UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21206
AEW Real Estate Income Fund
--------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
399 Boylston Street, Boston, Massachusetts 02116
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Coleen Downs Dinneen, Esq.
IXIS Asset Management Advisors, L.P.
399 Boylston Street
Boston, Massachusetts 02116
--------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (617) 449-2810
Date of fiscal year end: January 31
Date of reporting period: July 31, 2005
Item 1. Report to Stockholders.
[LOGO] AEW
AEW Real Estate Income Fund
Semiannual Report
July 31, 2005
AEW Management and Advisors
TABLE OF CONTENTS
Management Discussion
and Performance........Page 1
Schedule of InvestmentsPage 5
Financial Statements...Page 7
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
--------------------------------------------------------------------------------
July 31, 2005 Market Value Per Common Share:
$19.53
Net Asset Value Per Common Share:
$23.28
Management Discussion
--------------------------------------------------------------------------------
MARKET FACTS
Real estate investment trusts (REITs) once again outperformed the stock and
bond markets for the six months ended July 31, 2005. The MSCI US REIT Index (an
index of U.S. REIT performance, formerly called the Morgan Stanley REIT Index)
returned 24.70% for the period - substantially ahead of the 2.60% return on the
Dow Jones Industrial Average and 5.45% on the Standard & Poor's 500 Index. For
the same period, the Lehman Aggregate Bond Index (a broad-based index of U.S.
government and corporate bonds) returned just 0.95%, while the Lehman U.S.
Treasury Index (composed of Treasury bonds maturing in one year or more)
returned 1.06%.
FUND PERFORMANCE
AEW Real Estate Income Fund's total return for the six months ended July 31,
2005 was 16.54% based on the market price of its common shares. These results
assume that $0.69 in dividends were reinvested during the period and reflect
the increase in the market price of fund shares, which rose to $19.53 from
$17.40. This increase reflects investor demand, and is not directly linked to
changes in the fund's net asset value, which rose to $23.28 at July 31, 2005,
from $20.10 at January 31, 2005. The total return based on the net asset value
of common shares was 20.26% for the fiscal period.
PORTFOLIO INFORMATION
Both the fund's common stock and preferred holdings generated strong yields and
positive total returns. The apartment and office sectors were the strongest
areas. Gables Residential Trust - a Florida-based company with a portfolio of
upscale apartment communities in high-growth job markets - was a standout in
the apartment sector. The price of Gables' shares rose significantly in early
June following an announcement that the company had agreed to be acquired by a
private buyer at an attractive premium. In the office sector, Kilroy Realty
Corporation was among the top performers. Kilroy continues to benefit from the
recovery in southern California's real estate market as well as from strong
leasing and development pipelines.
No property type provided a negative return during the period, but lodging was
the weakest sector. The fund's use of interest-rate swap agreements during the
first six months of the year had a modest positive contribution to the fund's
net asset value, while the cost of leverage through the preferred shares was a
slight negative.
We made only marginal changes in the composition of the portfolio during the
period, with no major changes in the fund's sector weightings. One new common
stock position was added: Brandywine Realty Trust, which owns and operates
suburban office and industrial properties located in the mid-Atlantic United
States. In addition to being attractively valued, in our opinion, this REIT is
developing a large office tower in Philadelphia, which we think will be a
catalyst for continued growth over time.
As of July 31, 2005, the fund's common and preferred holdings amounted to 94.3%
and 35.6% of total net assets, respectively. The ten largest holdings amounted
to 32.0% of the fund's market value, and no single holding represented more
than 4.3%.
OUTLOOK
Demand for real estate as an asset class (both directly and through the
securities markets) continues to be robust, and we expect investor demand for
REITs to remain steady, at least in the near term. However, we are cautious
about REIT returns for the balance of 2005 because of their superior returns
relative to the broader stock market during the past five years.
In general, we believe returns from real estate should remain competitive with
other asset classes and should continue to help investors diversify their
portfolio of securities. However, we also think REIT investors should expect
higher and more frequent bouts of volatility, given the breadth of the REIT
investor base and the uncertain direction of the U.S. economy and interest
rates.
1
AEW REAL ESTATE INCOME FUND
Investment Results through July 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 -- July 31, 2005
SINCE
INCEPTION/1/
6 MONTHS/1/ 1 YEAR/1/ (11/26/02)
Total return on market value 16.54% 27.87% 20.72%
Total return on net asset value 20.26 35.51 31.13
------------------------------------------------------------------
COMPARATIVE PERFORMANCE
MSCI US REIT Index/2/ 24.70 41.71 31.28/3/
------------------------------------------------------------------
All returns represent past performance and do not guarantee future results.
Periods of less than one year are not annualized. Share price and return will
vary and you may have a gain 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.
