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
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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
Date of reporting period: January 31, 2006
Item 1. Report to Stockholders.
The Registrant's annual report transmitted to shareholders pursuant to Rule
30e-1 under the Investment Company Act of 1940 is as follows:
[LOGO] AEW
AEW Real Estate Income Fund
Annual Report
January 31, 2006
AEW Management and Advisors
TABLE OF CONTENTS
Management Discussion
and Performance.........Page 1
Portfolio of InvestmentsPage 4
Financial Statements....Page 6
AEW REAL ESTATE INCOME FUND
PORTFOLIO PROFILE
Objective:
High current income is a primary objective; capital appreciation is a secondary
objective
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Strategy:
Invests primarily in income-producing securities issued by real estate
companies, including REITs
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Inception Date:
November 26, 2002
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Portfolio Manager:
Matthew A. Troxell, CFA AEW Management and Advisors, L.P.
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Common shares American Stock Exchange Symbol:
RIF
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CUSIP Numbers
Common shares:
00104H107
Preferred shares:
00104H206
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January 31, 2006 Market Value Per Common Share:
$19.35
Net Asset Value Per Common Share:
$22.55
Management Discussion
--------------------------------------------------------------------------------
For the fiscal year ended January 31, 2006, returns on real estate investment
trusts (REITs) were higher than many other domestic investment media. The MSCI
US REIT Index returned 32.11% for the period, significantly higher than the
6.00% return on the Dow Jones Industrial Average and the 10.38% return on the
Standard & Poor's 500 Index. For the same period, the Lehman Brothers Aggregate
Bond Index (a broad-based index of U.S. government and corporate bonds)
returned 1.80%, while the Lehman Brothers U.S. Treasury Index (composed of
Treasury bonds maturing in one year or more) returned 1.74%.
FUND PERFORMANCE
AEW Real Estate Income Fund's total return for the fiscal year ended
January 31, 2006 was 23.03% based on the market price of its common shares.
These results assume that $0.92 in dividends and $0.97 in capital gains were
reinvested during the period and reflect the change in the market price of fund
shares, which rose to $19.35 at the end of January 2006, from $17.40 one year
ago. The increase in the market price of fund shares reflects investor demand
and is not directly linked to changes in the fund's net asset value. For the
fiscal year, the fund's total return based on net asset value was 24.12% with
all distributions reinvested, and the net asset value of shares rose to $22.55
at January 31, 2006, from $20.10 one year ago.
PORTFOLIO INFORMATION
Both the fund's common and preferred holdings posted positive total returns and
provided generous yields during the year, allowing the fund to meet its primary
objective of current income. The strongest performance came from the fund's
holdings in the office and apartment sectors. Among its office holdings, Kilroy
Realty Corp. was the top contributor. Kilroy's core portfolio of southern
California office properties has benefited from strong demand for office space
in that area. Among the fund's apartment holdings, Camden Property Trust was
the top performer for the year. Camden is one of the largest apartment REITs in
the nation, with a geographically diverse portfolio of properties located
primarily in the "sunbelt" and Midwestern markets, from Florida to California.
The company posted strong operating results during the year and was bolstered
by its merger with former apartment REIT Summit Properties in February 2005. No
property type posted a negative return during the period, but lodging was the
weakest sector. The fund's use of interest-rate swap agreements during the year
had a modest positive contribution to the fund's net asset value, while its
leverage was a slight negative.
We made only marginal changes to the portfolio's composition during the fiscal
year, all of which were designed to meet the fund's primary investment
objective of generating current income. We added Brandywine Realty Trust, which
owns and operates suburban office and industrial properties located in the
Mid-Atlantic United States. We also added Trustreet Properties, the largest
publicly traded restaurant REIT in the United States. Trustreet has more than
$2.5 billion in real estate assets, managing financial interests in
approximately 2,900 properties in 49 states.
As of January 31, 2006, the fund's common and preferred holdings amounted to
70.2% and 29.6% of total investments, respectively. The ten largest holdings
accounted for 30.3% of the fund's total investments, and no single holding
represented more than 3.9%.
OUTLOOK
Investor demand for commercial property is strong and we think it is likely to
remain so in 2006, reflecting broad economic trends and low interest rates. We
believe this demand should continue to benefit the REIT sector. However, after
double-digit total returns for the past three years, REIT returns may begin to
moderate in 2006, with continued high relative volatility. Nonetheless, we
believe REIT returns should remain competitive with other types of investments.
1
AEW REAL ESTATE INCOME FUND
Investment Results through January 31, 2006
--------------------------------------------------------------------------------
PERFORMANCE IN PERSPECTIVE
The chart 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, 2006
SINCE
INCEPTION/1/
1 YEAR/1/ (11/26/02)
Total return on market value 23.03% 19.02%
Total return on net asset value 24.12 26.87
------------------------------------------------------
COMPARATIVE PERFORMANCE
MSCI US REIT Index/2/ 32.11 28.07/3/
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. Current 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 FACTS
% of Investments as of
FUND COMPOSITION 1/31/06 1/31/05
------------------------------------------------------
Common Stocks 70.2 70.0
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Preferred Stocks 29.6 28.6
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Short-Term Investments
and Other 0.2 1.4
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% of Investments as of
TEN LARGEST HOLDINGS 1/31/06 1/31/05
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Camden Property Trust 3.9 2.8
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Healthcare Realty Trust, Inc. 3.7 4.2
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Senior Housing Properties Trust 3.0 3.0
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HRPT Properties Trust 3.0 3.6
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Heritage Property
Investment Trust 2.9 2.7
------------------------------------------------------
iStar Financial, Inc. 2.9 3.4
------------------------------------------------------
Highwoods Properties, Inc. 2.8 2.1
------------------------------------------------------
Mack-Cali Realty Corp. 2.8 2.7
------------------------------------------------------
Liberty Property Trust 2.7 2.6
------------------------------------------------------
Kilroy Realty Corp. 2.6 2.2
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% of Investments as of
FIVE LARGEST INDUSTRIES 1/31/06 1/31/05
------------------------------------------------------
REITs - Office 23.8 26.1
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REITs - Healthcare 13.2 13.5
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REITs - Apartments 12.1 13.9
------------------------------------------------------
REITs - Shopping Centers 11.4 15.5
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REITs - Diversified 9.2 6.2
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Portfolio holdings and asset allocations will vary.
