================================================================================
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)
John E. Pelletier, Esq.
CDC IXIS Asset Management Services, Inc.
399 Boylston Street
Boston, Massachusetts 02116
--------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (617) 449-2801
Date of fiscal year end: January 31, 2004
Date of reporting period: January 31, 2004
================================================================================
Item 1. Reports to Stockholders.
The Registrant's semi-annual report transmitted to shareholders pursuant to Rule
30e-1 under the Investment Company Act of 1940 is as follows:
AEW Real Estate Income Fund
[LOGO] AEW
AEW Real Estate Income Fund
Annual Report
January 31, 2004
AEW Management and Advisors
--------------------------------------------------------------------------------
AEW Real Estate Income Fund
--------------------------------------------------------------------------------
Portfolio Profile
--------------------------------------------------------------------------------
Objective:
High current income is a primary objective; capital appreciation is a secondary
objective
--------------------------------------------------------------------------------
Strategy:
Invests primarily in income-producing securities issued by real estate
companies, including REITs
--------------------------------------------------------------------------------
Inception Date: November 26, 2002
--------------------------------------------------------------------------------
Portfolio Manager: Matthew A. Troxell, CFA AEW Management and Advisors, L.P.
--------------------------------------------------------------------------------
Common shares
American Stock
Exchange Symbol: RIF
--------------------------------------------------------------------------------
CUSIP Numbers
Common shares: 00104H107
Preferred shares: 00104H206
--------------------------------------------------------------------------------
January 31, 2004
Market Value
Per Common Share: $17.87
Net Asset Value
Per Common Share: $19.70
Management Discussion
--------------------------------------------------------------------------------
REITs turned in spectacular performance during the 12-month period, posting the
best results since the start of the "modern REIT era" a decade earlier. They
outperformed the two most common benchmarks for large-cap investing, the
Standard & Poor's 500 Index and the Dow Jones Industrial Average, for the fourth
consecutive year and also outdistanced the bond market, which had outpaced REITs
in 2002. With a backdrop of increasing signs of an economic rebound and rising
confidence levels, REITs during the past year trailed only the most economically
sensitive asset classes, including small-cap, technology and cyclical stocks.
The strong performance came despite weakness in real estate market fundamentals
related to the sluggishness of the domestic economy since 2000. Investors pushed
aside those concerns and focused on the stable dividend yields and
diversification advantages of REITs. Foreign investors, including Japanese
institutions, recently have joined domestic investors in allocating increasing
sums to the U.S. REIT sector.
Performance Facts
AEW Real Estate Income Fund performed well in a strong market for REITs. The
fund's total return, based on the market price of common shares, was 37.45% for
the 12 months ended January 31, 2004. The fund's market price per common share
rose from $14.55 at the start of the fiscal year to $17.87 per share on January
31, 2004, the end of the fiscal period. Changes in the market price of fund
shares reflect investor demand and are not directly linked to changes in the
fund's net asset value.
Based on the net asset value of common shares and reinvestment of distributions
of $1.00 per share in dividends and $0.79 per share in capital gains, the AEW
Real Estate Income Fund's total return was 56.84% for the 12 months ended
January 31, 2004. During the same period, the fund's net asset value rose from
$14.03 per common share at the start of the fiscal year to $19.70 per share on
January 31, 2004. The fund had approximately 3.8 million common shares
outstanding at the close of the fiscal year and net assets totaling $75.5
million.
The fund's common stock holdings outperformed its preferred holdings during the
12-month fiscal period, although both areas provided solid total returns and
attractive current yields, helping the fund attain its primary objective of high
current income. Within the common stock portfolio, the strongest performance
came from the retail and healthcare industries.
Consistent with the fund's emphasis on current income, we made minor adjustments
to the portfolio during the period with the goal of strengthening the fund's
cash flow. We added several new common and preferred stock holdings in a variety
of property types and geographic regions in the United States. In February 2003,
the fund completed its issuance of auction market preferred shares to complete
the anticipated leverage of the fund, which proved beneficial to performance.
Earnings from that leverage enabled the fund to support its dividend. In
addition, price appreciation on the investments made with the leverage further
boosted the Fund's net asset value by year end.
The fund may enter into interest rate swaps to reduce risk from an increase in
short-term interest rates. The swaps entail the fund agreeing with a
counterparty to pay a fixed rate payment in exchange for the counterparty paying
the fund a variable rate payment. Interest rate swaps that were executed during
the year, as insurance against the prospect of higher interest rates in the
future, raised the fund's costs.