PORTFOLIO AS OF JULY 31, 2005
% of Investments as of
TEN LARGEST REIT SECTORS 7/31/05 1/31/05
------------------------------------------------------
Office 27.1 26.1
------------------------------------------------------
Shopping Centers 16.9 15.5
------------------------------------------------------
Healthcare 12.6 13.5
------------------------------------------------------
Apartments 11.9 13.9
------------------------------------------------------
Lodging/Resorts 7.2 8.0
------------------------------------------------------
Diversified 6.7 6.2
------------------------------------------------------
Regional Malls 6.3 6.9
------------------------------------------------------
Industrial 5.0 4.7
------------------------------------------------------
Factory Outlets 2.4 2.5
------------------------------------------------------
Specialty 1.6 1.4
------------------------------------------------------
% of Investments as of
TEN LARGEST HOLDINGS 7/31/05 1/31/05
------------------------------------------------------
Healthcare Realty Trust, Inc. 4.3 4.2
------------------------------------------------------
Camden Property Trust 3.9 2.8
------------------------------------------------------
HRPT Properties Trust 3.5 3.6
------------------------------------------------------
iStar Financial, Inc. 3.3 3.4
------------------------------------------------------
Senior Housing Properties Trust 3.2 3.0
------------------------------------------------------
Heritage Property Investment
Trust 3.0 2.7
------------------------------------------------------
Mack-Cali Realty Corp. 2.8 2.7
------------------------------------------------------
Prentiss Properties Trust 2.8 2.6
------------------------------------------------------
Arden Realty, Inc. 2.6 2.5
------------------------------------------------------
Liberty Property Trust 2.6 2.6
------------------------------------------------------
Portfolio holdings and asset allocations will vary.
NOTES TO TABLE
/1/Fund performance has been increased by expense waivers, without which
performance would have been lower.
/2/The MSCI US 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.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
2
BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
The Board of Trustees, including the Independent Trustees, considers matters
bearing on the Fund's advisory agreement (the "Agreement") at most of its
meetings throughout the year. Once a year, usually in the spring, the Contract
Review and Governance Committee of the Board meets to review the Agreement to
determine whether to recommend that the full Board approve the continuation of
the Agreement for an additional one-year period. After the Committee has made
its recommendation, the full Board, including the Independent Trustees,
determines whether to approve the continuation of the Agreement.
In connection with these meetings, the Trustees receive materials that the
Fund's investment adviser believes to be reasonably necessary for the Trustees
to evaluate the Agreement. These materials generally include, among other
items, (i) information on the investment performance of the Fund and the
performance of peer groups of funds and the Fund's performance benchmarks,
(ii) information on the Fund's advisory fee and other expenses, including
information comparing the Fund's expenses to those of peer groups of funds and
information about any applicable expense caps and fee "breakpoints,"
(iii) sales and redemption data in respect of the Fund, (iv) information about
the profitability of the Agreement to the Fund's adviser (the "Adviser"), and
(v) information obtained through the completion of a questionnaire by the
Adviser (the Trustees are consulted as to the information requested through
that questionnaire). The Board of Trustees, including the Independent Trustees,
may also consider other material facts such as (i) the Adviser's financial
results and financial condition, (ii) the Fund's investment objective and
strategies and the size, education and experience of the Adviser's respective
investment staffs and their use of technology, external research and trading
cost measurement tools, (iii) the procedures employed to determine the value of
the Fund's assets, (iv) the allocation of the Fund's brokerage, (v) the
resources devoted to, and the record of compliance with, the Fund's investment
policies and restrictions, policies on personal securities transactions and
other compliance policies, and (vi) the general economic outlook with
particular emphasis on the mutual fund industry. Throughout the process, the
Trustees are afforded the opportunity to ask questions of and request
additional materials from the Adviser and its affiliates.
The Board of Trustees most recently approved the continuation of the Agreement
at its meeting held in May, 2005. In considering whether to approve the
continuation of the Agreement, the Board of Trustees, including the Independent
Trustees, did not identify any single factor as determinative. Matters
considered by the Trustees, including the Independent Trustees, in connection
with their approval of the Agreement included the following:
The nature, extent and quality of the services provided to the Fund under the
Agreement. The Trustees considered the nature, extent and quality of the
services provided by the Adviser and its affiliates to the Fund and the
resources dedicated to the Fund by the Adviser and its affiliates. The Trustees
also considered the services provided by the Adviser's affiliates to the Fund,
including the monitoring and board reporting services provided. The Trustees
also considered the benefits to shareholders of investing in a mutual fund that
is part of a family of funds offering a variety of investment disciplines and
providing for a variety of fund and shareholder services. After reviewing these
and related factors, the Trustees concluded, within the context of their
overall conclusions regarding the Agreement, that the nature, extent and
quality of services provided supported the renewal of the Agreement.
Investment performance of the Fund and the Adviser. As noted above, the
Trustees received information about the performance of the Fund over various
time periods, including information which compared the performance of the Fund
to the performance of peer groups of funds and the Fund's performance
benchmark. In addition, the Trustees also reviewed data prepared by an
independent third party which analyzed the performance of the Fund using a
variety of performance metrics, including metrics which also measured the
performance of the Fund on a risk adjusted basis.
