized long-term gain on investments - (136,081)
Statement of Changes in Net Assets Original Restated
------------ -------------
Distributions to Preferred Shareholders:
Net investment income $ (454,181) $ (316,968)
Short-term capital gain - (1,132)
Long-term capital gain - (136,081)
Distributions to Common Shareholders:
Net investment income (5,193,528) (3,949,554)
Short-term capital gain - (14,108)
Long-term capital gain (465,757) (1,695,623)
Return of capital (96,550) (96,550)
Financial Highlights Original Restated
---------- ----------
Distributions to Preferred Shareholders:
Dividends from net investment income $ (0.12) $ (0.08)
Distributions from net realized short-term - (0.00) (a)
gains
Distributions from net realized long-term - (0.04)
gains
Distributions to Common Shareholders:
Dividends from net investment income (1.35) (1.03)
Distributions from net realized short-term - (0.00) (a)
gains
Distributions from net realized long-term (0.12) (0.44)
gains
Distributions from paid in capital (0.03) (0.03)
(a) Amount rounds to less than $0.01 per
share.
Notes to Financial Statements
Note 2e to the financial statements has been amended and restated as follows to
include additional language explaining the financial statement balances:
e. Dividends and Distributions to Shareholders. The Fund intends to make regular
monthly cash distributions to common shareholders at a level rate based on the
projected performance of the Fund. Distributions to common shareholders are
recorded on the ex-dividend date. Distributions to preferred shareholders are
recorded daily and are payable at the end of each dividend period. Each dividend
period for Auction Market Preferred Shares ("AMPS") is generally seven days. For
the year ended January 31, 2005 the dividend rates for AMPS ranged from 0.79% to
2.50%. The dividend rate for AMPS on January 31, 2005 was 2.47%. In addition, at
least annually, the Fund intends to distribute net capital gains, if any. When
the Fund identifies the character of distributions paid by REITs in the previous
calendar year, certain distributions to Fund shareholders may be redesignated as
capital gain distributions or, if in excess of taxable income, as a return of
capital.
The calendar year-end amounts of ordinary income, capital gains, and return of
capital included in dividends received from the Fund's investments in REITs are
reported to the Fund after the end of the calendar year; accordingly, the Fund
has estimated these amounts for the period from January 1 through January 31,
2005 for accounting purposes. Correspondingly, the timing and characterization
of certain income and capital gain distributions are determined annually on a
calendar year basis in accordance with federal tax regulations, which may differ
from accounting principles generally accepted in the United States of America.
The character of distributions paid as disclosed within the Statement of Changes
in Net Assets includes certain calendar year federal tax-based amounts and
corresponding estimates for the period from January 1 through January 31, 2005
of ordinary income, capital gains and return of capital based on dividends
received from REITs.
Permanent book and tax basis differences relating to shareholder distributions,
net investment income, and net realized gains will result in reclassifications
to the capital accounts.
Additionally, the tax character of distributions paid, originally reported as
unaudited additional information, has been added to Note 2e to the financial
statements, Dividends and Distributions to Shareholders, and is stated as:
2005 2004
------------- -------------
Distributions from:
Net investment income $ 3,906,427 $ 6,509,592
Long-term capital gain 2,207,039 686,193
Non-taxable return of capital 96,550 -
Differences between these amounts and those reported on the Statement of Changes
in Net Assets are primarily attributable to different book and tax treatment for
interest rate swaps and short-term capital gains.
At January 31, 2005, the difference between the components of distributable
earnings on a tax basis (as disclosed in note (b) to the Schedule of
Investments) and amounts reported on the Statement of Assets & Liabilities are
attributable to prior year wash sale loss deferrals.
AEW Real Estate Income Fund
STATEMENT OF OPERATIONS (AS RESTATED)
For the Year Ended January 31, 2005
INVESTMENT INCOME
Dividends $ 5,230,427
Interest 2,941
Less net foreign taxes withheld (16,720)
-------------
5,216,648
-------------
Expenses
Management fees 827,074
Trustees' fees and expenses 55,937
Accounting and administrative 150,000
Custodian 38,107
Transfer agent fees 41,730
Audit and tax services 30,657
Legal 74,288
Reports to shareholders 30,355
Preferred stock auction 71,167
Rating agency fees 10,999
American Stock Exchange fees 15,000
Miscellaneous 18,281
-------------
Total expenses before waivers 1,363,595
Less waivers (437,461)
-------------
Net expenses 926,134
-------------
Net investment income 4,290,514
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN
CURRENCY TRANSACTIONS AND INTEREST RATE SWAP CONTRACTS
Realized gain (loss) on:
Investments - net 1,756,744
Interest rate swap contracts - net (426,585)
Foreign currency transactions - net (377)
Change in unrealized appreciation (depreciation) of
Investments - net 1,788,175
Interest rate swap contracts - net 363,818
-------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and interest rate swap
contracts 3,481,775
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM 7,772,289
OPERATIONS LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS
Net investment income (316,968)
Net realized short-term gain on investments (1,132)
Net realized long-term gain on investments (136,081)
-------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 7,318,108
APPLICABLE TO COMMON SHARES =============
See accompanying notes to financial statements.
AEW Real Estate Income Fund
STATEMENTS OF CHANGES IN NET ASSETS (AS RESTATED)
Year Ended Year Ended
January 31, January 31,
2005 2004
--------------- ---------------
FROM OPERATIONS:
Net investment income $ 4,290,514 $ 3,811,296
Net realized gain (loss) on investments, foreign
currency transactions and interest rate swap
contracts 1,329,782 3,796,947
Net change in unrealized appreciation (depreciation)
of investments and interest rate swap contracts 2,151,993 21,906,703
--------------- ---------------
Increase (decrease) in net assets resulting from
operations 7,772,289 29,514,946
--------------- ---------------
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS:
Net investment income (316,968) (193,478)
Short-Term capital gain (1,132) (122,163)
Long-Term capital gain (136,081) (14,621)
--------------- ---------------
Increase (decrease) in net assets from operations
applicable to common shares 7,318,108 29,184,684
--------------- ---------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS:
Net investment income (3,949,554) (3,820,972)
Short-Term capital gain (14,108) (2,753,072)
Long-Term capital gain (1,695,623) (291,479)
Return of capital (96,550) --
--------------- ---------------
(5,755,835) (6,865,523)
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM
CAPITAL STOCK TRANSACTIONS: -- (591,720)
--------------- ---------------
Total increase (decrease) in net assets 1,562,273 21,727,441
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period 75,503,231 53,775,790
--------------- ---------------
End of period $ 77,065,504 $ 75,503,231
=============== ===============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME $ -- $ (23,992)
=============== ===============
See accompanying notes to financial statements.
AEW Real Estate Income Fund
FINANCIAL HIGHLIGHTS (AS RESTATED)
For a share outstanding throughout each period.
For the Period
November 26, 2002*
Year Ended January 31, through
--------------------------- January 31,
2005 2004 2003
---------- ---------- ------------------
Net Asset Value, Beginning of Period (Common Shares) $ 19.70 $ 14.03 $ 14.33/(a)/
---------- ---------- ------------------
Income From Investment Operations:
Net Investment Income /(b)/ 1.12 0.99 0.09
Net Realized and Unrealized Gain (Loss) on Investments 0.90 6.71 (0.24)
---------- ---------- ------------------
Total From Investment Operations 2.02 7.70 (0.15)
---------- ---------- ------------------
Less Distributions to Preferred Shareholders:
Dividends From Net Investment Income (0.08) (0.05) --
Distributions From Net Realized Short-Term Gains (0.00)/(f)/ (0.03) --
Distributions From Net Realized Long-Term Gains (0.04) 0.00/(f)/ --
---------- ---------- ------------------
Total From Investment Operations Applicable to Common 1.90 7.62 (0.15)
Shareholders ---------- ---------- ------------------
Less Distributions to Common Shareholders:
Dividends From Net Investment Income (1.03) (1.00) (0.09)
Distributions From Net Realized Short-Term Gains (0.00)/(f)/ (0.72) (0.00)/(f)/
Distributions From Net Realized Long-Term Gains (0.44) (0.07) (0.01)
Distributions From Paid In Capital (0.03) -- (0.02)
---------- ---------- ------------------
Total Distributions to Common Shareholders (1.50) (1.79) (0.12)
---------- ---------- ------------------
Common Shares Offering Costs Charged to Paid-in Capital -- -- (0.03)
---------- ---------- ------------------
Preferred Shares Underwriting Commissions and Offering -- (0.16) --
Costs ---------- ---------- ------------------
Net Asset Value, End of Period (Common Shares) $ 20.10 $ 19.70 $ 14.03
========== ========== ==================
Market Value, End of Period (Common Shares) $ 17.40 $ 17.87 $ 14.55
========== ========== ==================
Total Return on Market Value (%) /(j)/ 6.11 37.45 (2.23)/(c)/
Total Return on Net Asset Value (%) /(i)(j)/ 11.19 56.84 (1.29)/(c)/
Ratio of Expenses to Average Net Assets Applicable to /(e)/ 1.81 2.00 1.85
Common Shares, Before Waivers (%)
Ratio of Expenses to Average Net Assets Applicable to /(d)(e)/ 1.23 1.38 1.37
Common Shares, After Waivers (%)
Ratio of Net Investment Income to Average Net Assets /(e)/ 5.11 5.35 2.80
Applicable to Common Shares, Before Waivers (%)
Ratio of Net Investment Income to Average Net Assets /(e)/ 5.69 5.97 3.28
Applicable to Common Shares, After Waivers (%)
Portfolio Turnover Rate (%) 8 31 1
Net Assets Applicable to Common Shares, End of Period $ 77,066 $ 75,503 $ 53,776
(000)
Auction Market Preferred Shares
Total Shares Outstanding 1,120 1,120 --
Asset Coverage Per Share /(g)/ $ 93,820 $ 92,414 $ --
Involuntary Liquidation Preference Per Share /(h)/ $ 25,000 $ 25,000 $ --
Approximate Market Value Per Share $ 25,000 $ 25,000 $ --
* Commencement of operations
/(a)/ Net asset value at beginning of period reflects the deduction of the
sales load of $0.675 per share paid by the shareholder from the $15.00
offering price.
/(b)/ Calculated using the average common shares outstanding during the
period.
/(c)/ Total return on net asset value is calculated assuming a purchase at the
offering price of $15.00 less the sales load of $ 0.675 paid by the
shareholder on the first day and the ending net asset value per share.
Total return on market value is calculated assuming a purchase at the
offering price of $15.00 on the first day and a sale at the current
market price on the last day of the period.
/(d)/ The investment adviser and the Fund's administrator agreed to waive a
portion of their fees during the period. Without these waivers, expense
ratios would have been higher.
/(e)/ Computed on an annualized basis for periods less than one year.
/(f)/ Amount rounds to less than $0.01 per share.
/(g)/ Calculated by subtracting the Fund's total liabilities (not including
the preferred shares) from the Fund's total assets, and dividing this by
the number of preferred shares outstanding.
/(h)/ Plus accumulated and unpaid dividends.
/(i)/ Had certain expenses not been reduced during the period total return
would have been lower.
/(j)/ Periods less than one year are not annualized.
Notes to Financial Statements
For the Year Ended January 31, 2005
1. Organization. AEW Real Estate Income Fund (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "1940 Act"), as a
non-diversified closed-end management investment company. The Fund is organized
under the laws of the Commonwealth of Massachusetts by an Amended and Restated
Agreement and Declaration of Trust dated October 10, 2002. The Fund's primary
investment objective is high current income; the Fund's secondary investment
objective is capital appreciation. The Fund seeks to achieve its objective by
concentrating its investments in the United States real estate industry.
2. Significant Accounting Policies. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The Fund's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
which require the use of management estimates that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
a. Security Valuation. Equity securities for which market quotations are readily
available are valued at market price on the basis of valuations furnished to the
Fund by a pricing service, which has been authorized by the Trustees. The
pricing service provides the last reported sale price for securities listed on
an applicable securities exchange or, if no sale was reported and in the case of
over-the-counter securities not so listed, the last reported bid price.