Outlook
We believe the flow of new investment capital into the REIT sector should remain
strong, at least for the first half of 2004, both because of the competitive
income streams of REITs and the benefits of diversification offered by real
estate. In addition, we believe the flow of assets into the REIT sector should
increase because of the addition of several individual REITs to various Standard
& Poor's indexes.
1
--------------------------------------------------------------------------------
AEW Real Estate Income Fund
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Outlook Continued
While demand for REITs appears healthy, several potential risks do exist. Rising
interest rates could increase the relative attractiveness of some alternative
income-producing investments, including bonds. At the same time, an unexpected
downturn in the economy could further weaken the property market.
The most favorable outlook for the REIT market is that capital flows into real
estate will remain strong, while the underlying fundamentals in the real estate
industry recover with the rebound in the overall economy. This would allow the
cash flows of individual properties to rise to levels consistent with the
current values of REIT shares. While this scenario implies a period of somewhat
lacklus-ter returns, it also suggests that both public and private real estate
returns are likely to remain strong, though perhaps not spectacular, in the near
term.
Investment Results through January 31, 2004
--------------------------------------------------------------------------------
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 period from the fund's inception through
January 31, 2004. 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.
Portfolio as of January 31, 2004
---------------------------------------------------
% of Investments
as of
Ten Largest REIT Sectors 1/31/04 7/31/03
---------------------------------------------------
Office 23.5 22.0
Shopping Centers 14.5 15.3
Apartments 12.3 13.6
Healthcare 11.2 10.0
Diversified 10.4 10.1
Regional Malls 8.0 7.4
Lodging/Resorts 7.7 7.3
Office/Industrial 6.2 7.8
Industrial 2.2 2.2
Specialty 1.6 2.0
---------------------------------------------------
% of Investments
as of
Ten Largest Holdings* 1/31/04 7/31/03
---------------------------------------------------
Healthcare Realty Trust, Inc. 4.8 4.3
Senior Housing Properties Trust 3.3 2.8
iStar Financial, Inc. 3.3 3.3
HRPT Properties Trust 3.2 2.5
Urstadt Biddle Properties, Inc. 2.9 2.9
Gables Residential Trust 2.7 2.7
Camden Property Trust 2.7 2.6
Mack-Cali Realty Corp. 2.7 3.0
CarrAmerica Realty Corp. 2.6 2.0
Hospitality Properties Trust 2.6 2.1
---------------------------------------------------
* Common Shares except as noted
Total Returns -- January 31, 2004
--------------------------------------------------------------------------------
Since
Inception/1/
1 Year/1/ (11/26/02)
Total return on market value 37.45% 28.47%
Total return on net asset value 56.84 44.79
----------------------------------------------------------
Comparative Performance
Morgan Stanley REIT Index/2/ 46.78 36.54/3/
----------------------------------------------------------
Notes to Chart
All returns represent past performance and do not guarantee future results.
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. 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 dividends. 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 dividends.
/1/ Fund performance has been increased by expense waivers, without which
performance would have been lower.