After reviewing the information, the Board concluded that the Fund's
performance supported the renewal of the Agreement. The Trustees also
considered the Adviser's performance and reputation generally, the performance
of the fund family generally, and the historical responsiveness of the Adviser
and its affiliates to Trustee concerns about performance and the willingness of
the Adviser to take steps intended to improve performance.
After reviewing these and related factors, the Trustees concluded, within the
context of their overall conclusions regarding the Agreement, that the
performance of the Fund and the Adviser supported the renewal of the Agreement.
The costs of the services to be provided and profits to be realized by the
Adviser and its affiliates from their respective relationships with the Fund.
The Trustees considered the fees charged to the Fund for advisory services as
well as the total expense levels of the Fund. This information included
comparisons (provided both by management and also by an independent third
party) of the Fund's advisory fee and total expense levels to those of its peer
group and information about the advisory fee charged by the Adviser to
comparable
3
BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
accounts. In considering the fees charged to comparable accounts, the Trustees
considered, among other things, management's representations about the
differences between managing mutual funds as compared to other types of
accounts, including the additional resources required to effectively manage
mutual fund assets. In evaluating the Fund's advisory fee, the Trustees also
took into account the demands, complexity and quality of the investment
management of the Fund. The Trustees noted that the Fund was significantly
smaller than its peers, which negatively affected its expense ratio when
compared to its peers. The Trustees also noted management's stated
justification for the fee charged to the Fund, which included information about
the performance of the Fund, the services provided to the Fund and management's
view as to why it was appropriate that the Fund bear an advisory fee greater
than its peer group median and total expenses greater than its peer group
average.
The Trustees also considered the compensation directly or indirectly received
by the Adviser and its affiliates from their relationships with the Fund. The
Trustees reviewed information provided by management as to the profitability of
the Adviser's and its affiliates' relationships with the Fund, and information
about the allocation of expenses used to calculate profitability. When
reviewing profitability, the Trustees also considered information about court
cases in which adviser profitability was an issue in whole or in part, the
performance of the Fund, the expense levels of the Fund, and whether the
Adviser had implemented breakpoints and/or expense caps with respect to the
Fund.
After reviewing these and related factors, the Trustees concluded, within the
context of their overall conclusions regarding the Agreement, that the advisory
fee charged to the Fund was fair and reasonable, and that the costs of these
services generally and the related profitability of the Adviser and its
affiliates in respect of their relationships with the Fund supported the
renewal of the Agreement.
Economies of Scale. The Trustees considered the existence of any economies of
scale in the provision of services by the Adviser and whether those economies
are shared with the Fund through breakpoints in its investment advisory fee or
other means, such as expense waivers. The Trustees noted that the Fund
benefited from an expense waiver. In considering these issues, the Trustees
also took note of the costs of the services provided (both on an absolute and a
relative basis) and the profitability to the Adviser and its affiliates of
their relationships with the Fund, as discussed above.
After reviewing these and related factors, the Trustees considered, within the
context of their overall conclusions regarding the Agreement, that the extent
to which economies of scale were shared with the Fund supported the renewal of
the Agreement.
The Trustees also considered other factors, which included but were not limited
to the following:
. whether the Fund has operated in accordance with its investment objective
and the Fund's record of compliance with its investment restrictions, and
the compliance programs of the Fund and the Adviser. They also considered
the compliance related resources the Adviser and its affiliates were
providing to the Fund.
. the nature, quality, cost and extent of administrative and shareholder
services performed by the Adviser and its affiliates, both under the
Agreement and under separate agreements covering transfer agency and
administrative services.
. so-called "fallout benefits" to the Adviser and its affiliates. The Trustees
considered the possible conflicts of interest associated with these fallout
and other benefits, and the reporting, disclosure and other processes in
place to disclose and monitor such possible conflicts of interest.
Based on their evaluation of all factors that they deemed to be material,
including those factors described above, and assisted by the advice of
independent counsel, the Trustees, including the Independent Trustees,
concluded that the existing advisory agreement should be continued through
June 30, 2006.