NOTES TO CHART
/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 comparative performance shown is calculated from
12/1/02.
2
ADDITIONAL INFORMATION
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 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.
PROXY VOTING INFORMATION
A description of the fund's proxy voting policies and procedures is available
without charge, upon request, by calling IXIS Advisor Funds at 1-800-862-4863;
on the fund's web site, www.ixisag.com/aew_rif; and on the Securities and
Exchange's (SEC) 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.
/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.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
3
AEW REAL ESTATE INCOME FUND -- PORTFOLIO OF INVESTMENTS
Investments as of January 31, 2006
Shares Description Value (a)
--------------------------------------------------------------------
Common Stocks -- 92.0% of Net Assets
Real Estate -- 1.3%
Apartments -- 1.3%
41,500 Municipal Mortgage & Equity LLC $ 1,087,715
---------------
Real Estate Investment Trusts -- 90.7%
REITs - Apartments -- 10.9%
44,000 Archstone-Smith Trust 2,061,840
68,000 Camden Property Trust 4,426,800
55,000 GMH Communities Trust 887,150
40,000 Mid-America Apartment Communities, Inc. 2,042,000
---------------
9,417,790
---------------
REITs - Diversified -- 7.5%
20,500 CentraCore Properties Trust 582,610
90,000 iStar Financial, Inc. 3,230,100
70,000 Lexington Corporate Properties Trust 1,554,000
93,900 Spirit Finance Corp. 1,130,556
---------------
6,497,266
---------------
REITs - Factory Outlets -- 1.5%
40,000 Tanger Factory Outlet Centers, Inc. 1,260,400
---------------
REITs - Healthcare -- 14.0%
65,000 Health Care Property Investors, Inc. 1,803,750
121,000 Healthcare Realty Trust, Inc. 4,239,840
80,000 Omega Healthcare Investors, Inc. 1,048,800
190,500 Senior Housing Properties Trust 3,415,665
50,000 Ventas, Inc. 1,530,000
---------------
12,038,055
---------------
REITs - Industrial -- 7.0%
25,000 EastGroup Properties, Inc. 1,180,500
62,400 First Potomac Realty Trust 1,835,184
68,100 Liberty Property Trust 3,082,206
---------------
6,097,890
---------------
REITs - Lodging/Resorts -- 3.1%
63,000 Hospitality Properties Trust 2,700,810
---------------
REITs - Office -- 23.8%
87,700 Brandywine Realty Trust, Inc. 2,758,165
65,000 CarrAmerica Realty Corp. 2,392,000
77,000 Glenborough Realty Trust, Inc. 1,515,360
100,000 Highwoods Properties, Inc. 3,154,000
311,300 HRPT Properties Trust 3,340,249
43,000 Kilroy Realty Corp. 2,906,370
70,000 Mack-Cali Realty Corp. 3,130,400
33,000 Parkway Properties, Inc. 1,396,560
---------------
20,593,104
---------------
REITs - Regional Malls -- 7.5%
62,000 Glimcher Realty Trust 1,695,080
35,000 Macerich Co. (The) 2,539,950
150,000 Primaris Retail, 144A 2,236,074
---------------
6,471,104
---------------
REITs - Shopping Centers -- 8.3%
140,000 Cedar Shopping Centers, Inc. 2,070,600
30,000 Equity One, Inc. 719,100
94,000 Heritage Property Investment Trust 3,337,000
39,000 Ramco-Gershenson Properties Trust 1,099,020
---------------
7,225,720
---------------
Shares Description Value (a)
------------------------------------------------------------------------------
REITs - Single Tenant -- 5.7%
100,000 Commercial Net Lease Realty $ 2,293,000
55,000 Realty Income Corp. 1,280,950
90,000 Trustreet Properties, Inc. 1,322,100
---------------
4,896,050
---------------
REITs - Specialty -- 1.4%
27,000 Entertainment Properties Trust 1,173,420
---------------
Total Real Estate Investment Trusts 78,371,609
---------------
Total Common Stocks (Identified Cost $52,421,627) 79,459,324
---------------
Preferred Stocks -- 38.8%
Real Estate Investment Trusts -- 38.8%
REITs - Apartments -- 4.9%
50,000 Apartment Investment & Management Co., Series G 1,317,000
29,400 Apartment Investment & Management Co., Series R 754,992
42,000 Apartment Investment & Management Co., Series U 1,047,900
45,000 Apartment Investment & Management Co., Series Y 1,123,650
---------------
4,243,542
---------------
REITs - Diversified -- 4.5%
54,800 Crescent Real Estate Equities Co., Series B 1,413,840
70,000 Duke Realty Corp, Series M(b) 1,736,000
30,000 Vornado Realty Trust, Series H 732,900
---------------
3,882,740
---------------
REITs - Factory Outlets -- 1.8%
35,500 Mills Corp. (The), Series B 893,535
25,000 Mills Corp. (The), Series E 627,500
---------------
1,521,035
---------------
REITs - Healthcare -- 3.4%
50,000 Health Care Property Investors, Inc., Class F 1,263,000
65,400 Omega Healthcare Investors, Inc., Series D 1,696,476
---------------
2,959,476
---------------
REITs - Hotels -- 0.9%
30,000 Strategic Hotel Capital, Inc., Series B(b) 766,500
---------------
REITs - Lodging/Resorts -- 5.6%
75,000 Boykin Lodging Co., Series A 1,965,000
25,000 Felcor Lodging Trust, Inc., Series C 621,250
71,900 Hospitality Properties Trust, Series B 1,883,780
15,000 LaSalle Hotel Properties, Series A 387,300
---------------
4,857,330
---------------
REITs - Office -- 7.3%
30,000 Bedford Property Investors, Inc., Series A, 144A 1,469,064
100,000 CarrAmerica Realty Corp., Series E 2,535,000
90,400 HRPT Properties Trust, Series B 2,314,240
---------------
6,318,304
---------------
REITs - Regional Malls -- 3.5%
75,000 Glimcher Realty Trust, Series F 1,931,250
45,000 Taubman Centers, Inc., Series H 1,138,500
---------------
3,069,750
---------------
REITs - Shopping Centers -- 6.6%
27,000 Cedar Shopping Centers, Inc., Series A 724,950
42,200 Developers Diversified Realty Corp., Series F 1,100,154
21,300 Developers Diversified Realty Corp., Series G 549,753
13,000 Federal Realty Investment Trust, Series B 332,150
6,700 Ramco-Gershenson Properties Trust, Series B 175,540
27,000 Urstadt Biddle Properties, Inc., Series C 2,828,250
---------------
5,710,797
---------------
See accompanying notes to financial statements.