Securities traded on the NASDAQ National Market are valued at the NASDAQ
Official Closing Price ("NOCP"), or if lacking an NOCP, at the most recent bid
quotation on the NASDAQ National Market. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's investment adviser and
officers, under the supervision of the Fund's Trustees. Fair valuation may also
be used by the Board of Trustees if extraordinary events occur after the close
of the relevant market but prior to the close of the New York Stock Exchange.
The Fund may hold securities traded in foreign markets. Foreign securities are
valued at the market price in the foreign market. However, if events occurring
after the close of the foreign market (but before the close of regular trading
on the New York Stock Exchange) are believed to materially affect the value of
those securities, such securities are fair valued pursuant to procedures
approved by the Board of Trustees. When fair valuing securities, the Fund may,
among other things, use modeling tools or other processes that may take into
account factors such as securities market activity and/or significant events
that occur after the close of the foreign market and before the Fund calculates
its net asset value.
b. Security Transactions and Related Investment Income. Security transactions
are accounted for on trade date. Dividend income is recorded on ex-dividend
date, or in the case of certain foreign securities, as soon as the Fund is
notified, and interest income is recorded on an accrual basis. Dividend income
received by the Fund from its investment in REITs may consist of ordinary
income, capital gains and return of capital. Interest income is increased by the
accretion of discount and decreased by the amortization of premium. Investment
income is recorded net of foreign taxes withheld when recovery of such taxes is
uncertain. In determining net gain or loss on securities sold, the cost of
securities has been determined on an identified cost basis.
c. Foreign Currency Translation. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other assets
and liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
Since the values of investment securities are presented at the foreign exchange
rates prevailing at the end of the period, it is not practical to isolate that
portion of the results of operations arising from changes in exchange rates from
fluctuations arising from changes in market prices of the investment securities.
Such changes are included with the net realized and unrealized gain or loss on
investments.
Net realized foreign exchange gains or losses arise from: sales of foreign
currency, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the amounts of
dividends, interest and foreign withholding taxes recorded on the Fund's books
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities at the end of the fiscal periods, resulting from changes
in exchange rates.
d. Federal and Foreign Income Taxes. The Fund intends to meet the requirements
of the Internal Revenue Code applicable to regulated investment companies, and
to distribute to its shareholders substantially all of its net investment income
and any net realized capital gains at least annually. Accordingly, no provision
for federal income tax has been made. The Fund may be subject to foreign taxes
on income and gains on investments that are accrued based upon the Fund's
understanding of the tax rules and regulations that exist in the countries in
which the Fund invests. Foreign governments may also impose taxes or other
payments on investments with respect to foreign securities, such taxes are
accrued as applicable.
e. Dividends and Distributions to Shareholders. The Fund intends to make regular
monthly cash distributions to common shareholders at a level rate based on the
projected performance of the Fund. Distributions to common shareholders are
recorded on the ex-dividend date. Distributions to preferred shareholders are
recorded daily and are payable at the end of each dividend period. Each dividend
period for Auction Market Preferred Shares ("AMPS") is generally seven days. For
the year ended January 31, 2005 the dividend rates for AMPS ranged from 0.79% to
2.50%. The dividend rate for AMPS on January 31, 2005 was 2.47%. In addition, at
least annually, the Fund intends to distribute net capital gains, if any. When
the Fund identifies the character of distributions paid by REITs in the previous
calendar year, certain distributions to Fund shareholders may be redesignated as
capital gain distributions or, if in excess of taxable income, as a return of
capital.
The calendar year-end amounts of ordinary income, capital gains, and return of
capital included in dividends received from the Fund's investments in REITs are
reported to the Fund after the end of the calendar year; accordingly, the Fund
has estimated these amounts for the period from January 1 through January 31,
2005 for accounting purposes. Correspondingly, the timing and characterization
of certain income and capital gain distributions are determined annually on a
calendar year basis in accordance with federal tax regulations, which may differ
from accounting principles generally accepted in the United States of America.
The character of distributions paid as disclosed within the Statement of Changes
in Net Assets includes certain calendar year federal tax-based amounts and
corresponding estimates for the period from January 1 through January 31, 2005
of ordinary income, capital gains and return of capital based on dividends
received from REITs.
Permanent book and tax basis differences relating to shareholder distributions,
net investment income, and net realized gains will result in reclassifications
to the capital accounts.
The tax character of distributions paid for the years ended January 31, 2005 and
January 31, 2004 was as follows:
2005 2004
-------------- --------------
Distributions from:
Net investment income $ 3,906,427 $ 6,509,592
Long-term capital gain 2,207,039 686,193
Non-taxable return of capital 96,550 -
Differences between these amounts and those reported on the Statement of Changes
in Net Assets are primarily attributable to different book and tax treatment for
interest rate swaps and short-term capital gains.
At January 31, 2005, the difference between the components of distributable
earnings on a tax basis (as disclosed in note (b) to the Schedule of
Investments) and amounts reported on the Statement of Assets & Liabilities are
attributable to prior year wash sale loss deferrals.
f. Swap Agreements. The Fund may enter into swap agreements to manage its
exposure to the financial markets. A swap is an agreement to exchange the return
generated by one instrument for the return generated by another instrument. The
Fund may enter into interest rate, total return and forward swap spread lock
swap agreements to manage its exposure to interest rates. Interest rate swap
agreements involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal.
Swaps are marked to market daily based upon quotations from market makers and
the change in value, if any, is recorded as unrealized gain or loss in the
Statement of Operations. Payments received or made at the end of the measurement
period are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets. The
values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values may
differ significantly from the values that would have been realized had a ready
market for these instruments existed, and the differences could be material.
Entering into these agreements involves, to varying degrees, elements of credit,
legal, market and documentation risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility that
there will be no liquid market for these agreements, that the counterparty to
the agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, or that there may be unfavorable
changes in interest rates. See Note 7 for a summary of the open swap agreements
as of January 31, 2005.
g. Repurchase Agreements. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 102%
of the repurchase price, including interest. The Fund's investment adviser is
responsible for determining that the value of the collateral is at all times at
least equal to 102% of the repurchase price, including interest. Repurchase
agreements could involve certain risks in the event of default or insolvency of
the counterparty including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities.
3. Auction Market Preferred Shares. The Fund is authorized to issue an unlimited
number of preferred shares, par value $0.00001 per share. On February 10, 2003,
the Fund issued 1,120 shares of Series M AMPS with proceeds of $28,000,000 in a
public offering. Underwriting commissions and offering costs of $601,187 ($0.16
per common share) were incurred in connection with the offering and were charged
directly to paid-in-capital of the common shares. Dividends on the AMPS are
cumulative at a rate which was established at the offering of the AMPS and has
been reset every seven days thereafter by an auction. The Fund pays annual fees
equivalent to 0.25% of the preferred shares' liquidation value for the
remarketing efforts associated with the preferred auctions.
The AMPS are redeemable at the option of the Fund, at a redemption price equal
to $25,000 per share, plus accumulated and unpaid dividends, on any dividend
payment date. The AMPS may also be subject to mandatory redemption at a
redemption price equal to $25,000 per share, plus accumulated and unpaid
dividends, if the Fund defaults on its asset maintenance requirements with
respect to the AMPS and fails to cure such a default within the time permitted.
If the dividends on the AMPS shall remain unpaid in an amount equal to two full
years' dividends, the holders of the AMPS as a class have the right to elect a
majority of the Board of Trustees. In general, the holders of the AMPS and the
common shares have equal voting rights of one vote per share, except that the
holders of the AMPS, as a separate class, have the right to elect at least two
members of the Board of Trustees and to vote under certain other circumstances
specified in the Fund's By-Laws. The AMPS have a liquidation preference of
$25,000 per share. The Fund is required to maintain certain asset coverage with
respect to the AMPS as defined in the Fund's By-Laws.
4. Purchases and Sales of Securities. For the year ended January 31, 2005,
purchases and sales of securities (excluding short-term investments) were
$7,929,207 and $9,303,237, respectively.
5. Management Fees and Other Transactions with Affiliates.
a. Management Fees. AEW Management and Advisors, L. P. ("AEW") serves as the
investment adviser to the Fund. AEW is an affiliate of AEW Capital Management,
L. P., a wholly owned subsidiary of IXIS Asset Management North America, L.P.
("IXIS North America") formerly CDC IXIS Asset Management North America, L.P.
Under the terms of the management agreement, the Fund pays a monthly management
fee computed at the annual rate of 0.80% of the average daily managed assets of
the Fund (which include the liquidation preference of any preferred shares and
the principal amount of any borrowings used for leverage).
AEW has contractually agreed to waive a portion of its management fees in the
amount of 0.25% of average daily managed assets during the first five years of
the Fund's operations, 0.20% of average daily managed assets in year six, 0.15%
of average daily managed assets in year seven, 0.10% of average daily managed
assets in year eight, and 0.05% of average daily managed assets in year nine.
AEW has also agreed to waive an additional portion of its management fees in the
amount of 0.10% of average daily managed assets. This waiver is voluntary and
may be terminated by the investment adviser at any time without notice.
For the year ended January 31, 2005, management fees and waivers for the Fund
were as follows:
Percentage of Average
Gross Waiver of Net Daily Managed Assets
Management Management Management ----------------------
Fee Fee Fee Gross Net
------------ ------------ ------------ ---------- ----------
$ 827,074 $ 362,461 $ 464,613 0.80% 0.45%
b. Accounting and Administrative Expense. During the period February 1, 2004
through December 31, 2004, IXIS Asset Management Services Company ("IXIS
Services"), formerly CDC IXIS Asset Management Services, Inc., a wholly owned
subsidiary of IXIS North America, performed certain accounting and
administrative services for the Fund and subcontracted with Investors Bank &
Trust Company ("IBT") to serve as subadministrator. The Fund paid IXIS Services
a fee for these services based on the Fund's average daily managed assets, or if
higher, the minimum fee set forth below:
(1)
Percentage of Eligible Average Daily
Managed Assets
--------------------------------------
First Over
$300 million $300 million
--------------- ---------------
0.0600% 0.0575%
or
(2) An annual minimum fee of $150,000.
Effective January 1, 2005, IXIS Asset Management Advisors, L.P. ("IXIS
Advisors") assumed responsibility for providing accounting and administrative
services to the Fund. IBT continues to serve as subadministrator.
IXIS Services and IXIS Advisors each have agreed to voluntarily waive a portion
of its fee. This waiver is voluntary and may be terminated by IXIS Advisors at
any time without notice.
For the year ended January 31, 2005, the following was paid to IXIS Services and
IXIS Advisors for accounting and administrative services:
Gross Waiver of Net Percentage of Average
Accounting Accounting Accounting Daily Managed Assets
And And And -----------------------
Administrative Administrative Administrative Gross Net
-------------- -------------- -------------- --------- ---------
$ 150,000 $ 75,000 $ 75,000 0.15% 0.07%
c. Trustees Fees and Expenses. The Fund does not pay any compensation directly
to its officers or Trustees who are directors, officers or employees of IXIS
North America or its affiliates. Each Trustee who is an independent Trustee of
the Fund receives a retainer fee at the annual rate of $2,000 and meeting
attendance fees of $375 for each meeting of the Board of Trustees attended. Each
committee member receives an additional retainer fee at the annual rate of
$2,000 while each committee chairman receives a retainer fee (beyond the $2,000
fee) at the annual rate of $1,000. The retainer fees assume four Board or
Committee meetings per year; Trustees are compensated for each additional Board
or Committee meeting in excess of four meetings per year, at the rate of $375
and $200, respectively. Trustees are reimbursed for travel expenses in
connection with attendance at meetings.
d. Publishing Services. IXIS Services performs certain desktop publishing
services for the Fund. Fees for these services are presented in the Statement of
Operations as shareholder reporting. For the year ended January 31, 2005, the
Fund paid $871 to IXIS Services as compensation for these services.