4
AEW REAL ESTATE INCOME FUND -- SCHEDULE OF INVESTMENTS
Investments as of July 31, 2005 -- (unaudited)
Shares Description Value (a)
--------------------------------------------------------------
Common Stocks -- 94.3% of Total Net Assets
REAL ESTATE -- 1.2%
Apartments -- 1.2%
41,500 Municipal Mortgage & Equity LLC $ 1,097,675
-------------
REAL ESTATE INVESTMENT TRUSTS -- 93.1%
REITs -- Apartments -- 10.6%
44,000 Archstone Smith Trust 1,870,000
82,500 Camden Property Trust 4,560,600
25,000 Gables Residential Trust 1,085,750
40,000 Mid-America Apartment Communities, Inc. 1,926,000
-------------
9,442,350
-------------
REITs -- Diversified -- 6.2%
90,000 iStar Financial, Inc. 3,851,100
70,000 Lexington Corporate Properties Trust 1,678,600
-------------
5,529,700
-------------
REITs -- Factory Outlets -- 1.3%
40,000 Tanger Factory Outlet Centers, Inc. 1,152,000
-------------
REITs -- Healthcare -- 13.0%
65,000 Health Care Property Investors, Inc. 1,810,900
121,000 Healthcare Realty Trust, Inc. 4,944,060
80,000 Omega Healthcare Investors, Inc. 1,116,000
190,500 Senior Housing Properties Trust 3,756,660
-------------
11,627,620
-------------
REITs -- Industrial -- 6.5%
25,000 EastGroup Properties, Inc. 1,085,000
62,400 First Potomac Realty Trust 1,644,240
68,100 Liberty Property Trust 3,056,328
-------------
5,785,568
-------------
REITs -- Lodging/Resorts -- 3.8%
55,000 Eagle Hospitality Properties Trust, Inc. 563,200
63,000 Hospitality Properties Trust 2,797,200
-------------
3,360,400
-------------
REITs -- Mortgage -- 1.8%
50,000 Ventas Inc. 1,614,500
-------------
REITs -- Office -- 27.9%
77,000 Arden Realty, Inc. 3,074,610
32,500 Brandywine Realty Trust, Inc. 1,053,000
65,000 CarrAmerica Realty Corp. 2,524,600
77,000 Glenborough Realty Trust, Inc. 1,613,920
95,000 Highwoods Properties, Inc. 3,006,750
311,300 HRPT Properties Trust 4,012,657
43,000 Kilroy Realty Corp. 2,240,300
68,000 Mack-Cali Realty Corp. 3,257,880
30,000 Maguire Properties, Inc. 898,500
80,000 Prentiss Properties Trust 3,237,600
-------------
24,919,817
-------------
REITs -- Regional Malls -- 4.7%
62,000 Glimcher Realty Trust 1,788,700
35,000 Macerich Co. (The) 2,457,700
-------------
4,246,400
-------------
REITs -- Shopping Centers -- 15.2%
125,000 Cedar Shopping Centers, Inc. 1,927,500
100,000 Commercial Net Lease Realty, Inc. 2,075,000
30,000 Equity One, Inc. 714,000
94,000 Heritage Property Investment Trust 3,496,800
39,000 Inland Real Estate Corp. 647,010
12,000 New Plan Excel Realty Trust 328,560
Shares Description Value (a)
-----------------------------------------------------------------------------
REITs -- Shopping Centers -- continued
150,000 Primaris Retail 144A $ 1,809,315
39,000 Ramco-Gershenson Properties Trust 1,162,200
55,000 Realty Income Corp. 1,374,450
-------------
13,534,835
-------------
REITs -- Specialty -- 2.1%
20,500 Correctional Properties Trust 617,870
27,000 Entertainment Properties Trust 1,229,850
-------------
1,847,720
-------------
Total Real Estate Investment Trusts 83,060,910
-------------
Total Common Stocks (Identified Cost $52,580,923) 84,158,585
-------------
Shares
-----------------------------------------------------------------------------
Preferred Stocks -- 35.6%
REAL ESTATE INVESTMENT TRUSTS -- 35.6%
REITs -- Apartments -- 4.8%
50,000 Apartment Investment & Management Co., Series G 1,331,500
29,400 Apartment Investment & Management Co., Series R 779,100
42,000 Apartment Investment & Management Co., Series U 1,063,020
45,000 Apartment Investment & Management Co., Series Y 1,145,250
-------------
4,318,870
-------------
REITs -- Diversified -- 2.5%
54,800 Crescent Real Estate Equities Co., Series B 1,463,160
30,000 Vornado Realty Trust, Series H(c) 746,100
-------------
2,209,260
-------------
REITs -- Factory Outlets -- 1.8%
35,500 Mills Corp. (The), Series B 933,650
25,000 Mills Corp. (The), Series E 669,500
-------------
1,603,150
-------------
REITs -- Healthcare -- 3.3%
50,000 Health Care Property Investors, Inc., Class F 1,275,500
65,400 Omega Healthcare Investors, Inc., Series D 1,713,480
-------------
2,988,980
-------------
REITs -- Lodging/Resorts -- 5.7%
75,000 Boykin Lodging Co., Series A 2,085,000
25,000 Felcor Lodging Trust Inc., Series C 611,250
71,900 Hospitality Properties Trust, Series B 1,952,085
15,000 LaSalle Hotel Properties, Series A 405,000
-------------
5,053,335
-------------
REITs -- Office -- 7.3%
30,000 Bedford Property Investors, Inc., Series A, 144A 1,476,564
100,000 CarrAmerica Realty Corp., Series E 2,589,000
90,400 HRPT Properties Trust, Series B 2,443,512
-------------
6,509,076
-------------
REITs -- Regional Malls -- 3.5%
75,000 Glimcher Realty Trust, Series F 1,955,250
45,000 Taubman Centers Inc., Series H(c) 1,154,250
-------------
3,109,500
-------------
REITs -- Shopping Centers -- 6.7%
27,000 Cedar Shopping Centers, Inc., Series A 729,000
42,200 Developers Diversified Realty Corp., Series F 1,113,236
21,300 Developers Diversified Realty Corp., Series G 555,291
13,000 Federal Realty Investment Trust, Series B 339,430
6,700 Ramco-Gershenson Properties Trust, Series B 178,555
9,000 Realty Income Corp., Series D 237,060
27,000 Urstadt Biddle Properties, Inc., Series C 2,880,900
-------------
6,033,472
-------------
Total Preferred Stocks -- Real Estate Investment Trusts
(Identified Cost $30,510,426) 31,825,643
-------------
See accompanying notes to financial statements.