4
..
AEW REAL ESTATE INCOME FUND -- PORTFOLIO OF INVESTMENTS (continued)
Investments as of January 31, 2006
Shares Description Value (a)
-------------------------------------------------------------------------------------------------
REITs - Single Tenant -- 0.3%
9,000 Realty Income Corp., Series D $ 230,850
---------------
Total Preferred Stocks (Identified Cost $33,072,687) 33,560,324
---------------
Principal
Amount
-------------------------------------------------------------------------------------------------
Short-Term Investment -- 0.2%
$ 207,961 Tri-Party Repurchase Agreement with Fixed Income Clearing
Corporation, dated 1/31/2006 at 2.05% to be repurchased at
$207,973 on 2/1/2006, collateralized by $205,000 U.S.
Treasury Note, 6.25% due 2/15/2007 valued at $214,225
(Identified Cost $207,961) 207,961
---------------
Total Investments -- 131.0% (Identified Cost $85,702,275) (c) 113,227,609
---------------
Auction Rate Preferred Shares plus cumulative unpaid dividends -
(32.4)% (28,003,344)
Other Assets Less Liabilities - 1.4% 1,200,218
---------------
Total Net Assets -- 100% $ 86,424,483
===============
(a) See Note 2a of Notes to Financial Statements.
(b) Non-income producing security.
(c) Federal Tax Information:
At January 31, 2006, the net unrealized appreciation on
investments based on cost of $85,745,489 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 $ 27,600,551
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (118,431)
---------------
Net unrealized appreciation $ 27,482,120
===============
144A Securities exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At January 31, 2006, the value of these
securities amounted to $3,705,138 or 4.3% of net assets.
REITs Real Estate Investment Trusts
Holdings at January 31, 2006 as a Percentage of Net Assets (unaudited)
Office 31.1%
Healthcare 17.4
Apartments 17.1
Shopping Centers 14.9
Diversified 12.0
Regional Malls 11.0
Lodging/Resorts 8.7
Industrial 7.0
Single Tennant 6.0
Factory Outlets 3.3
Others, less than 2% each 2.3
See accompanying notes to financial statements.
5
STATEMENT OF ASSETS & LIABILITIES
For the Year Ended January 31, 2006
ASSETS
Investments at cost $ 85,702,275
Net unrealized appreciation 27,525,334
------------
Investments at value 113,227,609
Receivable for securities sold 1,126,998
Dividends and interest receivable 503,280
Receivable from investment adviser 683
Receivable for open swap agreements (Note 8) 842,827
Other assets 949
------------
TOTAL ASSETS 115,702,346
------------
LIABILITIES
Payable for securities purchased 1,109,858
Management fees payable 42,964
Administrative fees payable 6,250
Trustees' fees payable 1,435
Other accounts payable and accrued expenses 114,012
------------
TOTAL LIABILITIES 1,274,519
------------
Auction Preferred Shares (1,120 shares outstanding) at liquidation value plus cumulative unpaid dividends 28,003,344
------------
NET ASSETS $ 86,424,483
============
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
Accumulated net realized gain on investments, foreign currency transactions and swap agreements 4,055,914
Net unrealized appreciation on investments, foreign currency translations and swap agreements 28,368,221
------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 86,424,483
============
COMPUTATION OF NET ASSET VALUE PER COMMON SHARE:
Net assets $ 86,424,483
============
Common shares issued and outstanding 3,833,390
============
Net asset value per share ($86,424,483 / 3,833,390 shares of beneficial interest) $ 22.55
============
Market Value (closing price per share on American Stock Exchange) $ 19.35
============
See accompanying notes to financial statements.
6
STATEMENT OF OPERATIONS
For the Year Ended January 31, 2006
INVESTMENT INCOME
Dividends $ 4,841,558
Interest 14,049
Less net foreign taxes withheld (20,863)
-----------
4,834,744
-----------
Expenses
Management fees 885,157
Trustees' fees and expenses 50,983
Administrative fees 150,000
Custodian fees 27,349
Transfer agent fees 12,763
Audit fees 36,584
Legal fees 50,062
Shareholder reporting 24,891
Preferred stock auction fees 70,972
Rating agency fees 11,000
American Stock Exchange fees 15,000
Miscellaneous 24,877
-----------
Total expenses 1,359,638
Less waivers (462,252)
-----------
Net expenses 897,386
-----------
Net investment income 3,937,358
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS, FOREIGN CURRENCY TRANSACTIONS AND SWAP AGREEMENTS
Realized gain on:
Investments - net 6,865,064
Capital gain distributions received (Note 2) 1,436,179
Swap agreements - net 66,400
Foreign currency transactions - net 342
Change in unrealized appreciation (depreciation) of:
Investments - net 4,828,729
Swap agreements - net 431,062
Foreign currency translations - net 60
-----------
Net realized and unrealized gain on investments, foreign currency transactions and swap agreements 13,627,836
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 17,565,194
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (472,513)
Short-term capital gain (84,580)
Long-term capital gain (411,299)
-----------
(968,392)
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS $16,596,802
===========
See accompanying notes to financial statements.