6. Shares of Beneficial Interest. The Amended and Restated Agreement and
Declaration of Trust permits the Fund's Trustees to issue an unlimited number of
common shares, $0.00001 par value per share. Transactions in common shares were
as follows:
Year Year
Ended Ended
January 31, January 31,
2005 2004
------------------ --------------------
Shares Amount Shares Amount
-------- -------- -------- ----------
Shares issued pursuant to the
Fund's dividend reinvestment plan -- $ -- 676 $ 9,467
Offering costs and preferred shares
underwriting commissions -- -- -- (601,187)
-------- -------- -------- ----------
Increase (decrease) derived from
capital share transactions -- $ -- 676 $ (591,720)
======== ======== ======== ==========
7. Swap Contracts.
Expiration Unrealized Appreciation /
Notional Amount Date Description (Depreciation)
------------------- ---------- ------------------------------------------ ---------------------------
Interest Rate Swaps
$ 2,800,000 3/1/2006 Agreement with Bank of America dated $ 26,525
2/28/2003 to pay the notional amount
multiplied by 2.345% and to receive the
notional amount multiplied by the 1 week
Floating Rate London Interbank Offering
Rate ("LIBOR") adjusted by a specific
spread.
$ 14,000,000 3/3/2008 Agreement with Bank of America dated 251,029
2/28/2003 to pay the notional amount
multiplied by 3.104% and to receive the
notional amount multiplied by the 1 week
Floating Rate LIBOR adjusted by a specific
spread.
$ 8,400,000 3/1/2010 Agreement with Fleet National Bank dated 134,211
2/28/2003 to pay the notional amount
multiplied by 3.622% and to receive the
notional amount multiplied by the 1 week
Floating Rate LIBOR adjusted by a specific
spread.
---------------------------
$ 411,765
===========================
8. Other. On January 3, 2005, the Fund declared three monthly dividends of
$0.115 per common share for the months of January, February and March payable on
January 28, February 25, and March 24, respectively. Characterization of the
dividends for tax purposes may result in a portion of the dividends being
designated as a return of capital. Such designations are determined at the end
of the Fund's fiscal year.
9. Current Year Restatement. The Statement of Operations, Statement of Changes
in Net Assets and Financial Highlights for the year ended January 31, 2005 have
been restated to reflect the reclassification of certain distributions paid from
net investment income to distributions paid from capital gains. These
reclassifications had no effect on total distributions paid or net assets. The
amounts as originally reported and the restated amounts are as follows:
Statement of Operations Original Restated
------------ -----------
Less Distributions to Preferred Shareholders:
Net investment income $ (454,181) $ (316,968)
Net realized short-term gain on investments - (1,132)
Net realized long-term gain on investments - (136,081)
Statement of Changes in Net Assets Original Restated
------------ -----------
Distributions to Preferred Shareholders:
Net investment income $ (454,181) $ (316,968)
Short-term capital gain - (1,132)
Long-term capital gain - (136,081)
Distributions to Common Shareholders:
Net investment income (5,193,528) (3,949,554)
Short-term capital gain - (14,108)
Long-term capital gain (465,757) (1,695,623)
Return of capital (96,550) (96,550)
Financial Highlights Original Restated
------------ -----------
Distributions to Preferred Shareholders:
Dividends from net investment income $ (0.12) $ (0.08)
Distributions from net realized short-term
gains - (0.00) (a)
Distributions from net realized long-term
gains - (0.04)
Distributions to Common Shareholders:
Dividends from net investment income (1.35) (1.03)
Distributions from net realized short-term
gains - (0.00) (a)
Distributions from net realized long-term
gains (0.12) (0.44)
Distributions from paid in capital (0.03) (0.03)
(a) Amount rounds to less than $0.01 per share.
Note 2e to the financial statements was restated to include additional language
explaining the financial statement balances. The footnote is restated as
follows:
e. Dividends and Distributions to Shareholders. The Fund intends to make regular
monthly cash distributions to common shareholders at a level rate based on the
projected performance of the Fund.
Distributions to common shareholders are recorded on the ex-dividend date.
Distributions to preferred shareholders are recorded daily and are payable at
the end of each dividend period. Each dividend period for Auction Market
Preferred Shares ("AMPS") is generally seven days. For the year ended January
31, 2005 the dividend rates for AMPS ranged from 0.79% to 2.50%. The dividend
rate for AMPS on January 31, 2005 was 2.47%. In addition, at least annually, the
Fund intends to distribute net capital gains, if any. When the Fund identifies
the character of distributions paid by REITs in the previous calendar year,
certain distributions to Fund shareholders may be redesignated as capital gain
distributions or, if in excess of taxable income, as a return of capital.
The calendar year-end amounts of ordinary income, capital gains, and return of
capital included in dividends received from the Fund's investments in REITs are
reported to the Fund after the end of the calendar year; accordingly, the Fund
has estimated these amounts for the period from January 1 through January 31,
2005 for accounting purposes. Correspondingly, the timing and characterization
of certain income and capital gain distributions are determined annually on a
calendar year basis in accordance with federal tax regulations, which may differ
from accounting principles generally accepted in the United States of America.
The character of distributions paid as disclosed within the Statement of Changes
in Net Assets includes certain calendar year federal tax-based amounts and
corresponding estimates for the period from January 1 through January 31, 2005
of ordinary income, capital gains and return of capital based on dividends
received from REITs.
Permanent book and tax basis differences relating to shareholder distributions,
net investment income, and net realized gains will result in reclassifications
to the capital accounts.
Additionally, the tax character of distributions paid, originally reported as
unaudited additional information, has been added to Note 2e to the financial
statements, Dividends and Distributions to Shareholders, and is stated as
follows:
2005 2004
-------------- --------------
Distributions from:
Net investment income $ 3,906,427 $ 6,509,592
Long-term capital gain 2,207,039 686,193
Non-taxable return of capital 96,550 -
Differences between these amounts and those reported on the Statement of Changes
in Net Assets are primarily attributable to different book and tax treatment for
interest rate swaps and short-term capital gains.
At January 31, 2005, the difference between the components of distributable
earnings on a tax basis (as disclosed in note (b) to the Schedule of
Investments) and amounts reported on the Statement of Assets & Liabilities are
attributable to prior year wash sale loss deferrals.
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders
of AEW Real Estate Income Fund:
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 AEW Real Estate Income Fund (the
"Fund") at January 31, 2005, and the results of its operations, the changes in
its net assets and the financial highlights for the periods indicated, in
conformity with accounting principles generally accepted in the United States of
America. 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 the standards of the Public Company Accounting Oversight Board
(United States). Those standards 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 January 31, 2005 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
As discussed in Note 9, the Fund's 2005 financial statements have been restated.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 29, 2005
[LOGO] AEW
--------------------------------------------------------------------------------
AEW Real Estate Income Fund
Annual Report
January 31, 2005
--------------------------------------------------------------------------------
AEW Management and Advisors
TABLE OF CONTENTS
Management Discussion
and Performance ......................Page 1
Schedule of Investments ..............Page 3
Financial Statements .................Page 5
--------------------------------------------------------------------------------
AEW Real Estate Income Fund
--------------------------------------------------------------------------------
Portfolio Profile
--------------------------------------------------------------------------------
Objective:
High current income is a primary objective; capital appreciation is a secondary
objective
--------------------------------------------------------------------------------
Strategy:
Invests primarily in income-producing securities issued by real estate
companies, including REITs
--------------------------------------------------------------------------------
Inception Date:
November 26, 2002
--------------------------------------------------------------------------------
Portfolio Manager:
Matthew A. Troxell, CFA
AEW Management and Advisors, L.P.
--------------------------------------------------------------------------------
Common shares American Stock Exchange Symbol:
RIF
--------------------------------------------------------------------------------
CUSIP Numbers
Common shares:
00104H107
Preferred shares:
00104H206
--------------------------------------------------------------------------------
January 31, 2005
Market Value Per Common Share:
$17.40
Net Asset Value Per Common Share:
$20.10
--------------------------------------------------------------------------------
Management Discussion
--------------------------------------------------------------------------------
Market facts
Real estate investment trusts (REITs) generally outperformed common stocks again
this year, as capital flows into the U.S. REIT market remained strong for the 12
months ended January 31, 2005. For the same period, the Morgan Stanley REIT
Index returned 15.13%, while common stocks, as measured by the Dow Jones
Industrial Average and the Standard & Poor's 500 Index, returned 2.11% and
6.23%, respectively. REITs also outperformed the bond market. The Lehman
Aggregate Bond Index, a broad-based list of U.S. government and corporate bonds,
returned 4.16% for the 12-month period, while the Lehman U.S. Treasury Index,
composed of all Treasury bonds maturing in one year or more, returned 3.41%.
Fund performance AEW Real Estate Income Fund's total return for the fiscal year
was 6.11%, based on the market price of its common shares. These results assume
that $1.38 (including $0.03 that has been designated as a return of capital
distribution) in dividends and $0.12 in capital gains were reinvested during the
period and reflect the decline in the market price of shares during the period,
from $17.87 to $17.40. The decline in the market price of fund shares reflects a
decrease in investor demand and is not directly linked to changes in the fund's
net asset value. In fact, the net asset value per common share of the fund rose
from $19.70 to $20.10, so that the total return based on the net asset value of
common shares was 11.19% for the fiscal year.
Portfolio information
The strongest sectors represented in the portfolio were apartment, office, and
shopping center REITs. Kilroy Realty Corp., a Southern California-based company,
was a positive contributor in the office sector. The company benefited during
the recovery in Southern California's real estate markets during the year, as
well as from a leasing program that successfully boosted occupancy. The Macerich
Company, a regional mall REIT, was another good performer, profiting from strong
demand from retailers and speculation that the company might be a potential
acquisition target.
Since high current income is its primary investment objective, the fund
emphasizes income-producing securities. However, as interest rates rose during
the latter part of the year, prices of income securities declined. Our use of
interest rate swap agreements had a slightly negative impact on the fund's net
asset value during the fiscal year, as did the fund's cost of leverage through
its preferred shares.
We made only marginal changes in the composition of the portfolio during the
year, and those were primarily geared to meet the fund's income objective. We
trimmed the fund's exposure to the industrial sector, and increased its
positions in the office, apartment, and lodging sectors. As of January 31, 2005,
the fund's common and preferred holdings amounted to 94.6% and 38.7% of total
net assets, respectively. The ten largest holdings accounted for 30.4% of the
fund's market value, and no single holding represented more than 5.7%.
Outlook
The nation's property markets are showing slow but steady improvement in such
measures as vacancy and rental rates, and we expect that growth to continue
through 2005. Against this backdrop of gradually improving fundamentals, real
estate as an asset class continues to attract significant capital from a wide
range of investors. However, after the impressive returns of the past five
years, we would not be surprised to see REIT performance moderating in the
coming year. We will continue to focus on investment opportunities that we feel
will provide investors with strong current income and the potential for capital
appreciation.
1
--------------------------------------------------------------------------------
AEW Real Estate Income Fund
--------------------------------------------------------------------------------
Investment Results through January 31, 2005
--------------------------------------------------------------------------------
Performance in Perspective
The table comparing the fund's performance to a REIT index provides a general
sense of how the fund performed for the periods shown. It may be helpful to
understand the differences between the two. The fund's total returns for the
periods shown below include fund expenses, such as management fees/1/. An index
measures the performance of a theoretical portfolio. Unlike a fund, the index is
unmanaged and does not have expenses that affect investment results. It is not
possible to invest directly in an index. Few investors could purchase all of the
securities necessary to match the index and would incur transaction costs and
other expenses even if they could. AEW Real Estate Income Fund is a leveraged
fund that invests in common and preferred shares of REITs, which makes a REIT
index composed of purely common shares less than a direct comparison.
Average Annual Total Returns -- January 31, 2005
--------------------------------------------------------------------------------
Since
Inception/1/
1 Year/1/ (11/26/02)
--------- ------------
Total return on market value 6.11% 17.46%
Total return on net asset value 11.19 28.15
--------------------------------------------------------------------------------
Comparative Performance
Morgan Stanley REIT Index/2/ 15.13 26.19/3/
Notes to Table
All returns represent past performance and do not guarantee future results.
Share price and return will vary and you may have gain a or loss when you sell
your shares. Recent returns may be higher or lower than those shown. All results
include reinvestment of dividends and capital gains, including that portion of
distributions designated as a return of capital, if any. The table represents
past performance of the fund's common shares and does not reflect taxes
shareholders might owe on any fund distributions or when they sell their shares.
Total return on market value reflects, for the periods indicated, changes in the
fund's market price on the American Stock Exchange and the receipt and
reinvestment of all distributions. An investor may only purchase or sell shares
of the fund based upon its market price. In general, the market price of the
fund is determined by supply and demand. An investor's actual return will vary
depending on the market price of shares on the date of purchase and/or sale.