5
AEW REAL ESTATE INCOME FUND -- SCHEDULE OF INVESTMENTS (continued)
Investments as of July 31, 2005 -- (unaudited)
Principal
Amount Description Value (a)
------------------------------------------------------------------------------------------------------
Short Term Investment -- 0.1%
$ 76,527 Repurchase Agreement with Investors Bank & Trust Co.
dated 7/29/2005 at 2.28% to be repurchased at $76,542 on
8/01/2005, collateralized by $74,888 Small Business Administration
Bond, 6.125%, due 3/25/2023 valued at $80,354 $ 76,527
-------------
Total Short Term Investment (Identified Cost $76,527) 76,527
-------------
Total Investments -- 130.0%
(Identified Cost $83,167,876)(b) 116,060,755
Auction Market Preferred Shares plus cumulative unpaid
dividends (31.4%) (28,014,942)
Other assets less liabilities -- 1.4% 1,211,198
-------------
Total Net Assets -- 100% $ 89,257,011
=============
(a) See Note 2a of Notes to Financial Statements.
(b) Federal Tax Information (Amounts exclude certain adjustments made at
the end of the Fund's fiscal year for tax purposes. Such adjustments are
primarily due to wash sales.):
At July 31, 2005, the net unrealized appreciation on investments based
on cost of $83,167,876 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 $ 32,931,565
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value (38,686)
-------------
Net unrealized appreciation $ 32,892,879
=============
(c) Non-income producing security.
REITs Real Estate Investment Trusts
144A Securities exempt from registration under Rule 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 $3,285,879 or 3.7% of net assets.
Holdings at July 31, 2005 as a Percentage of Net Assets (unaudited)
Office 35.2%
Shopping Centers 21.9
Apartments 16.6
Healthcare 16.3
Lodging/Resorts 9.5
Diversified 8.7
Regional Malls 8.2
Industrial 6.5
Factory Outlets 3.1
Specialty 2.1
Other, less than 2% each 1.8
See accompanying notes to financial statements.
6
STATEMENT OF ASSETS & LIABILITIES
July 31, 2005 -- (unaudited)
ASSETS
Investments at cost $ 83,167,876
Net unrealized appreciation 32,892,879
------------
Investments at value 116,060,755
Dividends and interest receivable 652,779
Receivable for open swap contracts 712,970
------------
TOTAL ASSETS 117,426,504
------------
LIABILITIES
Dividends payable 22,431
Management fees payable 44,091
Transfer agent fees payable 2,500
Administrative fees payable 6,250
Other accounts payable and accrued
expenses 79,279
------------
TOTAL LIABILITIES 154,551
------------
Auction Preferred Shares (1,120 shares
outstanding) at liquidation value
plus cumulative unpaid dividends 28,014,942
------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 89,257,011
============
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 (1,044,374)
Accumulated net realized gain (loss)
on investments, foreign currency
transactions and interest rate swap
contracts 2,695,188
Net unrealized appreciation
(depreciation) of investments and
swap contracts 33,605,849
------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 89,257,011
============
COMPUTATION OF NET ASSET VALUE PER
COMMON SHARE:
Net assets $ 89,257,011
============
Common Shares issued and outstanding 3,833,390
============
Net asset value per share
($89,257,011/3,833,390 shares of
beneficial interest) $ 23.28
============
Market Value (closing price per
share on American Stock Exchange) $ 19.53
============
See accompanying notes to financial statements.