/2/ Morgan Stanley REIT Index is an unmanaged index of stocks issued by real
estate investment trusts (REITs). 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
--------------------------------------------------------------------------------
AEW Real Estate Income Fund -- Schedule of Investments
--------------------------------------------------------------------------------
Investments as of January 31, 2004
Shares Description Value (a)
-------------------------------------------------------------------
Common Stocks -- 95.5% of Total Net Assets
REAL ESTATE - 1.4%
Financial Services - 1.4%
41,500 Municipal Mortgage & Equity LLC $ 1,047,045
-------------
REAL ESTATE INVESTMENT TRUSTS - 94.1%
REITs - Apartments - 13.9%
32,000 Apartment Investment & Management Co.,
Class A 1,125,760
52,000 Archstone Smith Trust 1,426,360
65,000 Camden Property Trust 2,827,500
78,500 Gables Residential Trust 2,833,850
40,000 Mid-America Apartment Communities, Inc. 1,380,400
39,000 Summit Properties, Inc. 900,120
-------------
10,493,990
-------------
REITs - Diversified - 9.4%
55,000 Crescent Real Estate Equities Co. 990,000
62,400 First Potomac Realty Trust 1,254,240
85,000 iStar Financial, Inc. 3,401,700
70,000 Lexington Corporate Properties Trust 1,477,000
-------------
7,122,940
-------------
REITs - Factory Outlets - 1.1%
20,000 Tanger Factory Outlet Centers, Inc. 838,000
-------------
REITs - Healthcare - 13.6%
32,500 Health Care Property Investors, Inc. 1,827,475
121,000 Healthcare Realty Trust, Inc. 4,967,050
190,500 Senior Housing Properties Trust 3,444,240
-------------
10,238,765
-------------
REITs - Industrial - 1.1%
25,000 EastGroup Properties, Inc. 868,750
-------------
REITs - Lodging/Resorts - 3.5%
63,000 Hospitality Properties Trust 2,636,550
-------------
REITs - Office - 24.2%
77,000 Arden Realty, Inc. 2,387,000
65,000 CarrAmerica Realty Corp. 2,065,050
77,000 Glenborough Realty Trust, Inc. 1,494,570
90,000 Highwoods Properties, Inc. 2,457,000
311,300 HRPT Properties Trust 3,299,780
68,000 Mack-Cali Realty Corp. 2,758,760
50,000 Maguire Properties, Inc. 1,215,000
76,500 Prentiss Properties Trust 2,562,750
-------------
18,239,910
-------------
REITs - Office/Industrial - 6.5%
70,000 Kilroy Realty Corp. 2,292,500
68,100 Liberty Property Trust 2,627,298
-------------
4,919,798
-------------
REITs - Regional Malls - 6.1%
150,000 Borealis Retail REIT 1,368,778
62,000 Glimcher Realty Trust 1,561,780
35,000 Macerich Co. (The) 1,684,550
-------------
4,615,108
-------------
REITs - Shopping Centers - 12.6%
125,000 Cedar Shopping Centers, Inc. (c) 1,650,000
110,000 Commercial Net Lease Realty, Inc. 2,013,000
30,000 Equity One, Inc. 546,000
88,000 Heritage Property Investment Trust 2,565,200
65,000 New Plan Excel Realty Trust 1,638,650
39,000 Ramco-Gershenson Properties Trust 1,069,380
-------------
9,482,230
-------------
REITs - Specialty - 2.1%
26,000 Correctional Properties Trust $ 836,420
22,000 Entertainment Properties Trust 778,800
-------------
1,615,220
-------------
Total Real Estate Investment Trusts 71,071,261
-------------
Total Common Stocks (Identified Cost
$53,352,987) 72,118,306
-------------
Preferred Stocks - 40.3%
REAL ESTATE INVESTMENT TRUSTS - 40.3%
REITs - Apartments - 2.9%
50,000 Apartment Investment & Management 1,389,000
Co., Series G
29,400 Apartment Investment & Management
Co., Series R 808,206
-------------
2,197,206
-------------
REITs - Diversified - 4.8%
30,000 Capital Automotive Co., Class A 774,000
50,000 Colonial Properties Trust, Series D 1,329,000
54,800 Crescent Real Estate Equities Co.,
Series B 1,517,960
-------------
3,620,960
-------------
REITs - Healthcare - 1.7%
50,000 Health Care Property Investors, Inc.,
Class F (c) 1,281,000
-------------
REITs - Industrial - 1.9%
52,000 Keystone Property Trust, Series D 1,419,600
-------------
REITs - Lodging/Resorts - 7.0%
75,000 Boykin Lodging Co., Series A 2,163,750
25,000 FelCor Lodging Trust, Inc., Series B 629,000
75,000 Hospitality Properties Trust, Series B 2,085,000
15,000 LaSalle Hotel Properties, Series A 423,750
-------------
5,301,500
-------------
REITs - Office - 7.9%
100,000 CarrAmerica Realty Corp., Series E 2,690,000
30,000 Highwoods Properties, Inc., Series B 760,800