Total return on the net asset value reflects, for the periods indicated, changes
in the fund's net asset value per share, and the receipt and reinvestment of all
distributions.
/1/ Fund performance has been increased by expense waivers, without which
performance would have been lower.
/2/ Morgan Stanley REIT Index is an unmanaged index of the most actively traded
real estate investment trusts (REITs), designed to measure real estate
equity performance. It is not possible to invest directly in the index.
/3/ The since-inception index comparison is calculated from 11/30/02.
Portfolio as of January 31, 2005
--------------------------------------------------------------------------------
% of Investments
as of
Ten Largest REIT Sectors 1/31/05 7/31/04
------------------------ ------- -------
Office 26.1 26.2
Shopping Centers 15.5 15.5
Apartments 13.9 13.2
Healthcare 13.5 13.7
Lodging/Resorts 8.0 7.5
Regional Malls 6.9 6.3
Diversified 6.2 7.3
Industrial 4.7 6.0
Factory Outlets 2.5 2.4
Specialty 1.4 1.4
% of Investments
as of
Ten Largest Holdings* 1/31/05 7/31/04
------------------------ ------- -------
Healthcare Realty Trust, Inc. 4.2 4.4
HRPT Properties Trust 3.6 3.2
iStar Financial, Inc. 3.4 3.2
Senior Housing Properties Trust 3.0 3.2
Urstadt Biddle Properties, Inc. (Pfd.) 2.8 3.0
Camden Property Trust 2.8 2.9
Mack-Cali Realty Corp. 2.7 2.8
Heritage Property Investment Trust 2.7 2.4
Prentiss Properties Trust 2.6 2.6
Hospitality Properties Trust 2.6 2.5
* Common Shares except as noted
--------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
--------------------------------------------------------------------------------
2
--------------------------------------------------------------------------------
AEW Real Estate Income Fund -- Schedule of Investments
--------------------------------------------------------------------------------
Investments as of January 31, 2005
Shares Description Value (a)
-----------------------------------------------------------------------------------------------
Common Stocks -- 94.6% of Total Net Assets
REAL ESTATE - 1.5%
Apartments - 1.5%
41,500 Municipal Mortgage & Equity LLC $ 1,128,800
---------------
REAL ESTATE INVESTMENT TRUSTS - 93.1%
REITs - Apartments - 12.2%
44,000 Archstone Smith Trust 1,509,200
65,000 Camden Property Trust 2,945,150
78,500 Gables Residential Trust 2,626,610
40,000 Mid-America Apartment Communities, Inc. 1,512,800
27,000 Summit Properties, Inc. 822,150
---------------
9,415,910
---------------
REITs - Diversified - 6.5%
83,500 iStar Financial, Inc. 3,494,475
70,000 Lexington Corporate Properties Trust 1,498,000
---------------
4,992,475
---------------
REITs - Factory Outlets - 1.2%
40,000 Tanger Factory Outlet Centers, Inc. 944,000
---------------
REITs - Healthcare - 14.3%
65,000 Health Care Property Investors, Inc. 1,687,400
121,000 Healthcare Realty Trust, Inc. 4,412,870
15,000 Omega Healthcare Investors, Inc. 168,300
100,000 Provident Senior Living Trust, 144A(c) 1,645,000
190,500 Senior Housing Properties Trust 3,152,775
---------------
11,066,345
---------------
REITs - Industrial - 6.4%
25,000 EastGroup Properties, Inc. 904,750
62,400 First Potomac Realty Trust 1,338,480
68,100 Liberty Property Trust 2,659,305
---------------
4,902,535
---------------
REITs - Lodging/Resorts - 4.2%
55,000 Eagle Hospitality Properties Trust, Inc. 541,750
63,000 Hospitality Properties Trust 2,686,950
---------------
3,228,700
---------------
REITs - Office - 26.7%
77,000 Arden Realty, Inc. 2,596,440
65,000 CarrAmerica Realty Corp. 1,972,750
77,000 Glenborough Realty Trust, Inc. 1,483,020
90,000 Highwoods Properties, Inc. 2,205,000
311,300 HRPT Properties Trust 3,707,583
59,000 Kilroy Realty Corp. 2,305,720
68,000 Mack-Cali Realty Corp. 2,854,640
30,000 Maguire Properties, Inc. 709,500
76,500 Prentiss Properties Trust 2,740,995
---------------
20,575,648
---------------
REITs - Regional Malls - 6.8%
150,000 Borealis Retail REIT 1,660,946
62,000 Glimcher Realty Trust 1,586,580
35,000 Macerich Co. (The) 2,002,350
---------------
5,249,876
---------------
REITs - Shopping Centers - 12.9%
125,000 Cedar Shopping Centers, Inc. 1,726,250
100,000 Commercial Net Lease Realty, Inc. 1,875,000
30,000 Equity One, Inc. 612,300
94,000 Heritage Property Investment Trust 2,767,360
39,000 Inland Real Estate Corp. 591,630
30,000 New Plan Excel Realty Trust 758,100
39,000 Ramco-Gershenson Properties Trust 1,099,800
23,000 Realty Income Corp. 536,130
---------------
9,966,570
---------------
REITs - Specialty - 1.9%
20,500 Correctional Properties Trust $ 532,795
22,000 Entertainment Properties Trust 926,420
---------------
1,459,215
---------------
Total Real Estate Investment Trusts 71,801,274
---------------
Total Common Stocks (Identified Cost $51,883,818) 72,930,074
---------------
Preferred Stocks -- 38.7%
REAL ESTATE INVESTMENT TRUSTS - 38.7%
REITs - Apartments - 5.1%
50,000 Apartment Investment & Management Co., Series G 1,360,000
29,400 Apartment Investment & Management Co., Series R 791,448
42,000 Apartment Investment & Management Co., Series U 1,055,880
28,000 Apartment Investment & Management Co., Series Y(c) 702,240
---------------
3,909,568
---------------
REITs - Diversified - 1.9%
54,800 Crescent Real Estate Equities Co., Series B 1,454,940
---------------
REITs - Factory Outlets - 2.1%
35,500 Mills Corp. (The), Series B 969,150
25,000 Mills Corp. (The), Series E 676,750
---------------
1,645,900
---------------
REITs - Healthcare - 3.9%
50,000 Health Care Property Investors, Inc., Class F 1,280,000
65,400 Omega Healthcare Investors, Inc., Series D 1,693,860
---------------
2,973,860
---------------
REITs - Lodging/Resorts - 6.6%
75,000 Boykin Lodging Co., Series A 2,100,000
25,000 FelCor Lodging Trust, Inc., Series B 635,250
71,900 Hospitality Properties Trust, Series B 1,977,250
15,000 LaSalle Hotel Properties, Series A 415,500
---------------
5,128,000
---------------
REITs - Office - 8.6%
30,000 Bedford Property Investors, Inc., Series A, 144A 1,495,314
100,000 CarrAmerica Realty Corp., Series E 2,650,000
90,400 HRPT Properties Trust, Series B 2,458,880
---------------
6,604,194
---------------
REITs - Regional Malls - 2.5%
75,000 Glimcher Realty Trust, Series F 1,967,250
---------------
REITs - Shopping Centers - 8.0%
27,000 Cedar Shopping Centers, Inc., Series A 723,600
42,200 Developers Diversified Realty Corp., Series F 1,137,290
21,300 Developers Diversified Realty Corp., Series G 569,349
13,000 Federal Realty Investment Trust, Series B 347,880
6,700 Ramco-Gershenson Properties Trust, Series B 185,590
9,000 Realty Income Corp., Series D 236,340
27,000 Urstadt Biddle Properties, Inc., Series C 2,956,500
---------------
6,156,549
---------------
Total Preferred Stocks - Real Estate Investment Trusts
(Identified Cost $28,189,912) 29,840,261
---------------
See accompanying notes to financial statements.
3
--------------------------------------------------------------------------------
AEW Real Estate Income Fund -- Schedule of Investments (continued)
--------------------------------------------------------------------------------
Investments as of January 31, 2005
Principal
Amount Description Value (a)
-----------------------------------------------------------------------------------------------
Short Term Investment -- 1.9%
$ 1,414,362 Repurchase Agreement with Investors Bank & Trust Co.
dated 1/31/2005 at 2.00% to be repurchased at $1,414,441
on 2/01/2005, collateralized by $1,373,124 Small
Business Administration Bond, 5.625%, due 8/25/2026
valued at $1,485,080 $ 1,414,362
---------------
Total Short Term Investment (Identified Cost $1,414,362) 1,414,362
---------------
Total Investments -- 135.2% (Identified Cost $81,488,092)(b) 104,184,697
Auction Market Preferred Shares plus cumulative
unpaid dividends (36.3)% (28,012,410)
Other assets less liabilities -- 1.1% 893,217
---------------
Total Net Assets -- 100% $ 77,065,504
===============
(a) See Note 2a of Notes to Financial Statements.
(b) Federal Tax Information:
At January 31, 2005, the net unrealized appreciation on
investments based on cost of $81,531,306 for federal
income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost $ 22,658,077
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value (4,686)
---------------
Net unrealized appreciation $ 22,653,391
===============
At January 31, 2005, there was no undistributed ordinary
income or long-term capital gains except for unrealized
appreciation/depreciation disclosed on a tax basis.
(c) Non-income producing security.
REITs Real Estate Investment Trusts
144A Securities exempt from registration under Rule of 144A of
the Securities Act of 1933. These securities may be resold
in transactions exempt from registrations, normally to
qualified institutional buyers. At the period end, the
value of these amounted to $3,140,314 or 4.1% of net
assets.
Holdings at January 31, 2005 as a Percentage of Net Assets (unaudited)
Office 35.3%
Shopping Centers 20.9
Healthcare 18.2
Apartments - REITS 17.3
Lodging/Resorts 10.8
Regional Malls 9.3
Diversified 8.4
Industrial 6.4
Factory Outlets 3.3
Other, less than 2% each 3.4
See accompanying notes to financial statements.
4
--------------------------------------------------------------------------------
Statement of Assets & Liabilities
--------------------------------------------------------------------------------
January 31, 2005
ASSETS
Investments at cost $ 81,488,092
Net unrealized appreciation 22,696,605
---------------
Investments at value 104,184,697
Dividends and interest receivable 604,816
Receivable for open swap contracts 411,765
---------------
TOTAL ASSETS 105,201,278
---------------
LIABILITIES
Management fees payable 40,791
Transfer agent fees payable 11,769
Accounting and administrative fees payable 6,250
Other accounts payable and accrued expenses 64,554
---------------
TOTAL LIABILITIES 123,364
---------------
Auction Preferred Shares 1,120 shares outstanding at liquidation
value plus cumulative unpaid dividends 28,012,410
---------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 77,065,504
===============
NET ASSETS CONSIST OF:
Common Shares, $0.00001 par value; unlimited number of shares authorized,
3,833,390 shares issued and outstanding $ 38
Additional Paid in capital 54,000,310
Undistributed (overdistributed) net investment income -
Accumulated net realized gain (loss) on investments, foreign currency
transactions and interest rate swap contracts (43,214)
Net unrealized appreciation (depreciation) of investments and swap
contracts 23,108,370
---------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 77,065,504
===============
COMPUTATION OF NET ASSET VALUE PER COMMON SHARE:
Net assets $ 77,065,504
===============
Common Shares issued and outstanding 3,833,390
===============
Net asset value per share ($77,065,504/3,833,390 shares of beneficial
interest) 20.10
===============
Market Value (closing price per share on American Stock Exchange) 17.40
===============
See accompanying notes to financial statements.