7
STATEMENT OF OPERATIONS
Six Months Ended July 31, 2005 -- (unaudited)
NET INVESTMENT INCOME
Dividends $ 2,485,145
Interest 5,787
Less net foreign taxes withheld (8,159)
---------------------
2,482,773
---------------------
Expenses
Management fees 432,819
Trustees' fees and expenses 31,006
Administrative fees 75,000
Custodian fees 19,033
Transfer agent fees 7,208
Audit and tax services 14,560
Legal fees 35,913
Reports to shareholders 15,692
Preferred stock auction fees 35,194
Rating agency fees 5,455
American Stock Exchange fees 7,439
Miscellaneous 7,960
---------------------
Total expenses before waivers 687,279
Less waivers (226,539)
---------------------
Net expenses 460,740
---------------------
Net investment income 2,022,033
---------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FOREIGN CURRENCY TRANSACTIONS AND
INTEREST RATE SWAP CONTRACTS
Realized gain (loss) on:
Investments - net 2,770,907
Interest rate swap contracts - net (32,560)
Foreign currency transactions - net 55
Change in unrealized appreciation (depreciation)
of:
Investments - net 10,196,274
Interest rate swap contracts - net 301,205
---------------------
Net realized and unrealized gain (loss) on
investments, foreign currency transactions and
interest rate swaps 13,235,881
---------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 15,257,914
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS
Net investment income (421,368)
---------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS APPLICABLE TO COMMON SHARES $ 14,836,546
=====================
See accompanying notes to financial statements.
8
STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended
July 31,
2005 (unaudited)
---------------------
---------------------
FROM OPERATIONS:
Net investment income $ 2,022,033
Net realized gain (loss) on investments, foreign currency transactions and interest rate swap contracts 2,738,402
Net change in unrealized appreciation (depreciation) of investments and interest rate swap contracts 10,497,479
---------------------
Increase (decrease) in net assets resulting from operations 15,257,914
---------------------
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS:
Net investment income (421,368)
Short-Term capital gain --
Long-Term capital gain --
---------------------
Increase (decrease) in net assets from operations applicable to common shares 14,836,546
---------------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS:
Net investment income (2,645,039)
Short-Term capital gain --
Long-Term capital gain --
Return of capital --
---------------------
(2,645,039)
---------------------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS (Note 6): --
---------------------
Total increase (decrease) in net assets 12,191,507
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period 77,065,504
---------------------
End of period $ 89,257,011
=====================
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME $ (1,044,374)
=====================
Year Ended
January 31,
2005
---------------------
---------------------
FROM OPERATIONS:
Net investment income $ 4,290,514
Net realized gain (loss) on investments, foreign currency transactions and interest rate swap contracts 1,329,782
Net change in unrealized appreciation (depreciation) of investments and interest rate swap contracts 2,151,993
---------------------
Increase (decrease) in net assets resulting from operations 7,772,289
---------------------
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS:
Net investment income (316,968)
Short-Term capital gain (1,132)
Long-Term capital gain (136,081)
---------------------
Increase (decrease) in net assets from operations applicable to common shares 7,318,108
---------------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS:
Net investment income (3,949,554)
Short-Term capital gain (14,108)
Long-Term capital gain (1,695,623)
Return of capital (96,550)
---------------------
(5,755,835)
---------------------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL SHARE TRANSACTIONS (Note 6): --
---------------------
Total increase (decrease) in net assets 1,562,273
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period 75,503,231
---------------------
End of period $ 77,065,504
=====================
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME $ --
=====================
See accompanying notes to financial statements.
9
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period.
For the Period
Six Months Ended Year Ended January 31, November 26,
July 31, 2005 ---------------------- 2002* through
(unaudited) 2005 2004 January 31, 2003
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
Net Asset Value, Beginning of
Period (Common Shares) $ 20.10 $ 19.70 $ 14.03 $ 14.33 (a)
------------------- ------------------- ------------------- -------------------
Income from Investment
Operations:
Net Investment Income (b) 0.53 1.12 0.99 0.09
Net Realized and Unrealized
Gain (Loss) on Investments 3.45 0.90 6.71 (0.24)
------------------- ------------------- ------------------- -------------------
Total From Investment
Operations 3.98 2.02 7.70 (0.15)
------------------- ------------------- ------------------- -------------------
Less Distributions to
Preferred Shareholders:
Dividends From Net
Investment Income (0.11) (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 Shareholders 3.87 1.90 7.62 (0.15)
------------------- ------------------- ------------------- -------------------
Less Distributions to Common
Shareholders:
Dividends From Net
Investment Income (0.69) (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 (0.69) (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 the
Period (Common Shares) $ 23.28 $ 20.10 $ 19.70 $ 14.03
=================== =================== =================== ===================
Market Value, End of Period
(Common Shares) $ 19.53 $ 17.40 $ 17.87 $ 14.55
=================== =================== =================== ===================
Total Return on Market Value
(%) (j) 16.54 6.11 37.45 (2.23) (c)
Total Return on Net Asset
Value (%) (i)(j) 20.26 11.19 56.84 (1.29) (c)
Ratio of Expenses to Average
Net Assets Applicable to
Common Shares, Before
Waivers (%) (e) 1.71 1.81 2.00 1.85
Ratio of Expenses to Average
Net Assets Applicable to
Common Shares, After Waivers
(%) (d)(e) 1.15 1.23 1.38 1.37
Ratio of Net Investment
Income to Average Net Assets
Applicable to Common Shares,
Before Waivers (%) (e) 4.47 5.11 5.35 2.80
Ratio of Net Investment
Income to Average Net Assets
Applicable to Common Shares,
After Waivers (%) (e) 5.03 5.69 5.97 3.28
Portfolio Turnover Rate (%) 6 8 31 1
Net Assets Applicable to
Common Shares, End of Period
(000's) $ 89,257 $ 77,066 $ 75,503 $ 53,776
Auction Market Preferred
Shares
Total Shares Outstanding 1,120 1,120 1,120 --
Asset Coverage Per Share (g) $ 104,707 $ 93,820 $ 92,414 $ --
Involuntary Liquidation
Preference Per Share (h) $ 25,000 $ 25,000 $ 25,000 $ --
Approximate Market Value Per
Share $ 25,000 $ 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.