7
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
January 31, 2006 January 31, 2005
--------------------- ---------------------
FROM OPERATIONS:
Net investment income $ 3,937,358 $ 4,290,514
Net realized gain on investments,
foreign currency transactions and
swap agreements 8,367,985 1,329,782
Net change in unrealized appreciation
(depreciation) of investments,
foreign currency translations and
swap agreements 5,259,851 2,151,993
--------------------- ---------------------
Net increase in net assets resulting
from operations 17,565,194 7,772,289
--------------------- ---------------------
LESS DISTRIBUTIONS TO PREFERRED
SHAREHOLDERS FROM:
Net investment income (472,513) (316,968)
Short-term capital gain (84,580) (1,132)
Long-term capital gain (411,299) (136,081)
--------------------- ---------------------
(968,392) (454,181)
--------------------- ---------------------
Increase in net assets from operations
applicable to common shareholders 16,596,802 7,318,108
--------------------- ---------------------
LESS DISTRIBUTIONS TO COMMON
SHAREHOLDERS FROM:
Net investment income (3,531,588) (3,949,554)
Short-term capital gain (632,156) (14,108)
Long-term capital gain (3,074,079) (1,695,623)
Tax return of capital -- (96,550)
--------------------- ---------------------
(7,237,823) (5,755,835)
--------------------- ---------------------
Total increase in net assets 9,358,979 1,562,273
NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS
Beginning of the year 77,065,504 75,503,231
--------------------- ---------------------
End of the year $ 86,424,483 $ 77,065,504
===================== =====================
8
See accompanying notes to financial statements.
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period.
Year Ended January 31,
----------------------------------------------------------------
2006 2005 2004
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Net asset value, beginning of period (common shares) $ 20.10 $ 19.70 $ 14.03
------------------- ------------------- -------------------
Income from investment operations:
Net investment income (b) 1.03 1.12 0.99
Net realized and unrealized gain (loss) on investments 3.56 0.90 6.71
------------------- ------------------- -------------------
Total from investment operations 4.59 2.02 7.70
------------------- ------------------- -------------------
Less distributions to preferred shareholders from:
Net investment income (0.12) (0.08) (0.05)
Short-term gain (0.02) (0.00)(f) (0.03)
Long-term gain (0.11) (0.04) (0.00)(f)
------------------- ------------------- -------------------
(0.25) (0.12) (0.08)
------------------- ------------------- -------------------
Total from investment operations applicable to common
shareholders 4.34 1.90 7.62
------------------- ------------------- -------------------
Less distributions to common shareholders from:
Net investment income (0.92) (1.03) (1.00)
Short-term gain (0.17) (0.00)(f) (0.72)
Long-term gain (0.80) (0.44) (0.07)
Tax return of capital -- (0.03) --
------------------- ------------------- -------------------
Total distributions to common shareholders (1.89) (1.50) (1.79)
------------------- ------------------- -------------------
Common shares offering costs charged to paid-in capital -- -- --
------------------- ------------------- -------------------
Preferred shares underwriting commissions and offering costs -- -- (0.16)
------------------- ------------------- -------------------
Net asset value, end of period (common shares) $ 22.55 $ 20.10 $ 19.70
=================== =================== ===================
Market value, end of period (common shares) $ 19.35 $ 17.40 $ 17.87
=================== =================== ===================
Total return on market value (%) (j) 23.03 6.11 37.45
Total return on net asset value (%) (i)(j) 24.12 11.19 56.84
Ratio of expenses to average net assets applicable to
common shares, before waivers (%) (e) 1.65 1.81 2.00
Ratio of expenses to average net assets applicable to
common shares, after waivers (%) (d) (e) 1.09 1.23 1.38
Ratio of net investment income to average net assets
applicable to common shares, before waivers (%) (e) 4.20 5.11 5.35
Ratio of net investment income to average net assets
applicable to common shares, after waivers (%) (e) 4.76 5.69 5.97
Portfolio turnover rate (%) 15 8 31
Net assets applicable to common shares, end of period
(000's) $ 86,424 $ 77,066 $ 75,503
Auction market preferred shares:
Total shares outstanding 1,120 1,120 1,120
Asset coverage per share (g) $ 102,168 $ 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
For the Period
November 26, 2002*
through January 31,
2003
-------------------
-------------------
Net asset value, beginning of period (common shares) $ 14.33(a)
-------------------
Income from investment operations:
Net investment income (b) 0.09
Net realized and unrealized gain (loss) on investments (0.24)
-------------------
Total from investment operations (0.15)
-------------------
Less distributions to preferred shareholders from:
Net investment income --
Short-term gain --
Long-term gain --
-------------------
--
-------------------
Total from investment operations applicable to common
shareholders (0.15)
-------------------
Less distributions to common shareholders from:
Net investment income (0.09)
Short-term gain (0.00)(f)
Long-term gain (0.01)
Tax return of capital (0.02)
-------------------
Total distributions to common shareholders (0.12)
-------------------
Common shares offering costs charged to paid-in capital (0.03)
-------------------
Preferred shares underwriting commissions and offering costs --
-------------------
Net asset value, end of period (common shares) $ 14.03
===================
Market value, end of period (common shares) $ 14.55
===================
Total return on market value (%) (j) (2.23)(c)
Total return on net asset value (%) (i)(j) (1.29)(c)
Ratio of expenses to average net assets applicable to
common shares, before waivers (%) (e) 1.85
Ratio of expenses to average net assets applicable to
common shares, after waivers (%) (d) (e) 1.37
Ratio of net investment income to average net assets
applicable to common shares, before waivers (%) (e) 2.80
Ratio of net investment income to average net assets
applicable to common shares, after waivers (%) (e) 3.28
Portfolio turnover rate (%) 1
Net assets applicable to common shares, end of period
(000's) $ 53,776
Auction market preferred shares:
Total shares outstanding --
Asset coverage per share (g) $ --
Involuntary liquidation preference per share (h) $ --
Approximate market value per share $ --
* 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. See Note 5.