5
--------------------------------------------------------------------------------
Statement of Operations
--------------------------------------------------------------------------------
For the Year Ended January 31, 2005
INVESTMENT INCOME
Dividends $ 5,230,427
Interest 2,941
Less net foreign taxes withheld (16,720)
---------------
5,216,648
---------------
Expenses
Management fees 827,074
Trustees' fees and expenses 55,937
Accounting and administrative 150,000
Custodian 38,107
Transfer agent fees 41,730
Audit and tax services 30,657
Legal 74,288
Reports to shareholders 30,355
Preferred stock auction 71,167
Rating agency fees 10,999
American Stock Exchange fees 15,000
Miscellaneous 18,281
---------------
Total expenses before waivers 1,363,595
Less waivers (437,461)
---------------
Net expenses 926,134
---------------
Net investment income 4,290,514
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN
CURRENCY TRANSACTIONS AND INTEREST RATE SWAP CONTRACTS
Realized gain (loss) on:
Investments - net 1,756,744
Interest rate swap contracts - net (426,585)
Foreign currency transactions - net (377)
Change in unrealized appreciation (depreciation) of:
Investments - net 1,788,175
Interest rate swap contracts - net 363,818
---------------
Net realized and unrealized gain (loss) on investments, foreign currency
transactions and interest rate swap contracts 3,481,775
---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 7,772,289
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS
Net investment income (454,181)
---------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS APPLICABLE TO COMMON
SHARES $ 7,318,108
===============
See accompanying notes to financial statements.
6
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
--------------------------------------------------------------------------------
Year Ended Year Ended
January 31, January 31,
2005 2004
--------------- ---------------
FROM OPERATIONS:
Net investment income $ 4,290,514 $ 3,811,296
Net realized gain (loss) on investments, foreign currency
transactions and interest rate swap contracts 1,329,782 3,796,947
Net change in unrealized appreciation (depreciation) of
investments and interest rate swap contracts 2,151,993 21,906,703
--------------- ---------------
Increase (decrease) in net assets resulting from operations 7,772,289 29,514,946
--------------- ---------------
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS:
Net investment income (454,181) (193,478)
Short-Term capital gain - (122,163)
Long-Term capital gain - (14,621)
--------------- ---------------
Increase (decrease) in net assets from operations applicable to
common shares 7,318,108 29,184,684
--------------- ---------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS:
Net investment income (5,193,528) (3,820,972)
Short-Term capital gain - (2,753,072)
Long-Term capital gain (465,757) (291,479)
Return of capital (96,550) -
--------------- ---------------
(5,755,835) (6,865,523)
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL STOCK
TRANSACTIONS: - (591,720)
--------------- ---------------
Total increase (decrease) in net assets 1,562,273 21,727,441
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period 75,503,231 53,775,790
--------------- ---------------
End of period $ 77,065,504 $ 75,503,231
=============== ===============
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME $ - $ (23,992)
=============== ===============
See accompanying notes to financial statements.
7
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
For a share outstanding throughout each period.
For the Period
November 26, 2002*
For the Year Ended For the Year Ended to
January 31, 2005 January 31, 2004 January 31, 2003
------------------ ------------------ ------------------
Net Asset Value, Beginning of Period (Common Shares) $ 19.70 $ 14.03 $ 14.33(a)
----------- ----------- -----------
Income From Investment Operations:
Net Investment Income (b) 1.12 0.99 0.09
Net Realized and Unrealized Gain (Loss) on Investments 0.90 6.71 (0.24)
----------- ----------- -----------
Total From Investment Operations 2.02 7.70 (0.15)
----------- ----------- -----------
Less Distributions to Preferred Shareholders:
Dividends From Net Investment Income (0.12) (0.05) -
Distributions From Net Realized Short-Term Gains - (0.03) -
Distributions From Net Realized Long-Term Gains - 0.00(f) -
----------- ----------- -----------
Total From Investment Operations Applicable to
Common Shareholders 1.90 7.62 (0.15)
----------- ----------- -----------
Less Distributions to Common Shareholders:
Dividends From Net Investment Income (1.35) (1.00) (0.09)
Distributions From Net Realized Short-Term Gains - (0.72) (0.00)(f)
Distributions From Net Realized Long-Term Gains (0.12) (0.07) (0.01)
Distributions From Paid In Capital (0.03) - (0.02)
----------- ----------- -----------
Total Distributions to Common Shareholders (1.50) (1.79) (0.12)
----------- ----------- -----------
Common Shares Offering Costs Charged to Paid-in Capital - - (0.03)
----------- ----------- -----------
Preferred Shares Underwriting Commissions and
Offering Costs - (0.16) -
----------- ----------- -----------
Net Asset Value, End of Period (Common Shares) $ 20.10 $ 19.70 $ 14.03
=========== =========== ===========
Market Value, End of Period (Common Shares) $ 17.40 $ 17.87 $ 14.55
=========== =========== ===========
Total Return on Market Value (%)(j) 6.11 37.45 (2.23)(c)
Total Return on Net Asset Value (%)(i)(j) 11.19 56.84 (1.29)(c)
Ratio of Expenses to Average Net Assets Applicable
to Common Shares, Before Waivers (%)(e) 1.81 2.00 1.85
Ratio of Expenses to Average Net Assets Applicable
to Common Shares, After Waivers (%)(d)(e) 1.23 1.38 1.37
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares, Before Waivers (%)(e) 5.11 5.35 2.80
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares, After Waivers (%)(e) 5.69 5.97 3.28
Portfolio Turnover Rate (%) 8 31 1
Net Assets Applicable to Common Shares, End of Period (000) $ 77,066 $ 75,503 $ 53,776
Auction Market Preferred Shares
Total Shares Outstanding 1,120 1,120 -
Asset Coverage Per Share (g) $ 93,820 $ 92,414 $ -
Involuntary Liquidation Preference Per Share (h) $ 25,000 $ 25,000 $ -
Approximate Market Value Per Share $ 25,000 $ 25,000 $ -
* Commencement of operations.
(a) Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.00 offering
price.
(b) Calculated using the average common shares outstanding during the period.
(c) Total return on net asset value is calculated assuming a purchase at the
offering price of $15.00 less the sales load of $0.675 paid by the
shareholder on the first day and the ending net asset value per share.
Total return on market value is calculated assuming a purchase at the
offering price of $15.00 on the first day and a sale at the current market
price of the last day of the period.
(d) The investment adviser and the Fund's administrator agreed to waive a
portion of their fees during the period. Without these waivers, expense
ratios would have been higher.
(e) Computed on an annualized basis for periods less than one year.
(f) Amount rounds to less than $0.01 per share.
(g) Calculated by subtracting the Fund's total liabilities (not including the
preferred shares) from the Fund's total assets, and dividing this by the
number of preferred shares outstanding.
(h) Plus accumulated and unpaid dividends.
(i) Had certain expenses not been reduced during the period total return would
have been lower.
(j) Periods less than one year are not annualized.
See accompanying notes to financial statements.
8
--------------------------------------------------------------------------------
Notes to Financial Statements
--------------------------------------------------------------------------------
For the Year Ended January 31, 2005
1. Organization. AEW Real Estate Income Fund (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "1940 Act"), as a
non-diversified closed-end management investment company. The Fund is organized
under the laws of the Commonwealth of Massachusetts by an Amended and Restated
Agreement and Declaration of Trust dated October 10, 2002. The Fund's primary
investment objective is high current income; the Fund's secondary investment
objective is capital appreciation. The Fund seeks to achieve its objective by
concentrating its investments in the United States real estate industry.
2. Significant Accounting Policies. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The Fund's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
which require the use of management estimates that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
a. Security Valuation. Equity securities for which market quotations are readily
available are valued at market price on the basis of valuations furnished to the
Fund by a pricing service, which has been authorized by the Trustees. The
pricing service provides the last reported sale price for securities listed on
an applicable securities exchange or, if no sale was reported and in the case of
over-the-counter securities not so listed, the last reported bid price.
Securities traded on the NASDAQ National Market are valued at the NASDAQ
Official Closing Price ("NOCP"), or if lacking an NOCP, at the most recent bid
quotation on the NASDAQ National Market. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's investment adviser and
officers, under the supervision of the Fund's Trustees. Fair valuation may also
be used by the Board of Trustees if extraordinary events occur after the close
of the relevant market but prior to the close of the New York Stock Exchange.
The Fund may hold securities traded in foreign markets. Foreign securities are
valued at the market price in the foreign market. However, if events occurring
after the close of the foreign market (but before the close of regular trading
on the New York Stock Exchange) are believed to materially affect the value of
those securities, such securities are fair valued pursuant to procedures
approved by the Board of Trustees. When fair valuing securities, the Fund may,
among other things, use modeling tools or other processes that may take into
account factors such as securities market activity and/or significant events
that occur after the close of the foreign market and before the Fund calculates
its net asset value.
b. Security Transactions and Related Investment Income. Security transactions
are accounted for on trade date. Dividend income is recorded on ex-dividend
date, or in the case of certain foreign securities, as soon as the Fund is
notified, and interest income is recorded on an accrual basis. Dividend income
received by the Fund from its investment in REITs may consist of ordinary
income, capital gains and return of capital. Interest income is increased by the
accretion of discount and decreased by the amortization of premium. Investment
income is recorded net of foreign taxes withheld when recovery of such taxes is
uncertain. In determining net gain or loss on securities sold, the cost of
securities has been determined on an identified cost basis.
c. Foreign Currency Translation. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other assets
and liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
Since the values of investment securities are presented at the foreign exchange
rates prevailing at the end of the period, it is not practical to isolate that
portion of the results of operations arising from changes in exchange rates from
fluctuations arising from changes in market prices of the investment securities.
Such changes are included with the net realized and unrealized gain or loss on
investments.
Net realized foreign exchange gains or losses arise from: sales of foreign
currency, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the amounts of
dividends, interest and foreign withholding taxes recorded on the Fund's books
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities at the end of the fiscal periods, resulting from changes
in exchange rates.
d. Federal and Foreign Income Taxes. The Fund intends to meet the requirements
of the Internal Revenue Code applicable to regulated investment companies, and
to distribute to its shareholders substantially all of its net investment income
and any net realized capital gains at least annually. Accordingly, no provision
for federal income tax has been made. The Fund may be subject to foreign taxes
on income and gains on investments that are accrued based upon the Fund's
understanding of the tax rules and regulations that exist in the countries in
which the Fund invests. Foreign governments may also impose taxes or other
payments on investments with respect to foreign securities, such taxes are
accrued as applicable.
e. Dividends and Distributions to Shareholders. The Fund intends to make regular
monthly cash distributions to common shareholders at a level rate based on the
projected performance of the Fund. Distributions to common shareholders are
recorded on the ex-dividend date. Distributions to preferred shareholders are
recorded daily and are payable at the end of each dividend period. Each dividend
period for Auction Market Preferred Shares ("AMPS") is generally seven days. For
the year ended January 31, 2005 the dividend rates for AMPS ranged from 0.79% to
2.50%. The dividend rate for AMPS on January 31, 2005 was 2.47%. In addition, at
least annually, the Fund intends to distribute net capital gains, if any. The
timing and characterization of certain income and capital gains distributions
are determined in accordance with federal tax regulations which may differ from
accounting principles generally accepted in the United States of America.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to the capital accounts. Distributions from net
investment income and short-term capital gains are considered to be ordinary
income for tax purposes. The amounts of ordinary income, capital gains, and
return of capital included in dividends received from the Fund's investments in
REITs are determined at the end of the Fund's fiscal year. Distributions in
excess of tax basis earnings and profits, if any, are reported in the Fund's
financial statements and to shareholders as a return of capital.
9
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
For the Year Ended January 31, 2005
f. Swap Agreements. The Fund may enter into swap agreements to manage its
exposure to the financial markets. A swap is an agreement to exchange the return
generated by one instrument for the return generated by another instrument. The
Fund may enter into interest rate, total return and forward swap spread lock
swap agreements to manage its exposure to interest rates. Interest rate swap
agreements involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal.
Swaps are marked to market daily based upon quotations from market makers and
the change in value, if any, is recorded as unrealized gain or loss in the
Statement of Operations. Payments received or made at the end of the measurement
period are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets. The
values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values may
differ significantly from the values that would have been realized had a ready
market for these instruments existed, and the differences could be material.
Entering into these agreements involves, to varying degrees, elements of credit,
legal, market and documentation risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility that
there will be no liquid market for these agreements, that the counterparty to
the agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, or that there may be unfavorable
changes in interest rates. See Note 7 for a summary of the open swap agreements
as of January 31, 2005.
g. Repurchase Agreements. The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 102%
of the repurchase price, including interest. The Fund's investment adviser is
responsible for determining that the value of the collateral is at all times at
least equal to 102% of the repurchase price, including interest. Repurchase
agreements could involve certain risks in the event of default or insolvency of
the counterparty including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities.