90,400 HRPT Properties Trust, Series B 2,523,064
-------------
5,973,864
-------------
REITs - Office/Industrial - 2.0%
30,000 Bedford Property Investors, Inc.,
Series A, 144A 1,511,250
-------------
REITs - Regional Malls - 4.8%
75,000 Glimcher Realty Trust, Series F 1,996,500
35,500 Mills Corp. (The), Series B 972,700
25,000 Mills Corp. (The), Series E 677,250
-------------
3,646,450
-------------
REITs - Shopping Centers - 7.3%
42,200 Developers Diversified Realty Corp.,
Series F 1,153,326
25,000 Developers Diversified Realty Corp.,
Series G 676,500
13,000 Federal Realty Investment Trust,
Series B 352,950
12,500 Ramco-Gershenson Properties Trust,
Series B 365,625
27,000 Urstadt Biddle Properties, Inc.,
Series C 2,960,720
-------------
5,509,121
-------------
Total Real Estate Investment Trusts 30,460,951
-------------
Total Preferred Stocks (Identified
Cost $28,317,840) 30,460,951
-------------
3 See accompanying notes to financial statements.
--------------------------------------------------------------------------------
AEW Real Estate Income Fund -- Schedule of Investments (CONTINUED)
--------------------------------------------------------------------------------
Investments as of January 31, 2004
Principal
Amount Description Value (a)
-------------------------------------------------------------------------------
Short Term Investment -- 0.7%
$ 490,983 Repurchase Agreement with Investors Bank &
Trust Co. dated 1/30/2004 at 0.75% to be
repurchased at $491,014 on 2/02/2004,
collateralized by $501,822 Federal National
Mortgage Association Bond, 4.342% due 9/01/2032
valued at $515,533 $ 490,983
--------------
Total Short Term Investment (Identified Cost
$490,983) $ 490,983
--------------
Total Investments - 136.5% (Identified Cost
$82,161,810) (b) 103,070,240
Auction Market Preferred Shares plus cumulative
unpaid dividends (37.1)% (28,004,079)
Other assets less liabilities - 0.6% 437,070
--------------
Total Net Assets - 100% $ 75,503,231
==============
(a) See Note 2a of Notes to Financial Statements.
(b) Federal Tax Information:
At January 31, 2004, the net unrealized appreciation on
investments based on cost of $82,205,024 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 $ 20,905,409
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
value (40,193)
--------------
Net unrealized appreciation $ 20,865,216
==============
At January 31, 2004, the components of distributable
earnings, excluding unrealized appreciation/depreciation,
disclosed on a tax basis consisted of $0 in undistributed
ordinary income and $469,690 in undistributed long-term
gains.
(c) Non-income producing security.
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 $1,511,250 or 2.0% of
net assets.
See accompanying notes to financial statements. 4
--------------------------------------------------------------------------------
Statement of Assets & Liabilities
--------------------------------------------------------------------------------
January 31, 2004
ASSETS
Investments at cost $ 82,161,810
Net unrealized appreciation 20,908,430
-------------
Investments at value 103,070,240
Dividends and interest receivable 603,558
Receivable for open swap contracts 47,947
-------------
TOTAL ASSETS 103,721,745
-------------
LIABILITIES
Dividends payable 23,992
Management fees payable 38,540
Transfer agent fees payable 3,771
Accounting and administrative fees payable 6,250
Other accounts payable and accrued expenses 141,882
-------------
TOTAL LIABILITIES 214,435
-------------
AUCTION PREFERRED SHARES 1,120 shares outstanding at
liquidation value plus cumulative unpaid dividends 28,004,079
-------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 75,503,231
=============
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 54,144,332
Undistributed (overdistributed) net investment income (23,992)
Accumulated net realized gain (loss) on investments,
foreign currency transactions and interest rate swap
contracts 426,476
Net unrealized appreciation (depreciation) of investments
and swap contracts 20,956,377
-------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 75,503,231
=============
COMPUTATION OF NET ASSET VALUE PER COMMON SHARE:
Net assets $ 75,503,231
=============
Common Shares issued and outstanding 3,833,390
=============
Net asset value per share $ 19.70
=============
Market Value (closing price per share on American Stock
Exchange) $ 17.87
=============
5 See accompanying notes to financial statements.
--------------------------------------------------------------------------------
Statement of Operations
--------------------------------------------------------------------------------
For the Year Ended January 31, 2004
INVESTMENT INCOME
Dividends $ 4,692,143
Interest 12,145
Less net foreign taxes withheld (7,941)
-------------
4,696,347
-------------
Expenses
Management fees 728,534
Trustees' fees and expenses 52,208
Accounting and administrative 150,000
Custodian 37,711
Transfer agent fees 41,707
Audit and tax services 42,000
Legal 79,731
Reports to shareholders 34,660
Preferred stock auction 67,667
Rating agency fees 13,501
American Stock Exchange fees 14,527
Miscellaneous 16,539
-------------
Total expenses before waivers 1,278,785
Less waivers (393,734)
-------------
Net expenses 885,051
-------------
Net investment income 3,811,296
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FOREIGN
CURRENCY TRANSACTIONS AND INTEREST RATE SWAPS
Realized gain on:
Investments - net 4,276,158
Interest rate swap contracts - net (472,930)
Foreign currency transactions - net (6,281)
Change in unrealized appreciation (depreciation) of:
Investments - net 21,858,756
Interest rate swap contracts - net 47,947
-------------
Net realized and unrealized gain (loss) on investments,
foreign currency transactions and interest rate swaps 25,703,650
-------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 29,514,946
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS
Net investment income (193,478)
Net realized short-term gain on investments (122,163)
Net realized long-term gain on investments (14,621)
-------------
(330,262)
-------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
APPLICABLE TO COMMON SHARES $ 29,184,684
=============
See accompanying notes to financial statements. 6
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
--------------------------------------------------------------------------------
For the Period
November 26, 2002*
For the Year Ended to
January 31, 2004 January 31, 2003
------------------ ------------------
FROM OPERATIONS:
Net investment income $ 3,811,296 $ 322,911
Net realized gain (loss) on investments,
foreign currency transactions and interest
rate swap contracts 3,796,947 53,343
Net change in unrealized appreciation
(depreciation) of investments and interest
rate swap contracts 21,906,703 (950,326)
------------------ ------------------
Increase (decrease) in net assets resulting
from operations 29,514,946 (574,072)
------------------ ------------------
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS:
Net investment income (193,478) --
Short-Term capital gain (122,163) --
Long-Term capital gain (14,621) --
------------------ ------------------
Increase (decrease) in net assets from
operations applicable to common shares 29,184,684 (574,072)
------------------ ------------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS:
Net investment income (3,820,972) (328,168)
Short-Term capital gain (2,753,072) (14,018)
Long-Term capital gain (291,479) (39,698)
Return of capital -- (58,796)
------------------ ------------------
(6,865,523) (440,680)
------------------ ------------------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM
CAPITAL STOCK TRANSACTIONS: 9,467 54,790,542
------------------ ------------------
Offering costs and preferred shares
underwriting commissions (601,187) --
------------------ ------------------
Total increase (decrease) in net assets 21,727,441 53,775,790
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period 53,775,790 --
------------------ ------------------
End of period $ 75,503,231 $ 53,775,790
================== ==================
UNDISTRIBUTED (OVERDISTRIBUTED) NET
INVESTMENT INCOME $ (23,992) $ --
================== ==================
* Commencement of operations.
7 See accompanying notes to financial statements.
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
For a share outstanding throughout each period.
For the Period
November 26, 2002*
For the Year Ended to
January 31, 2004 January 31, 2003
------------------ ------------------
Net Asset Value, Beginning of Period (Common Shares) $ 14.03 $ 14.33(a)
------------------ ------------------
Income From Investment Operations:
Net Investment Income (b) 0.99 0.09
Net Realized and Unrealized Gain (Loss) on Investments 6.71 (0.24)
------------------ ------------------
Total From Investment Operations 7.70 (0.15)
------------------ ------------------
Less Distributions to Preferred Shareholders:
Dividends From Net Investment Income (0.05) --
Distributions From Net Realized Short-Term Gains (0.03) --
Distributions From Net Realized Long-Term Gains 0.00(f) --
------------------ ------------------
Total From Investment Operations Applicable to Common
Shareholders 7.62 (0.15)
------------------ ------------------
Less Distributions to Common Shareholders:
Dividends From Net Investment Income (1.00) (0.09)
Distributions From Net Realized Short-Term Gains (0.72) (0.00)(f)
Distributions From Net Realized Long-Term Gains (0.07) (0.01)
Distributions From Paid In Capital -- (0.02)
------------------ ------------------
Total Distributions (1.79) (0.12)
------------------ ------------------
Common Shares Offering Costs Charged to Paid-In Capital -- (0.03)
------------------ ------------------
Preferred Shares Underwriting Commissions and Offering Costs (0.16) --
------------------ ------------------
Net Asset Value, End of Period (Common Shares) $ 19.70 $ 14.03
================== ==================
Market Value, End of Period (Common Shares) $ 17.87 $ 14.55
================== ==================
Total Return on Market Value(%) 37.45 (2.23)(c)
Total Return on Net Asset Value(%)(i) 56.84 (1.29)(c)
Ratio of Expenses to Average Net Assets Applicable to Common
Shares, Before Waivers(%)(e) 2.00 1.85
Ratio of Expenses to Average Net Assets Applicable to Common
Shares, After Waivers (%)(d)(e) 1.38 1.37
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares, Before Waivers(%)(e) 5.35 2.80
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares, After Waivers(%) 5.97 3.28
Portfolio Turnover Rate (%) 31 1
Net Assets Applicable to Common Shares, End of Period (000) $ 75,503 $ 53,776
Auction Market Preferred Shares
Total Shares Outstanding 1,120 --
Asset Coverage Per Share(g) $ 92,414 $ --
Involuntary Liquidation Preference Per Share(h) $ 25,000 $ --
Approximate Market Value Per Share $ 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 average common shares outstanding during the period.