(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 waived during the period total return would
have been lower.
(j)Periods less than one year are not annualized.
See accompanying notes to financial statements.
9
NOTES TO FINANCIAL STATEMENTS
January 31, 2006
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 objectives 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 to the Fund 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. Distributions
received on securities that represent a return of capital or capital gain are
recorded as a reduction of cost of investments and as a realized gain,
respectively. The calendar year-end amounts of ordinary income, capital gains,
and return of capital included in dividends received from the Fund's
investments in real estate investment trusts ("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 values 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 period, resulting from changes
in exchange rates.
The Fund may use foreign currency exchange contracts to facilitate transactions
in foreign-denominated investments. Losses may arise from changes in the value
of the foreign currency or if the counterparties do not perform under the
contracts' terms.
The Fund may purchase investments of foreign issuers. Investing in securities
of foreign issuers involves special risks and considerations not typically
associated with investing in U.S. companies and securities of the U.S.
government. These risks include revaluation of currencies and the risk of
appropriation. Moreover, the markets for securities of many foreign issuers may
be less liquid and the prices of such securities may be more volatile than
those of comparable U.S. companies and the U.S. government.
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
10
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 2006
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, 2006, the dividend rates for AMPS ranged
from 2.47% to 4.50%. The dividend rate for AMPS on January 31, 2006 was 4.30%.
In addition, at least annually, the Fund intends to distribute net capital
gains, if any.
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. 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
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, 2006
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. These permanent differences are primarily due to
differing treatments for book and tax purposes of items such as foreign
currency transactions and swap agreements. Temporary differences between book
and tax distributable earnings are primarily due to wash sales.
The tax character of distributions paid for the years ended January 31, 2006
and 2005 were as follows:
2006 2005
- ---------- ----------
Distributions from:
Ordinary income $4,720,837 $3,906,427
Long-term capital gains 3,485,378 2,207,039
Non-taxable return of capital -- 96,550
---------- ----------
$8,206,215 $6,210,016
========== ==========
The difference between these amounts and those reported in the Statement of
Changes in Net Assets are primarily attributable to different book and tax
treatment for short-term capital gains and swap agreements.
As of January 31, 2006, the components of distributable earnings on a tax basis
were as follows:
Undistributed ordinary income $ --
Undistributed long-term capital gains 4,099,128
-----------
Total undistributed earnings 4,099,128
Unrealized appreciation 28,325,007
-----------
Total accumulated earnings $32,424,135
===========
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 in 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 8 for a summary of
the open swap agreements as of January 31, 2006.
11
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 2006
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 repurchase agreements are
tri-party agreements whereby the collateral is held at the custodian bank in a
segregated account for the benefit of the Fund and the counterparty. 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 as defined in the Fund's By-Laws 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.
4. Purchases and Sales of Securities. For the year ended January 31, 2006,
purchases and sales of securities (excluding short-term investments) were
$16,001,691 and $16,353,260, 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 US Group, L.P. ("IXIS
US Group") (formerly IXIS Asset Management North America, L.P.), which is part
of IXIS Asset Management Group, an international asset management group based
in Paris, France. IXIS Asset Management Group is ultimately owned principally,
directly or indirectly by three large affiliated French financial services
entities: the Caisse Nationale des Caisses d'Epargne, a financial institution
owned by CDC (as defined below) and by French regional savings banks known as
the Caisses d'Epargne; the Caisse des Depots et Consignations ("CDC"), a public
sector financial institution created by the French government in 1816; and CNP
Assurances, a large French life insurance company. Under the terms of the
management agreement, the Fund pays a management fee at the annual rate of
0.80%, calculated daily and payable monthly, based on the Fund's average daily
managed assets (net assets applicable to common shares plus 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 year ended January 31, 2006, management fees and waivers for the Fund
were as follows:
Percentage of Average Daily Managed Assets
------------------------------------------
Gross Management Fee Waiver of Management Fee Net Management Fee Gross Net
-------------------- ------------------------ ------------------ ----- ---
$885,157 $387,252 $497,905 0.80% 0.45%
b. Administrative Expense. IXIS Asset Management Advisors, L.P. ("IXIS
Advisors"), a wholly-owned subsidiary of IXIS US Group, provides certain
administrative services for the Fund and subcontracts with State Street Bank
and Trust Company ("State Street Bank") to serve as subadministrator. The Fund
pays 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.
12
NOTES TO FINANCIAL STATEMENTS (continued)
January 31, 2006
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.
Prior to September 1, 2005, Investors Bank & Trust Company ("IBT") served as
subadministrator.
For the year ended January 31, 2006, the following was paid to IXIS Advisors
for administrative services:
Percentage of Average Daily Managed Assets
Gross Waiver of ------------------------------------------
Administrative Fee Administrative Fee Net Administrative Fee Gross Net
------------------ ------------------ ---------------------- ----- ---
$150,000 $75,000 $75,000 0.14% 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 US
Group or its affiliates. The Chairperson of the Board receives a retainer fee
at the annual rate of $200,000. The Chairperson does not receive any meeting
attendance fees for Board of Trustees meetings or committee meetings that she
attends. Each independent Trustee (other than the Chairperson) 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 he or she attends. Each committee
member receives an additional retainer fee at the annual rate of $2,000 while
each committee chairman receives a retainer fee at the annual rate of $3,000.
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. The annual
retainer fee of the Chairperson of the Board is allocated among the Fund and
the funds in the IXIS Advisor Funds Trusts and Loomis Sayles Funds Trusts based
on a formula that takes into account, among other factors, the relative net
assets of each fund. 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 year ended January 31,
2006, the Fund's portion of such expense was approximately $1,500.
6. Brokerage Commission Recapture. The Fund has entered into agreements with
certain brokers whereby the brokers will rebate a portion of brokerage
commissions. All amounts rebated by the brokers are returned to the Fund under
such agreements and are presented as realized gains in the Statement of
Operations. For the year ended January 31, 2006, $1,632 was rebated under these
agreements.