10
NOTES TO FINANCIAL STATEMENTS
July 31, 2005 -- (unaudited)
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
Board of 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. Debt securities for
which market quotations are readily available (other than short-term
obligations with a remaining maturity of less than sixty days) are generally
valued at market price on the basis of valuations furnished by a pricing
service authorized by the Board of Trustees, which service determines
valuations for normal, institutional-size trading units of such securities
using market information, transactions for comparable securities and various
relationships between securities which are generally recognized by
institutional traders. Short-term obligations with a remaining maturity of less
than sixty days are stated at amortized cost, which approximates market value.
Securities traded on foreign exchanges are valued at the market price on the
non-U.S. exchange, unless the Fund believes that an occurrence after the
closing of that exchange will materially affect a security's value. In that
case the security may be fair valued at the time the Fund determines its net
asset value by or pursuant to procedures approved by the Board of Trustees.
When fair valuing its 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 local market and before the time the Fund's net asset value is
calculated. All other securities and assets are valued at their fair value as
determined in good faith by the Fund's investment adviser, pursuant to the
procedures approved by the Board of Trustees.
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. 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
estimates these amounts for accounting purposes until the characterization of
REIT distributions is reported to the Fund after the end of the calendar year.
Estimates are based on the most recent REIT distribution information available.
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, 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.
11
NOTES TO FINANCIAL STATEMENTS (continued)
July 31, 2005 -- (unaudited)
The 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. 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. For
the year ended January 31, 2005, 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. For the six
months ended July 31, 2005, no redesignations have been made with respect to
distributions paid as disclosed within the Statement of Changes in Net Assets.
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 year ended January 31, 2005 was
as follows:
2005
- -----------
Distributions from:
Net investment income $ 3,906,427
Long-term capital gain 2,207,039
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.
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 July 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.
h. Indemnifications. Under the Fund's organizational documents, its officers
and trustees are indemnified against certain liability arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. However, based on experience, the
Fund expects the risk of loss to be remote.
3. Auction Market Preferred Shares. 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
12
NOTES TO FINANCIAL STATEMENTS (continued)
July 31, 2005 -- (unaudited)
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 six months ended July 31, 2005,
purchases and sales of securities (excluding short-term investments) were
$6,814,031 and $7,317,545, 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"). 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 the Fund's 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 the Fund's average daily managed assets. This waiver is
voluntary and may be terminated by the investment adviser at any time without
notice.
For the six months ended July 31, 2005, management fees and waivers for the
Fund were as follows:
Percentage of
Average Daily Net
Gross Waiver of Net Assets
Management Management Management ------
Fee Fee Fee Gross Net
--- --- --- ----- ---
$432,819 $189,039 $243,780 0.80% 0.45%
b. Administrative Expense. During the period, IXIS Asset Management Advisors,
L.P. ("IXIS Advisors") performed certain administrative services for the Fund
and subcontracted with Investors Bank & Trust Company ("IBT") to serve as
subadministrator. The Fund paid IXIS Advisors a fee for these services at the
annual rate of 0.0600% of the first $300 million of the Fund's average daily
managed assets, and 0.0575% of such assets in excess of $300 million, subject
to an annual minimum fee of $150,000.
IXIS Advisors has 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 six months ended July 31, 2005, the following was paid to IXIS Advisors
for administrative services:
Percentage of
Average Daily
Gross Waiver of Net Managed Assets
Administrative Administrative Administrative --------------
Fee Fee Fee Gross Net
--- --- --- ----- ---
$75,000 $37,500 $37,500 0.14% 0.07%
Effective September 1, 2005, State Street Bank and Trust Company became the
subadministrator for the Fund.
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.
Additionally, the Board of Trustees has approved the use of Fund assets to pay
its portion of the annual salary for 2005 of an employee of IXIS Advisors who
supports the Fund's Chief Compliance Officer. For the period ended July 31,
2005, the Fund's portion of such expense was $534.