(c) Total return on net asset value is calculated assuming a purchase at the
offering price of $15.00 less the sales load of $0.675 paid by the
shareholder on the first day and the ending net asset value per share.
Total return on market value is calculated assuming a purchase at the
offering price of $15.00 on the first day and a sale at the current market
price on the last day of the period.
Total return on net asset value and total return on market value are not
computed on an annualized basis.
(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.
See accompanying notes to financial statements. 8
--------------------------------------------------------------------------------
Notes to Financial Statements
--------------------------------------------------------------------------------
For the Year Ended January 31, 2004
1. Organization. AEW Real Estate Income Fund, (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "1940 Act"), as a
non-diversified closed-end management investment company. The Fund is organized
under the laws of the Commonwealth of Massachusetts by an amended and restated
Agreement and Declaration of Trust dated October 10, 2002. The Fund's primary
investment objective is high current income; the Fund's secondary investment
objective is capital appreciation. The Fund seeks to achieve its objective by
concentrating its investments in the United States real estate industry.
2. Significant Accounting Policies. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The Fund's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
which require the use of management estimates that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
a. Security Valuation. Equity securities for which market quotations are
readily available are valued at market price on the basis of valuations
furnished to the Fund by a pricing service, which has been authorized by the
Trustees. The pricing service provides the last reported sale price for
securities listed on an applicable securities exchange or on the NASDAQ national
market system, or, if no sale was reported and in the case of over-the-counter
securities not so listed, the last reported bid price. Effective April 14, 2003,
securities traded on the NASDAQ National Market are valued at the NASDAQ
Official Closing Price ("NOCP"), or if lacking an NOCP, at the most recent bid
quotation on the NASDAQ National Market. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's investment adviser and
officers, under the supervision of the Fund's Trustees. Fair valuation may also
be used by the Board of Trustees if extraordinary events occur after the close
of the relevant market prior to the close of the New York Stock Exchange.
The Fund may hold securities traded in foreign markets. Foreign securities are
valued at the market price in the foreign market. However, if events occurring
after the close of the foreign market (but before the close of regular trading
on the New York Stock Exchange) are believed to materially affect the value of
those securities, such securities are fair valued pursuant to procedures
approved by the Board of Trustees. When fair valuing securities, the Fund may,
among other things, use modeling tools or other processes that may take into
account factors such as securities market activity and/or significant events
that occur after the close of the foreign market and before the Fund calculates
its net asset value.
b. Security Transactions and Related Investment Income. Security transactions
are accounted for on trade date. Dividend income is recorded on ex-dividend
date, or in the case of certain foreign securities, as soon as the Fund is
notified, and interest income is recorded on an accrual basis. Dividend income
received by the Fund from its investment in REITs may consist of ordinary
income, capital gains and return of capital. Interest income is increased by the
accretion of discount and decreased by the amortization of premium. Investment
income is recorded net of foreign taxes withheld when recovery of such taxes is
uncertain. In determining net gain or loss on securities sold, the cost of
securities has been determined on an identified cost basis.
c. Foreign Currency Translation. The books and records of the Fund are
maintained in U.S. dollars. The value of securities, currencies and other assets
and liabilities denominated in currencies other than U.S. dollars are translated
into U.S. dollars based upon foreign exchange rates prevailing at the end of the
period. Purchases and sales of investment securities, income and expenses are
translated on the respective dates of such transactions.
Since the values of investment securities are presented at the foreign exchange
rates prevailing at the end of the period, it is not practical to isolate that
portion of the results of operations arising from changes in exchange rates from
fluctuations arising from changes in market prices of the investment securities.
Such changes are included with the net realized and unrealized gain or loss on
investments.