7. 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 years ended January 31,
2006 and 2005, there were no transactions in common shares.
8. Swap Agreements. Open swap agreements as of January 31, 2006 are as follows:
Expiration Unrealized
Notional Amount Date Description Appreciation
------------------- ---------- ----------------------------- --------------
Interest Rate Swaps
$ 2,800,000 3/1/2006 Agreement with Bank of $ 4,784
America dated 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 471,125
America dated 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 366,918
America dated 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.
--------------
$ 842,827
==============
9. Other. On January 4, 2006, the Fund declared three monthly dividends of
$0.115 per common share for the months of January, February and March payable
on January 27, February 24, and March 31, respectively. Characterization of the
dividends for tax purposes, determined annually on a calendar year basis, may
result in a portion of the dividends being designated as a return of capital.
10. Concentration of Risk. The Fund concentrates its investments in real estate
securities, including REITs. A fund with a concentrated portfolio is vulnerable
to the risks of the industry in which it invests and is subject to greater
risks and market fluctuations than funds investing in a broader range of
industries. Real estate securities are susceptible to the risks associated with
direct ownership of real estate such as declining property values, increase in
property taxes, operating expenses, interest rates or competition, zoning
changes and losses from casualty and condemnation.
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of AEW Real Estate Income Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio 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 the AEW Real Estate Income Fund
(the "Fund"), at January 31, 2006, and the results of its operations, the
changes in its net assets and the financial highlights for each of 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, 2006 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 17, 2006
14
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 Computershare Limited, 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.
15
2006 U.S. TAX DISTRIBUTION INFORMATION TO SHAREHOLDERS (UNAUDITED)
Capital Gains Distributions. Pursuant to Internal Revenue Section 852(b), the
Fund designated $3,485,378 as capital gains dividends paid during the year
ended January 31, 2006.
16
TRUSTEE AND OFFICER INFORMATION
The table below provides certain information regarding the Trustees and
Officers of AEW Real Estate Income Fund (the "Fund"). Unless otherwise
indicated, the address of all persons below is 399 Boylston Street, Boston, MA
02116.
Position(s) Held with the Number of Portfolios in
Trust, 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 since 2002 Douglas Dillon Professor and 38
(3/23/40) Contract Review and Director of the Belfer Center Director, Taubman Centers,
(Class I) Governance Committee of Science for International Inc. (real estate investment
Member Affairs, John F. Kennedy trust)
School of Government,
Harvard University
Charles D. Baker Trustee since 2005 President and Chief Executive 38
(11/13/56) Contract Review and Officer, Harvard Pilgrim None
(Class III) Governance Committee Health Care (health plan)
Member
Edward A. Benjamin Trustee since 2003 Retired 38
(5/30/38) Contract Review and Director, Precision Optics
(Class II) Governance Committee Corporation (optics
Member manufacturer)
Daniel M. Cain Trustee since 2002 President and Chief Executive 38
(2/24/45) Chairman of the Audit Officer, Cain Brothers & Director, Sheridan
(Class II) Committee Company, Incorporated Healthcare Inc. (physician
(investment banking) practice management)
Paul G. Chenault Trustee since 2003 Retired; Trustee, First Variable 38
(9/12/33) Contract Review and Life (variable life insurance) Director, Mailco Office
(Class I) Governance Committee Products, Inc. (mailing
Member equipment)
Kenneth J. Cowan Trustee since 2002 Retired 38
(4/5/32) Chairman of the Contract None
(Class II) Review and Governance
Committee
Richard Darman Trustee since 2002 Partner, The Carlyle Group 38
(5/10/43) Contract Review and (investments); formerly, Director and Chairman of
(Class I) Governance Committee Professor, John F. Kennedy Board of Directors, AES
Member School of Government, Corporation (international
Harvard University power company)
Sandra O. Moose Chairperson of the Board President, Strategic Advisory 38
(2/17/42) of Trustees Services (management Director, Verizon
(Class III) since November 2005 consulting); formerly, Senior Communications;
Trustee since 2002 Vice President and Director, Director, Rohm and Haas
Ex officio member of the The Boston Consulting Group, Company (specialty
Audit Committee and Inc. (management consulting) chemicals);
Contract Review and Director, AES Corporation
Governance Committee
17
TRUSTEE AND OFFICER INFORMATION
Position(s) Held with the Number of Portfolios in
Trust, 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
John A. Shane Trustee since 2002 President, Palmer Service 38
(2/22/33) Audit Committee Member Corporation (venture capital Director, Gensym
(Class III) organization) Corporation (software and
technology service provider);
Director and Chairman of the
Board, Abt Associates Inc.
(research and consulting firm)
Cynthia L. Walker Trustee since 2005 Executive Dean for 38
(7/25/56) Audit Committee Member Administration (formerly, None
(Class III) Dean for Finance and CFO),
Harvard Medical School
INTERESTED TRUSTEES
Robert J. Blanding/1 Trustee since 2003 President, Chairman, Director, 38
/(4/14/47) Chief Executive Officer for and Chief Executive Officer, None
555 California Street Loomis Sayles Trust II Loomis, Sayles & Company,
San Francisco, CA 94104 L.P.; President and Chief
(Class I) Executive Officer -- Loomis
Sayles Funds I
John T. Hailer/2/ Trustee since 2002 President and Chief Executive 38
(11/23/60) President, Officer, IXIS Asset None
(Class II) Chief Executive Officer Management Advisors, L.P.
and IXIS Asset Management
Distributors, L.P.; Executive
Vice President, Loomis Sayles
Funds I; President and Chief
Executive Officer, IXIS
Advisor Cash Management
Trust, IXIS Advisor Funds
Trust II, IXIS Advisor Funds
Trust III and IXIS Advisor
Funds Trust IV
OFFICERS
Coleen Downs Dinneen Secretary, Clerk and Chief Senior Vice President, General Not Applicable
(12/16/60) Legal Officer, since 2004 Counsel, Secretary and Clerk
(formerly, Deputy General
Counsel, Assistant Secretary and
Assistant Clerk), IXIS Asset
Management Distribution
Corporation, IXIS Asset
Management Distributors, L.P.
and IXIS Asset Management
Advisors, L.P.