3. Auction Market Preferred Shares. The Fund is authorized to issue an unlimited
number of preferred shares, par value $0.00001 per share. On February 10, 2003,
the Fund issued 1,120 shares of Series M AMPS with proceeds of $28,000,000 in a
public offering. Underwriting commissions and offering costs of $601,187 ($0.16
per common share) were incurred in connection with the offering and were charged
directly to paid-in-capital of the common shares. Dividends on the AMPS are
cumulative at a rate which was established at the offering of the AMPS and has
been reset every seven days thereafter by an auction. The Fund pays annual fees
equivalent to 0.25% of the preferred shares' liquidation value for the
remarketing efforts associated with the preferred auctions.
The AMPS are redeemable at the option of the Fund, at a redemption price equal
to $25,000 per share, plus accumulated and unpaid dividends, on any dividend
payment date. The AMPS may also be subject to mandatory redemption at a
redemption price equal to $25,000 per share, plus accumulated and unpaid
dividends, if the Fund defaults on its asset maintenance requirements with
respect to the AMPS and fails to cure such a default within the time permitted.
If the dividends on the AMPS shall remain unpaid in an amount equal to two full
years' dividends, the holders of the AMPS as a class have the right to elect a
majority of the Board of Trustees. In general, the holders of the AMPS and the
common shares have equal voting rights of one vote per share, except that the
holders of the AMPS, as a separate class, have the right to elect at least two
members of the Board of Trustees and to vote under certain other circumstances
specified in the Fund's By-Laws. The AMPS have a liquidation preference of
$25,000 per share. The Fund is required to maintain certain asset coverage with
respect to the AMPS as defined in the Fund's By-Laws.
4. Purchases and Sales of Securities. For the year ended January 31, 2005,
purchases and sales of securities (excluding short-term investments) were
$7,929,207 and $9,303,237, respectively.
5. Management Fees and Other Transactions with Affiliates.
a. Management Fees. AEW Management and Advisors, L.P. ("AEW") serves as the
investment adviser to the Fund. AEW is an affiliate of AEW Capital Management,
L.P., a wholly owned subsidiary of IXIS Asset Management North America, L.P.
("IXIS North America") formerly CDC IXIS Asset Management North America, L.P.
Under the terms of the management agreement, the Fund pays a monthly management
fee computed at the annual rate of 0.80% of the average daily managed assets of
the Fund (which include the liquidation preference of any preferred shares and
the principal amount of any borrowings used for leverage).
AEW has contractually agreed to waive a portion of its management fees in the
amount of 0.25% of average daily managed assets during the first five years of
the Fund's operations, 0.20% of average daily managed assets in year six, 0.15%
of average daily managed assets in year seven, 0.10% of average daily managed
assets in year eight, and 0.05% of average daily managed assets in year nine.
AEW has also agreed to waive an additional portion of its management fees in the
amount of 0.10% of average daily managed assets. This waiver is voluntary and
may be terminated by the investment adviser at any time without notice.
10
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
For the Year Ended January 31, 2005
For the year ended January 31, 2005, management fees and waivers for the Fund
were as follows:
Percentage of Average
Gross Waiver of Net Daily Managed Assets
Management Management Management ---------------------
Fee Fee Fee Gross Net
---------- ---------- ---------- ------- -------
$827,074 $362,461 $464,613 0.80% 0.45%
b. Accounting and Administrative Expense. During the period February 1, 2004
through December 31, 2004, IXIS Asset Management Services Company ("IXIS
Services"), formerly CDC IXIS Asset Management Services, Inc., a wholly owned
subsidiary of IXIS Asset Management North America, performed certain accounting
and administrative services for the Fund and subcontracted with Investors Bank &
Trust Company ("IBT") to serve as subadministrator. The Fund paid IXIS Services
a fee for these services based on the Fund's average daily managed assets, or if
higher, the minimum fee set forth below:
(1) Percentage of Eligible Average Daily Net Assets
First Over
$300 million $300 million
------------ ------------
0.0600% 0.0575%
or
(2) An annual minimum fee of $150,000.
Effective January 1, 2005, IXIS Asset Management Advisors, L.P. ("IXIS
Advisors") assumed responsibility for providing accounting and administrative
services to the Fund. IBT continues to serve as subadministrator.
IXIS Services and IXIS Advisors each have agreed to voluntarily waive a portion
of its fee. This waiver is voluntary and may be terminated by IXIS Advisors at
any time without notice.
For the year ended January 31, 2005, the following was paid to IXIS Services and
IXIS Advisors for accounting and administrative services:
Gross Waiver of Net Percentage of Average
Accounting Accounting Accounting Daily Managed Assets
And And And ---------------------
Administrative Administrative Administrative Gross Net
-------------- -------------- --------------- -------- -------
$150,000 $75,000 $75,000 0.15% 0.07%
c. Trustees Fees and Expenses. The Fund does not pay any compensation directly
to its officers or Trustees who are directors, officers or employees of IXIS
North America or its affiliates. Each Trustee who is an independent Trustee of
the Fund receives a retainer fee at the annual rate of $2,000 and meeting
attendance fees of $375 for each meeting of the Board of Trustees attended. Each
committee member receives an additional retainer fee at the annual rate of
$2,000 while each committee chairman receives a retainer fee (beyond the $2,000
fee) at the annual rate of $1,000. The retainer fees assume four Board or
Committee meetings per year; Trustees are compensated for each additional Board
or Committee meeting in excess of four meetings per year, at the rate of $375
and $200, respectively. Trustees are reimbursed for travel expenses in
connection with attendance at meetings.
d. Publishing Services. IXIS Services performs certain desktop publishing
services for the Fund. Fees for these services are presented in the Statement of
Operations as shareholder reporting. For the year ended January 31, 2005, the
Fund paid $871 to IXIS Services as compensation for these services.
11
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
For the Year Ended January 31, 2005
6. Shares of Beneficial Interest. The Amended and Restated Agreement and
Declaration of Trust permits the Fund's Trustees to issue an unlimited number of
common shares, $0.00001 par value per share. Transactions in common shares were
as follows:
Year Ended Year Ended
January 31, 2005 January 31, 2004
----------------------- ---------------------
Shares Amount Shares Amount
-------- -------- ------ ----------
Shares issued pursuant to the Fund's dividend
reinvestment plan - $ - 676 $ 9,467
-------- -------- ------ ----------
Offering costs and preferred shares underwriting
commissions - $ - - $ (601,187)
-------- -------- ------ ----------
Increase (decrease) derived from capital shares
transactions - $ - 676 $ (591,720)
======== ======== ====== ==========
7. Swap Contracts.
Expiration Unrealized
Notional Amount Date Description Appreciation/(Depreciation)
------------------- ---------- ------------------------------------------------------ --------------------------
Interest Rate Swaps
2,800,000 USD 3/1/2006 Agreement with Bank of America dated 2/28/2003 to pay $ 26,525
the notional amount multiplied by 2.345% and to
receive the notional amount multiplied by the 1
week Floating Rate London Interbank Offering Rate
("LIBOR") adjusted by a specific spread.
14,000,000 USD 3/3/2008 Agreement with Bank of America dated 2/28/2003 to pay 251,029
the notional amount multiplied by 3.104% and to receive
the notional amount multiplied by the 1 week Floating
Rate LIBOR adjusted by a specific spread.
8,400,000 USD 3/1/2010 Agreement with Fleet National Bank dated 2/28/2003 to 134,211
pay the notional amount multiplied by 3.622% and to
receive the notional amount multiplied by the 1 week
Floating Rate LIBOR adjusted by a specific spread.
----------
$ 411,765
==========
8. Other. On January 3, 2005, the Fund declared three monthly dividends of
$0.115 per common share for the months of January, February and March payable on
January 28, February 25, and March 24, respectively. Characterization of the
dividends for tax purposes may result in a portion of the dividends being
designated as a return of capital. Such designations are determined at the end
of the Fund's fiscal year.
12
--------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
--------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of AEW Real Estate Income Fund:
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 AEW Real Estate Income Fund (the
"Fund") at January 31, 2005, the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with accounting principles generally accepted in the United States of America.
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 the standards of the Public Company Accounting Oversight Board (United
States). Those standards 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 January 31, 2005 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 16, 2005
13
--------------------------------------------------------------------------------
Dividend reinvestment plan
--------------------------------------------------------------------------------
The Fund has a Dividend Reinvestment Plan (the "Plan") commonly referred
to as an "opt-out" plan. Each Common Shareholder will have all distributions of
dividends and capital gains automatically reinvested in additional Common Shares
by EquiServe Trust Company, N.A., as agent for shareholders pursuant to the Plan
(the "Plan Agent"), unless they elect to receive cash. The Plan Agent will
either (i) effect purchases of Common Shares under the Plan in the open market
or (ii) distribute newly issued Common Shares of the Fund. Shareholders who
elect not to participate in the Plan will receive all distributions in cash paid
by check mailed directly to the shareholder of record (or if the shares are held
in street or other nominee name, then to the nominee) by the Plan Agent, as
dividend disbursing agent. Shareholders whose Common Shares are held in the name
of a broker or nominee should contact the broker or nominee to determine whether
and how they may participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Fund declares a dividend or makes a capital gain distribution,
the Plan Agent will, as agent for the participants, either (i) receive the cash
payment and use it to buy Common Shares in the open market, on the American
Stock Exchange or elsewhere, for the participants' accounts or (ii) distribute
newly issued Common Shares of the Fund on behalf of the participants. The Plan
Agent will receive cash from the Fund with which to buy Common Shares in the
open market if, on the determination date, the net asset value per share exceeds
the market price per share plus estimated brokerage commissions on that date.
The Plan Agent will receive the dividend or distribution in newly issued Common
Shares of the Fund if, on the determination date, the market price per share
plus estimated brokerage commissions equals or exceeds the net asset value per
share of the Fund on that date. The number of shares to be issued will be
computed at a per share rate equal to the greater of (i) the net asset value or
(ii) 95% of the closing market price per share on the payment date.
Participants in the Plan may withdraw from the Plan upon written notice
to the Plan Agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a distribution record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole Common Shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a Common Share
credited to such account. In the alternative, upon receipt of the participant's
instructions, Common Shares will be sold and the proceeds sent to the
participant less brokerage commissions and any applicable taxes.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes confirmations of all acquisitions made for the participant. Common
Shares in the account of each Plan participant will be held by the Plan Agent on
behalf of the participant. Proxy material relating to shareholders' meetings of
the Fund will include those shares purchased as well as shares held pursuant to
the Plan.
In the case of shareholders, such as banks, brokers or nominees, which
hold Common Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Common Shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are participants in the Plan.
The Plan Agent's fees for the handling of reinvestment of dividends and
other distributions will be paid by the Fund. Each participant will pay a pro
rata share of brokerage commissions incurred with respect to the Plan Agent's
open market purchases in connection with the reinvestment of distributions.
There are no other charges to participants for reinvesting dividends or capital
gain distributions; however, the Fund reserves the right to amend the Plan to
include a service charge payable by the participants.
The automatic reinvestment of dividends and other distributions will not
relieve participants of any income tax that may be payable or required to be
withheld on such dividends or distributions.
The Fund and the Plan Agent reserve the right to amend or terminate the
Plan. All correspondence concerning the Plan should be directed to the Plan
Agent by telephone at (800) 730-6001.
14
--------------------------------------------------------------------------------
Trustee and Officer Information
--------------------------------------------------------------------------------
The table below provides certain information regarding the Trustees and Officers
of the Fund. Unless otherwise indicated, the address of all persons below is 399
Boylston Street, Boston, MA 02116. The statement of additional information
includes additional information about the Trustees of the Fund and is available
by calling (800) 862-4863.
Position(s) Held with the Number of Portfolios in
Fund, Length of Time Principal Occupation(s) Fund Complex Overseen***
Name and Date of Birth Served and Term of Office* During Past 5 Years** and Other Directorships held
---------------------- -------------------------- ----------------------- -----------------------------
INDEPENDENT TRUSTEES
Graham T. Allison, Jr. Trustee, Contract Review Douglas Dillon Professor and 39; Director, Taubman
(3/23/40) and Governance Committee Director for the Belfer Center Centers, Inc. (real estate
(Class I) Member, since 2002 of Science and International investment trust); Advisory
Affairs, John F. Kennedy Board Member, USEC Inc.