13
NOTES TO FINANCIAL STATEMENTS (continued)
July 31, 2005 -- (unaudited)
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. For the six months ended
July 31, 2005, and the year ended January 31, 2005, there were no transactions
in common shares.
7. Swap Contracts.
Unrealized
Expiration Appreciation/
Notional Amount Date Description (Depreciation)
------------------- ---------- ----------- --------------
-------- --------------------------------------- -------------------
Interest Rate Swaps
$ 2,800,000 3/1/2006 Agreement with Bank of America dated $ 25,922
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 412,253
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 Bank of America dated 274,795
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.
-------------------
$ 712,970
===================
8. Other. On July 1, 2005, the Fund declared three monthly dividends of $0.115
per common share for the months of July, August and September payable on
July 29, August 26, and September 30, 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. Restatement of Annual Report. The information presented in the Statement of
Operations, Statement of Changes in Net Assets and Financial Highlights for the
year ended January 31, 2005 was 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.
14
SHAREHOLDER PROXY RESULTS
It is currently anticipated that the Fund's 2006 annual meeting of Shareholders
will be held in May 2006. Shareholders submitting any proposals for the Fund
intended to be presented at the 2006 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 March 12, 2006 and not earlier than February 25, 2006. Shareholders
that wish for the Fund to include a proposal in the proxy statement for next
year's annual meeting of Shareholders must submit their proposal so that it is
received by the Fund no later than December 28, 2005. 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 June 15, 2005,
shareholders of the AEW Real Estate Income Fund voted for the following
proposal:
1. Election of Trustees
For Against Abstained* Total Votes
- --- ------- ---------- -----------
Charles D. Baker 3,739,074.41 49,029 0 3,788,103.41
John A. Shane 3,737,204.41 50,899 0 3,788,103.41
Cynthia L. Walker 3,738,874.41 49,229 0 3,788,103.41
Sandra O. Moose** 681 1 0 682
* Includes Broker Non-Votes (if any).
** Preferred Shares Trustee.
Messrs. Graham T. Allison, Jr., Edward A. Benjamin, Daniel M. Cain, Paul G.
Chenault, Kenneth J. Cowan, Richard Darman, Robert J. Blanding and John T.
Hailer, Trustees of the Fund, each have terms of office as Trustee that
continued after the Meeting. Mr. Charles D. Baker and Ms. Cynthia L. Walker
became Trustees of the Fund in June 2005.
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.
15
ADDITIONAL INFORMATION
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 customers.
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 no 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 customer's 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 IXIS Advisor Funds at
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, 2005 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 operations of the
Public Reference Room may be obtained by calling 1-800-SEC-0330.
16
[LOGO] AEW
CEAEW58-0705
Item 2. Code of Ethics.
Not applicable
Item 3. Audit Committee Financial Expert.
Not applicable
Item 4. Principal Accountant Fees and Services.
Not applicable
Item 5. Audit Committee of Listed Registrants.
Not applicable
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.
Not applicable
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers.
[FUND ADMIN SUPPLYING DATA FOR TABLE BELOW]
-------------------------------------------------------------------------------------------------------------
(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
-------------------------------------------------------------------------------------------------------------
February 1 through 1,365.760 17.73 1,365.760 N/A
February 28
-------------------------------------------------------------------------------------------------------------
March 1 through 2,621.850 17.88 2,621.850 N/A
March 31
-------------------------------------------------------------------------------------------------------------
April 1 through N/A N/A N/A N/A
April 30
-------------------------------------------------------------------------------------------------------------
May 1 through 1,298.847 17.73 1,298.847 N/A
May 31
-------------------------------------------------------------------------------------------------------------
June 1 through 2,501.176 18.36 2,501.176 N/A
June 30
-------------------------------------------------------------------------------------------------------------
July 1 through N/A N/A N/A N/A
July 31
-------------------------------------------------------------------------------------------------------------
TOTAL 7,787.633 17.98 7,787.633 N/A
-------------------------------------------------------------------------------------------------------------
Item 10. Submission of Matters to a Vote of Securities Holders.
There were no material changes to the procedures by which shareholders may
recommend nominees to the Registrant's Board of Trustees.
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 was 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 restatement of the financial statements did 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 resulted 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 the 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 was a significant
deficiency in the operation of the registrant's internal control over financial
reporting.
The registrant has remediated 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 included the following:
. Management 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 changed 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 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 filing, the registrant's principal executive and
principal financial officers have, within 90 days of this 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.
Other than as described above, there was no change in the registrant's internal
control over financial reporting during the quarter ended July 31, 2005 that
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting. However, during the
quarter ended July 31, 2005, the registrant undertook some of 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), are filed herewith as exhibits
(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).
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: September 29, 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: September 29, 2005
By: /s/ Michael C. Kardok
------------------------------------
Name: Michael C. Kardok
Title: Treasurer
Date: September 29, 2005