18
TRUSTEE AND OFFICER INFORMATION
Position(s) Held with the Number of Portfolios in
Trust, 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
AEW Capital Management Clerk, AEW Management and
Two Seaport Lane Advisors, L.P.; General
Boston, MA 02110 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 Director,
PFPC Inc; formerly, Vice
President -- Division
Manager, First Data Investor
Services, Inc.
Max J. Mahoney Anti-Money Laundering Senior Vice President, Deputy Not Applicable
(5/1/62) Officer and Assistant General Counsel, Assistant
Secretary, since 2005 Secretary and Assistant Clerk,
IXIS Asset Management
Distribution Corporation, IXIS
Asset Management
Distributors, L.P. and IXIS
Asset Management Advisors,
L.P.; Chief Compliance
Officer, IXIS Asset
Management Advisors, L.P.;
formerly, Senior Counsel,
MetLife, Inc.; formerly,
Associate Counsel, LPL
Financial Services, Inc.
19
TRUSTEE AND OFFICER INFORMATION
Position(s) Held with the Number of Portfolios in
Trust, 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, Senior Vice President,
General Counsel, Secretary and
Clerk), IXIS Asset Management
Distributors, L.P. and IXIS Asset
Management Advisors, L.P.;
Executive Vice President and
Chief Operating Officer
(formerly, Senior Vice President,
General Counsel, Secretary and
Clerk), IXIS Asset Management
Distribution Corporation;
Executive Vice President, Chief
Operating Officer and Director
(formerly, President, Chief
Operating Officer and Director),
IXIS Asset Management Services
Company.
Russell L. Kane Interim Chief Interim Chief Compliance Not Applicable
(7/23/69) Compliance Officer, Officer for Mutual Funds, Vice
since 2006, Assistant President, Associate General
Secretary since 2004 Counsel, Assistant Secretary and
Assistant Clerk, IXIS Asset
Management Distributors, L.P.
and IXIS Asset Management
Advisors, L.P.; Vice President,
Associate General Counsel,
Assistant Secretary and Assistant
Clerk, IXIS Asset Management
Distribution Corporation;
formerly, Senior Counsel,
Columbia Management Group.
* 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 2008. It is currently expected that, in
accordance with the Board's current retirement policy, Messrs. Chenault,
Cowan and Shane will retire as Trustees prior to the June 2007 Annual
Meeting. The current retirement age is 72, but the retirement policy was
suspended for the calendar year 2005. At a meeting held on August 26, 2005,
the Trustees voted to lift the suspension of the retirement policy and to
designate 2006 as a transition period so that any Trustees who are currently
age 72 or older or who reach age 72 during the remainder of 2005 or in 2006
will not be required to retire until the end of calendar year 2006. The
position of Chairperson of the Board is appointed for a two-year term.
** Each person listed above, except as noted, holds the same position(s) with
the Trust. Previous positions during the past five years with IXIS Asset
Management Distributors, L.P. (the "Distributor"), IXIS Asset Management
Advisors, L.P. ("IXIS Advisors") or Loomis, Sayles & Company, L.P. are
omitted if not materially different from a Trustee's or officer's current
position with such entity.
***The Trustees of the Trust serve as Trustees of a fund complex that includes
all series of IXIS Advisor Funds Trust I, IXIS Advisor Funds Trust II, IXIS
Advisor Funds Trust III, IXIS Advisor Funds Trust IV, IXIS Advisor Cash
Management Trust, AEW Real Estate Income Fund, Loomis Sayles Funds I and
Loomis Sayles Funds II.
/1/ Mr. Blanding is deemed an "interested person" of the Trust because he
holds the following positions with affiliated persons of the Trust:
President, Chairman, Director and Chief Executive Officer of Loomis,
Sayles & Company, L.P.
/2/ Mr. Hailer is deemed an "interested person" of the Trust because he holds
the following positions with affiliated persons of the Trust: Director and
Executive Vice President of IXIS Asset Management Distribution
Corporation, President and Chief Executive Officer of IXIS Advisors.
20
ADDITIONAL INFORMATION
It is currently anticipated that the Fund's 2006 annual meeting of Shareholders
will be held on June 14, 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. 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 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.
21
[LOGO] AEW
CEAEW58-0106
Item 2. Code of Ethics.
The Registrant has adopted a code of ethics that applies to the Registrant's
principal executive officer, principal financial officer and persons performing
similar functions.
Item 3. Audit Committee Financial Expert.
The Board of Trustees of the Registrant has established an audit committee.
Ms. Cynthia L. Walker, Mr. Daniel M. Cain and Mr. John A. Shane are members of
the audit committee and have been designated as "audit committee financial
experts" by the Board of Trustees. Each of these individuals is also an
Independent Trustee of the Registrant.
Item 4. Principal Accountant Fees and Services.
Fees paid to Principal Accountant by the Fund.
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 Registrant'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 Registrant, other than the services
provided reported as a part of (a) through (c) of this Item.
Audit-related All other
Audit fees fees/1/ Tax fees/2/ fees
----------------- ---------------- --------------- ---------
2004 2005 2004 2005 2004 2005 2004 2005
-------- -------- -------- ------- ------- ------- ---- ----
AEW Real Estate Income Fund $ 20,000 $ 24,400 $ 10,000 $ 7,900 $ 1,250 $ 1,316 $ 0 $ 0
1. The audit related fees for 2004 and 2005 consist of $5,000 related to
rating agency procedures reports (2004, 2005), $5,000 related to the
performance of agreed-upon procedures relating to the Trust's
semi-annual financial statements in accordance with SAS 100 (2004), and
$2,900 related to the performance of agreed-upon procedures related to a
change in the Trust's custodian.
2. The tax fees consist of a review of year-end shareholder reporting.
Aggregate fees billed to the Registrant for non-audit services during 2004 and
2005 were $11,250 and $9,216, 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 AEW Management and Advisors, L.P. and entities
controlling, controlled by or under common control with AEW Management and
Advisors, L.P. that provide ongoing services to the Trust ("Control
Affiliates") for the last two fiscal years.