School of Government, (energy supplier)
Harvard University
Edward A. Benjamin Trustee, Audit Committee Retired 39; Director, Coal, Energy
(5/30/38) Member, since 2003 Investments &
(Class II) Management, LLC; Director,
Precision Optics
Corporation (optics
manufacturer)
Daniel M. Cain Trustee, Chairman of the President and Chief 39; Trustee, Universal
(2/24/45) Audit Committee, since Executive Officer, Cain Health Realty Income Trust;
(Class II) 2002; Co-Chairman of the Brothers & Company, Director, Sheridan
Board, since 2004 Incorporated (investment Healthcorp (physician
banking) practice management)
Paul G. Chenault Trustee, Contract Review Retired; Trustee, First 39; Director, Mailco Office
(9/12/33) and Governance Committee Variable Life (variable life Products, Inc. (mailing
(Class I) Member, since 2003 insurance) equipment)
Kenneth J. Cowan Trustee, Chairman of the Retired 39; None
(4/5/32) Contract Review and
(Class II) Governance Committee,
since 2002; Co-Chairman of
the Board, since 2004
Richard Darman Trustee, Contract Review Partner, The Carlyle Group 39; Director and Chairman
(5/10/43) and Governance Committee (investments); formerly, of the Board of Directors,
(Class I) Member, since 2002 Professor, John F. Kennedy AES Corporation (independent
School of Government, power company)
Harvard University
15
--------------------------------------------------------------------------------
Trustee and Officer Information
--------------------------------------------------------------------------------
Position(s) Held with the Number of Portfolios in
Fund, Length of Time Principal Occupation(s) Fund Complex Overseen***
Name and Date of Birth Served and Term of Office* During Past 5 Years** and Other Directorships held
---------------------- -------------------------- ----------------------- -----------------------------
INDEPENDENT TRUSTEES
continued
Sandra O. Moose Trustee, Audit Committee President, Strategic Advisory 39; Director, Verizon
(2/17/42) Member, since 2002 Services (management consulting); Communications; Director,
(Class III) formerly, Senior Vice Rohm and Haas Company
President and Director, The (specialty chemicals);
Boston Consulting Group, Director, AES Corporation
Inc. (management consulting)
John A. Shane Trustee, Contract Review President and Director, 39; Director, Gensym
(2/22/33) and Governance Committee Palmer Service Corporation Corporation (software and
(Class III) Member, since 2002 (venture capital organization) technology services
provider); Director, Abt
Associates Inc. (research
and consulting)
INTERESTED TRUSTEES
Robert J. Blanding/1/ Trustee, since 2003 President, Chairman, 39; None
(4/17/47) Director and Chief Executive
555 California Street Officer, Loomis, Sayles &
San Francisco, CA 94104 Company, L.P.; President and
(Class I) Chief Executive Officer -
Loomis Sayles Funds I; Chief
Executive Officer - Loomis
Sayles Funds II
John T. Hailer/2/ President, Chief Executive President and Chief 39; None
(11/23/60) Officer and Trustee, since Executive Officer, IXIS Asset
(Class II) 2002 Management Distributors,
L.P.; Executive Vice
President - Loomis
Sayles Funds I;
President - Loomis
Sayles Funds II;
President and Chief
Executive Officer -
CDC Nvest Funds Trusts I,
II and III, CDC
Nvest Cash
Management Trust
and CDC Nvest
Companies Trust I
OFFICERS
Coleen Downs Dinneen Secretary, Clerk and Chief Senior Vice President, Not Applicable
(12/16/60) Legal Officer, since 2004 General Counsel, Secretary
and Clerk (formerly, Deputy
General Counsel, Assistant
Secretary and Assistant Clerk),
IXIS Asset Management
Distribution Corporation, IXIS
Asset Management Distributors,
L.P., IXIS Asset Management
Advisors, L.P. and IXIS Asset
Management Services Company;
Chief Compliance Officer, IXIS
Asset Management Advisors, L.P.
16
--------------------------------------------------------------------------------
Trustee and Officer Information
--------------------------------------------------------------------------------
Position(s) Held with the Number of Portfolios in
Fund, Length of Time Principal Occupation(s) Fund Complex Overseen***
Name and Date of Birth Served and Term of Office* During Past 5 Years** and Other Directorships held
---------------------- -------------------------- ----------------------- -----------------------------
OFFICERS
(continued)
James J. Finnegan Executive Vice President, General Counsel, Managing Not Applicable
(4/29/60) since 2004 Director, Vice President and
Two Seaport Lane Clerk, AEW Management
Boston, MA 02110 and Advisors, L.P.; General
Counsel and Vice President,
AEW Capital Management,
L.P.; Vice President and
Assistant Clerk, AEW
Investment Group, Inc.; Vice
President and Assistant
Clerk, AEW Real Estate
Advisors, Inc.
Michael C. Kardok Treasurer, Principal Senior Vice President, IXIS Not Applicable
(7/17/59) Financial and Accounting Asset Management Advisors,
Officer, since 2004 L.P. and IXIS Asset
Management Distributors,
L.P.; formerly, Senior Vice
President, IXIS Asset
Management Services
Company; formerly, Senior
Director, PFPC Inc; formerly,
Vice President - Division
Manager, First Data Investor
Services, Inc.
Frank A. LoPiccolo Anti-Money Laundering President, Chief Executive Not Applicable
(4/1/53) Officer, since 2003 Officer and Director (for-
merly, Executive Vice
President), IXIS Asset
Management Services
Company
17
--------------------------------------------------------------------------------
Trustee and Officer Information
--------------------------------------------------------------------------------
Position(s) Held with the Number of Portfolios in
Fund, Length of Time Principal Occupation(s) Fund Complex Overseen***
Name and Date of Birth Served and Term of Office* During Past 5 Years** and Other Directorships held
---------------------------- ---------------------------- --------------------------------- -----------------------------
OFFICERS
(continued)
John E. Pelletier Chief Operating Officer, Executive Vice President and Not Applicable
(6/24/64) since 2004 Chief Operating Officer
(formerly, General Counsel,
Secretary and Clerk), IXIS
Asset Management
Distributors, L.P. and IXIS
Asset Management
Advisors, L.P.; Executive
Vice President (formerly,
Senior Vice President,
General Counsel, Secretary
and Clerk), IXIS Asset
Management Distribution
Corporation; Director (for-
merly, President, Chief
Executive Officer, General
Counsel, Secretary and
Clerk), IXIS Asset
Management Services
Company
Kristin Vigneaux Chief Compliance Officer, Chief Compliance Officer Not Applicable
(9/25/69) since 2004 for Mutual Funds, IXIS
Asset Management
Distributors, L.P., IXIS
Asset Management
Advisors, L.P. and IXIS
Asset Management Services
Company; formerly, Vice
President, IXIS Asset
Management Services
Company
* The Trustees are divided into three Classes and serve staggered three-year
terms, subject to their prior death, retirement, resignation,
disqualification or removal from the Board. The Terms of Class I Trustees
expire in 2006, the terms of Class II Trustees expire in 2007, and the
terms of the Class III Trustees expire in 2005. It is currently expected
that, in accordance with the Board's current retirement policy, Mr. Shane
will retire as a Trustee prior to the December 2008 Annual Meeting. The
current retirement age is 72. At a meeting held on November 19, 2004, the
Trustees voted to suspend the retirement policy until 2006. Officers hold
office at the pleasure of the Fund's Board and until their successors are
appointed and qualified or until their earlier resignation or removal.
** Previous positions during the past five years with IXIS Asset Management
Distributors, L.P. (the "Distributor"), IXIS Asset Management Advisors,
L.P. or Loomis, Sayles & Company, L.P. are omitted if not materially
different from a trustee's or officer's current position with such entity.
As indicated, each Trustee is also a trustee of certain other investment
companies for which the Distributor acts as principal underwriter.
*** The Trustees of the Fund serve as Trustees of a fund complex that includes
all series of CDC Nvest Funds Trust I, CDC Nvest Funds Trust II, CDC Nvest
Funds Trust III, CDC Nvest Cash Management Trust, CDC Nvest Companies Trust
I, AEW Real Estate Income Fund, Loomis Sayles Funds I and Loomis Sayles
Funds II.
/1/ Mr. Blanding is deemed an "interested person" of the Fund because he holds
the following positions with affiliated persons of the Fund: President,
Chairman, Director and Chief Executive Officer of Loomis, Sayles & Company,
L.P.
/2/ Mr. Hailer is an "interested person" of the Fund because he holds the
following positions with affiliated persons of the Fund: Director and
Executive Vice President of IXIS Asset Management Distribution Corporation,
President and Chief Executive Officer of IXIS Asset Management Advisors,
L.P.
18
--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------
It is currently anticipated that the Fund's 2005 annual meeting of Shareholders
will be held on June 15, 2005. Shareholders submitting any proposals for the
Fund intended to be presented at the 2005 annual meeting must ensure that such
proposals are received by the Fund, in good order and in compliance with all
applicable legal requirements and the requirements of the Fund's Bylaws, no
later than February 9, 2005 and not earlier than January 25, 2005. If a
Shareholder who wishes to present a proposal fails to notify the Fund within
these dates, the proxies solicited for the meeting will have discretionary
authority to vote on the Shareholder's proposal if it is properly brought before
the meeting. The submission by a Shareholder of a proposal for inclusion in the
proxy materials does not guarantee that it will be included. Shareholder
proposals are subject to certain requirements under the federal securities laws
and must be submitted in accordance with the Fund's Bylaws. Shareholder
proposals should be addressed to the attention of the Secretary of the Fund.
In accordance with Section 23(c) of the Investment Company Act of 1940, as
amended, the Fund hereby gives notice that it may, from time to time, repurchase
its shares in the open market at the option of the Board of Trustees and on such
terms as the Board of Trustees shall determine.
Shareholder Meeting (unaudited). At the annual meeting (the "Meeting") of
shareholders held on May 20, 2004, shareholders of the AEW Real Estate Income
Fund voted for the following proposal:
1. Election of Trustees
For Against Abstained Total Votes
Edward A. Benjamin 2,531,149 35,173 - 2,566,322
Kenneth J. Cowan 2,537,173 29,149 - 2,566,322
John T. Hailer 2,367,773 198,549 - 2,566,322
Daniel M. Cain* 520 - - 520
* Preferred Shares Trustee.
Messrs. Graham T. Allison, Robert J. Blanding, Paul G. Chenault, Richard Darman,
John A. Shane, Peter S. Voss and Ms. Sandra O. Moose, Trustees of the Fund, each
have terms of office as Trustee that continued after the Meeting.
The statement of additional information includes additional information about
Trustees of the Fund and is available, without charge, upon request, by calling
(800) 862-4863.
19
--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------
IXIS Asset Management Advisors, L.P.
AEW Real Estate Income Fund
Notice of Privacy Policies and Practices
We/1/ consider shareholder relationships to be the hallmark of our business and
are dedicated to protecting the confidentiality of any nonpublic personal
information provided by our customers/2/. We understand the trust that our
customers place in us and are committed to earning that trust well into the
future.
Types of Information Gathered
We collect personal information on applications, forms, documents, transaction
histories and correspondence (electronic, written and telephonic) with
customers. Through our Web sites we gather information about visitors and their
needs submitted through answers to surveys, data input to calculators and
information entered onto forms. This information includes but is not limited to
name, postal address, e-mail address and social security number. Much of the
data collected is statistical in nature and is not generally attributable to
any specific customer.
How We Use the Information
We use the information gathered to service your account and to provide you with
additional information about products and services. We do not disclose any
nonpublic information about current or former customers to any unaffiliated
third party except as permitted by law, or at the specific request of the
customer. The information we collect, as described above, may be shared with our
corporate affiliates in the financial services industry in order to enhance and
improve customer communications, services, and products designed to meet our
customers' needs. We may disclose some or all of the above information to
affiliated and unaffiliated companies that perform marketing and other services
(such as preparing and mailing prospectuses, reports and account statements,
conducting research on client satisfaction, and gathering votes for shareholder
proxies) on our or the Funds' behalf or to other financial institutions with
whom we have joint marketing agreements. These parties that are not affiliated
with us have agreed not to use this information for any other purpose.