Audit-related fees Tax fees All other fees
------------------ ----------------- -------------
2004 2005 2004 2005 2004 2005
--------- -------- ------- --------- -------- ----
Control Affiliates $ 106,000 $ 24,000 $ 7,000 $ 129,060 $ 12,000 $ 0
Aggregate fees billed to Control Affiliates for non-audit services during 2004
and 2005 were $125,000 and $153,060, 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 Registrant'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 Registrant'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.
The Registrant has a separately-designated standing audit committee established
in accordance with Section 3(a)(58)(A) of the Exchange Act (15 U.S.C.
78c(a)(58)(A)). Daniel M. Cain, John A. Shane and Cynthia L. Walker are each
independent trustees and collectively constitute the entire 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.
Portfolio Manager Information
Matthew A. Troxell, Principal and Portfolio Manager, has managed the AEW Real
Estate Income Fund since its inception. During the past 5 years, Mr. Troxell
has been employed by AEW Management and Advisors, L.P. ("AEW") and serves as
portfolio manager for all of AEW's real estate equity securities portfolios.
Portfolio Manager's Management of Other Accounts
As of January 31, 2006, Mr. Troxell managed the following other accounts in
addition to managing the AEW Real Estate Income Fund:
Registered Investment Other Pooled Investment
Companies Vehicles Other Accounts
-------------------------- -------------------------- ---------------------------
Advisory fee Advisory fee Advisory fee
Other Accounts is based on Other Accounts is based on Other Accounts is based on
Managed performance Managed performance Managed performance
-------------- ------------ ------------- ------------ ------------- -------------
# of Total # of Total # of Total # of Total # of Total # of Total
Accts Assets Accts Assets Accts Assets Accts Assets Accts Assets Accts Assets
----- ------- ----- ------ ----- ------- ----- ------ ----- ------- ----- -------
7 $ 1.837 0 0 4 $ 670.7 0 0 49 $ 4.8 9 $ 1.203
billion million billion billion
One potential conflict of interest that may arise in connection with the
Portfolio Manager's management of the AEW Real Estate Income Fund and the
investments in the other accounts he manages, is when the Portfolio Manager
wants to short a stock in one of AEW's Long/Short strategy accounts that AEW
holds long in any of its accounts/funds. To address this potential conflict,
AEW has developed policies and procedures where the Portfolio Manager must get
prior approval from AEW's Chief Compliance Officer in order to short a stock
that is currently held long.
Portfolio Manager's Compensation
The following describes the structure of, and the method used to determine, the
compensation of the above listed portfolio manager as of January 31, 2006:
Compensation for all of AEW professionals, including AEW REIT investment
professionals, is composed of two parts: base salary and incentive
compensation. The firm's base salary structure is designed to reflect market
rates for the various disciplines within the company, such as investment
management, asset management and accounting. To determine appropriate "market
ranges" for the various function areas (based on specific job characteristics
and years of experience), AEW uses the services of an independent consulting
firm which performs research into the compensation practices of firms similar
to AEW within the industry.
Base salaries are supplemented by year-end incentive compensation awards, which
account for a significant portion of total compensation. The awarding of
incentive compensation is based upon the achievement of corporate objectives
and specific individual goals, which are generally tied to the achievement of
client objectives. The firm's operating margins for the year determine the
availability of funds for incentive compensation. Additionally, AEW's senior
professionals (Principals), including the Portfolio Manager (Matthew Troxell)
and his team of three Assistant Portfolio Managers, are eligible for
participation in AEW's Equity Sharing program, which gives Principals of the
firm economic interests in a portion of the firm's profits. This program is
sponsored by AEW's parent company IXIS Asset Management US Group, L.P.
(formerly IXIS Asset Management North America, L.P.)
Portfolio Manager's Ownership of Fund Shares
As of January 31, 2006, Mr. Troxell beneficially owned in the dollar range of
$50,000 - $100,000 of equity securities of the AEW Real Estate Income Fund.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers.
(d)
Maximum Number
(c) (or Approximate
Total Number of Dollar Value) of
Shares (or Units) Shares (or Units)
(a) Purchased as Part that May Yet Be
Total Number of (b) of Publicly Purchased Under
Shares (or Units) Average Price Paid Announced Plans the Plans or
Period Purchased per Share (or Unit) or Programs Programs
------ ----------------- ------------------- ----------------- -----------------
February 1 through 1365.760 17.73 1365.760 N/A
February 28
March 1 through 2621.850 17.88 2621.850 N/A
March 31
April 1 through N/A N/A N/A N/A
April 30
May 1 through 1298.847 17.73 1298.847 N/A
May 31
June 1 through 2501.176 18.36 2501.176 N/A
June 31
July 1 through N/A N/A N/A N/A
July 31
August 1 through 1136.901 19.73 1136.901 N/A
August 31
September 1 through 1200.013 18.67 1200.013 N/A
September 30
October 1 through 1159.781 19.19 1159.781 N/A
October 31
November 1 through 2417.604 18.61 2417.604 N/A
November 30
December 1 through N/A N/A N/A N/A
December 31
January 1 through 6604.027 18.55 6604.027 N/A
January 31
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.
The Registrant's principal executive officer and principal financial officer
have concluded that the Registrant's disclosure controls and procedures are
sufficient to ensure that information required to be disclosed by the
Registrant in this Form N-CSR was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report.
There were no changes in the Registrant's internal control over financial
reporting that occurred during the Registrant's last fiscal quarter of the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, the Registrant's internal control over financial
reporting.
Item 12. Exhibits.
(a) (1) Code of Ethics required by Item 2 hereof, filed herewith as
exhibit (a)(1).
(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
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: March 27, 2006
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: March 27, 2006
By: /s/ Michael C. Kardok
-------------------------------------
Name: Michael C. Kardok
Title: Treasurer
Date: March 27, 2006