Policies and Practices to Protect Confidential Information
Only those employees that have a business need for personally identifiable data
about our customers are given access to that information. We maintain physical,
electronic and procedural safeguards that comply with federal standards to
protect your nonpublic personal information. For example, we take precautions to
help keep our information systems secure, including the use of firewalls for our
Internet-based systems. We also use, when appropriate, encryption technologies,
user authentication systems and access control mechanisms.
/1/ For purposes of this notice the term "We" includes AEW Real Estate Income
Fund and IXIS Asset Management Advisors, L.P.
/2/ For purposes of this notice, the terms customer or customers include both
shareholders of AEW Real Estate Income Fund and individuals who provide
nonpublic personal information, but do not invest in the Fund.
Proxy voting information
A description of the Fund's proxy voting policies and the procedures that the
Fund uses to determine how to vote proxies relating to portfolio securities is
available without charge, upon request, by calling (800) 862-4863; on the Fund's
web site, www.ixisag.com/aew_rif; and on the Securities and Exchange's website
at www.sec.gov. Information describing how the Fund voted proxies relating to
portfolio securities during the 12-month period ended June 30, 2004 is available
from the Fund's website and the SEC website.
Quarterly portfolio schedule
The Fund files a complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available on the SEC's website and may be reviewed and copied at the SEC's
Public Reference Room in Washington, DC. Information on the operation of the
Public Reference Room may be obtained by calling 1-800-SEC-0330.
Tax Information (unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the Fund designated
$2,207,039 as capital gain dividends paid during the year ended January 31,
2005.
During the year ended January 31, 2005, the tax character of distributions paid
was $3,906,427 from ordinary income, $2,207,039 from long-term capital gains and
$96,550 from paid in capital.
20
[LOGO] AEW
CEAEW58-0105
Item 2. Code of Ethics.
The Trust has adopted a code of Ethics that applies to the Trust's principal
executive officer, principal financial officer and persons performing similar
functions.
Item 3. Audit Committee Financial Expert.
The Board of Trustees of the Trust has established an audit committee. Ms.
Sandra O. Moose, and Messrs. Edward A. Benjamin and Daniel M. Cain, all members
of the audit committee have been designated financial experts. Each of these
individuals is also an Independent Trustee of the Trust.
Item 4. Principal Accountant Fees and Services.
Fees paid to Principal Accountant by the Funds. The table below sets forth fees
billed by the principal accountant, PricewaterhouseCoopers LLP, for the past two
fiscal years for professional services rendered in connection with a) the audit
of the Trust's annual financial statements and services provided in connection
with regulatory filings; b) audit-related services (including services that are
reasonably related to the performance of the audit of the registrant's financial
statements and but not reported under "Audit Fees"); c) tax compliance, tax
advice and tax planning and d) all other fees billed for professional services
rendered by the principal accountant to the Trust, other than the services
provided reported as a part of (a) through (c) of this Item.
Audit fees Audit-related fees/1/ Tax fees/2/ All other fees
----------------------------------------------------------------------------------------------------------
2003 2004 2003 2004 2003 2004 2003 2004
----------------------------------------------------------------------------------------------------------
AEW Real Estate Income Fund $ 20,000 $ 20,000 $ 14,000 $ 10,000 $ 7,000 $ 1,250 $ 0 $ 0
----------------------------------------------------------------------------------------------------------
1. The audit related fees for 2003 and 2004 consist of $10,000 and
$5,000, respectively, related to rating agency procedures reports and
$4,000 and $5,000, respectively, related to the performance of
agreed-upon procedures relating to the Trust's semi-annual financial
statements in accordance with SAS 100.
2. The tax fees consist of a review of the Trust's tax returns (2003) and
year-end shareholder reporting (2004).
Aggregate fees billed to the Trust for non-audit services for 2003 and 2004 were
$21,000 and $11,250, respectively.
Fees paid to Principal Accountant By Adviser and Control Affiliates. The
following table sets forth the non-audit services provided by the Trust's
principal accountant to IXIS Asset Management Advisors, L.P. and entities
controlling, controlled by or under common control with IXIS Asset Management
Advisors, L.P. that provide ongoing services to the Trust ("Control Affiliates")
for the last two fiscal years.
Audit-related fees/1/ Tax fees 2 All other fees 3
--------------------------------------------------------------------------------
2003 2004 2003 2004 2003 2004
--------------------------------------------------------------------------------
Control Affiliates $ 107,000 $ 106,000 n/a $ 7,000 n/a $ 12,000
--------------------------------------------------------------------------------
1. The audit related fees consist of performing SAS 70 internal
examinations for a Trust affiliate, reviewing of anti-money laundering
procedures for the investment adviser and, for 2003, a review of 12b-1
expenditures for IXIS Asset Management Distributors, L.P.
2. The tax fees consist of a review of the Trust's tax returns.
3. Other fees are related to the review of the ICI transfer agency
survey.
Aggregate fees billed to Control Affiliates for non-audit services during 2003
and 2004 were $195,000 and $180,000, respectively
None of the services described above were approved pursuant to (c)(7)(i)(C) of
Regulation S-X.
Audit Committee Pre Approval Policies.
Annually, the Trust's Audit Committee reviews the audit, audit-related,
tax and other non-audit services together with the projected fees, for services
proposed to be rendered to the Trust and/or other entities for which
pre-approval is required during the upcoming year. Any subsequent revisions to
already pre-approved services or fees (including fee increases) and requests for
pre-approval of new services would be presented for consideration quarterly as
needed.
If, in the opinion of management, a proposed engagement by the Trust's
independent accountants needs to commence before the next regularly scheduled
Audit Committee meeting, any member of the Audit Committee who is an independent
Board member is authorized to pre-approve the engagement, but only for
engagements to provide audit, audit related and tax services. This approval is
subject to review of the full Audit committee at its next quarterly meeting. All
other engagements require the approval of all the members of the audit
committee.
Item 5. Audit Committee of Listed Registrants.
Since the filing of the N-CSR for the period ended January 31, 2005, Ms. Cynthia
L. Walker, an independent trustee elected by shareholders on June 15, 2005, was
appointed to serve on the audit committee of the Registrant. Edward A. Benjamin,
Daniel M. Cain and Sandra O. Moose, independent trustees, also serve on the
audit committee.
Item 6. Schedule of Investments.
Included as part of the Report to Shareholders filed as Item 1 herewith.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
When voting proxies and responding to tender offers, AEW acts prudently,
solely in the best interest of its clients, and for the exclusive purpose of
maximizing value to its clients. AEW takes reasonable steps under the
circumstances to assure that it has actually received all of the proxies for
which it has voting authority. AEW considers those factors that would affect the
value of its clients' investments and may not, unless specifically directed to
do so by a client, consider unrelated objectives, such as social considerations.
In the event of any conflict of interest involving a proxy vote AEW will vote in
accordance with recommendations provided by an independent party proxy service
provider.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not yet applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers.
---------------------------------------------------------------------------------------------------------
(d)
Maximum Number (or
(c) Approximate Dollar
Total Number of Value) of Shares
Shares (or Units) (or Units) that
(a) Purchased as Part May Yet Be
Total Number of (b) of Publicly Purchased Under
Shares (or Units) Average Price Paid Announced Plans or the Plans or
Period Purchased per Share (or Unit) Programs Programs
---------------------------------------------------------------------------------------------------------
August 1 through N/A N/A N/A N/A
August 31
---------------------------------------------------------------------------------------------------------
September 1 through 2909.808 17.24 2909.808 N/A
September 30
---------------------------------------------------------------------------------------------------------
October 1 through N/A N/A N/A N/A
October 31
---------------------------------------------------------------------------------------------------------
November 1 through 4192.704 18.10 4192.704 N/A
November 30
---------------------------------------------------------------------------------------------------------
December 1 through N/A N/A N/A N/A
December 31
---------------------------------------------------------------------------------------------------------
January 1 through 1287.707 19.12 1287.707 N/A
January 31
------------------------------------------------------------------------------------- -------------------
Item 10. Submission of Matters to a Vote of Securities Holders.
The following represents new procedures by which shareholders may
recommend nominees to the registrant's board of trustees:
According to procedures adopted by the Board of Trustees on November 19,
2004, any shareholder recommendation of a candidate for nomination as an
Independent Trustee shall be kept on file and considered by the Board for six
(6) months from the date of receipt, after which the shareholder recommendation
will be considered stale and discarded.
Item 11. Controls and Procedures.
Subsequent to the filing with the Securities and Exchange Commission and mailing
to shareholders of the annual report of the registrant for the period ended
January 31, 2005, it was determined that the financial statements and related
footnotes for such period contained certain misstatements regarding the
characterization of distributions paid by the registrant.
After reviewing the misstatements and consulting with the Fund's counsel and
auditors, management decided that is in the best interest of the registrant and
its shareholders to restate the financial statement balances and related
footnotes contained in the annual report for the period ended January 31, 2005
to correct the misstatements. The restated financial statements, including the
notes thereto, are included as Item 1 to this Form N-CSR/A.
The restatement of the financial statements does not change the registrant's
total return or net asset value as of the financial statement date or the total
amounts distributed to any shareholders during the periods in question. Instead,
the adjustments only result in reclassification of the character of
distributions paid by the registrant.
In connection with the restatement of the financial statements, the registrant's
principal executive and principal financial officers reevaluated the
registrant's disclosure controls and procedures within 90 days of this amended
report and determined that those disclosure controls and procedures were not
effective for the period ended January 31, 2005 in that there was a failure by
certain service providers of the registrant to follow the process for
redesignating distributions made by the registrant to its shareholders resulting
from the determination of the estimated tax character of the corresponding
income earned by the Fund from its investments in Real Estate Investment Trusts
(REITs). The Chief Financial Officer and Chief Executive Officer of the
registrant disclosed to the registrant's auditors, PricewaterhouseCoopers LLP,
and the Audit Committee of the registrant's Board of Trustees their conclusion
that the failure to follow the above-mentioned process is a significant
deficiency in the operation of the registrant's internal control over financial
reporting.
The registrant is remediating the significant deficiency in the operation of its
internal control over financial reporting with respect to the process for
adjusting shareholder distributions based upon the character of dividends
received from REITs. Such remedial actions include the following:
. Management has discussed with each service provider the cause of
the error and the corrective actions they have taken, or are
taking, to detect and/or prevent future errors of this type. It
is worth noting that the registrant is changing service
providers for fund accounting and sub-administration services
effective September 1, 2005. Management has evaluated the
successor service provider's internal controls and procedures
concerning this matter to ensure that they are complete and
effective.
. Management has hired a tax professional to help oversee the
service providers' work in greater detail.
. In the future, the registrant will wait until actual REIT
information becomes available, to the extent possible, and will
include this information in the financial statements rather than
rely on estimates of such information.
In connection with this amended filing, the registrant's principal executive and
principal financial officers have, within 90 days of this amended report,
evaluated the registrant's disclosure controls and procedures currently in
effect, including the remedial actions discussed above, and concluded that the
registrant's disclosure controls and procedures are effective and operating
properly.
As previously reported, there was no change in the registrant's internal control
over financial reporting during the quarter ended January 31, 2005 that
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting. However, subsequent to
January 31, 2005, the registrant undertook the remedial actions described above.
Item 12. Exhibits.
(a) (1) Not applicable.
(a) (2) Certifications of Principal Executive Officer and Principal
Financial Officer pursuant to 30a-2 under the Investment Company
Act of 1940 (17 CFR 270.30a-2), as herewith as exhibit (a)(2)(1)
and a(2)(2), respectively
(a) (3) Not applicable.
(b) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 are filed
herewith as Exhibit (b)(1) and (b)(2), respectively.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AEW Real Estate Income Fund
By: /s/ John T. Hailer
----------------------------------------
Name: John T. Hailer
Title: President and Chief Executive Officer
Date: August 17, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ John T. Hailer
----------------------------------------
Name: John T. Hailer
Title: President and Chief Executive Officer
Date: August 17, 2005
By: /s/ Michael C. Kardok
----------------------------------------
Name: Michael C. Kardok
Title: Treasurer
Date: August 17, 2005