Net realized foreign exchange gains or losses arise from: sales of foreign
currency, currency gains or losses realized between the trade and settlement
dates on securities transactions, 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, 2004, the dividend rates for AMPS ranged
from 1.02% to 1.50%. The dividend rate for AMPS on January 31, 2004 was 1.05%.
In addition, at least annually, the Fund intends to distribute net capital
gains, if any. The timing and characterization of certain income and capital
gains distributions are determined in accordance with federal tax regulations
which may differ from accounting principles generally accepted in the United
States of America. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassifications to the capital
accounts. Distributions from net investment income and short-term capital gains
are considered to be ordinary income for tax purposes.
9
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
For the Year Ended January 31, 2004
f. Swap Agreements. The Fund may enter into swap agreements to manage its
exposure to the financial markets. A swap is an agreement to exchange the return
generated by one instrument for the return generated by another instrument. The
Fund may enter into interest rate, total return and forward swap spread lock
swap agreements to manage its exposure to interest rates. Interest rate swap
agreements involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal.
Swaps are marked to market daily based upon quotations from market makers and
the change in value, if any, is recorded as unrealized gain or loss in the
Statement of Operations. Payments received or made at the end of the measurement
period are recorded as realized gain or loss in the Statement of Operations.
These financial instruments are not actively traded on financial markets. The
values assigned to these instruments are based upon the best available
information and because of the uncertainty of the valuation, these values may
differ significantly from the values that would have been realized had a ready
market for these instruments existed, and the differences could be material.
Entering into these agreements involves, to varying degrees, elements of credit,
legal, market and documentation risk in excess of the amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility that
there will be no liquid market for these agreements, that the counterparty to
the agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, or that there may be unfavorable
changes in interest rates. See Note 7 for a summary of the open swap agreements
as of January 31, 2004.
g. Repurchase Agreements The Fund, through its custodian, receives delivery of
the underlying securities collateralizing repurchase agreements. It is the
Fund's policy that the market value of the collateral be at least equal to 102%
of the repurchase price, including interest. The Fund's investment adviser is
responsible for determining that the value of the collateral is at all times at
least equal to 102% of the repurchase price, including interest. Repurchase
agreements could involve certain risks in the event of default or insolvency of
the counterparty including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities.
3. Auction Market Preferred Shares The Fund is authorized to issue an
unlimited number of preferred shares, $0.00001 par value per share. On February
10, 2003, the Fund issued 1,120 shares of Series M AMPS with proceeds of
$28,000,000 in a public offering. Underwriting commissions and offering costs of
$601,187 ($0.16 per common share) were incurred in connection with the offering
and were charged directly to paid-in-capital of the common shares. Dividends on
the AMPS are cumulative at a rate which was established at the offering of the
AMPS and has been reset every seven days thereafter by an auction. The Fund pays
annual fees equivalent to 0.25% of the preferred shares' liquidation value for
the remarketing efforts associated with the preferred auctions as disclosed in
the Statement of Operations.
The AMPS are redeemable at the option of the Fund, at a redemption price equal
to $25,000 per share, plus accumulated and unpaid dividends, on any dividend
payment date. The AMPS may also be subject to mandatory redemption at a
redemption price equal to $25,000 per share, plus accumulated and unpaid
dividends, if the Fund defaults on its asset maintenance requirements with
respect to the AMPS and fails to cure such a default within the time permitted.
If the dividends on the AMPS shall remain unpaid in an amount equal to two full
years' dividends, the holders of the AMPS as a class have the right to elect a
majority of the Board of Trustees. In general, the holders of the AMPS and the
common shares have equal voting rights of one vote per share, except that the
holders of the AMPS, as a separate class, have the right to elect at least two
members of the Board of Trustees and to vote under certain other circumstances
specified in the Fund's By-Laws. The AMPS have a liquidation preference of
$25,000 per share. The Fund is required to maintain certain asset coverage with
respect to the AMPS as defined in the Fund's By-Laws.
4. Purchases and Sales of Securities. For the year ended January 31, 2004,
purchases and sales of securities (excluding short-term investments) were
$54,336,850 and $27,158,711 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 CDC IXIS Asset Management North America,
L.P. ("CDC 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 average daily managed assets during the first five years of
the Fund's operations, 0.20% of average daily managed assets in year six, 0.15%
of average daily managed assets in year seven, 0.10% of average daily managed
assets in year eight, and 0.05% of average daily managed assets in year nine.
AEW has also agreed to waive an additional portion of its management fees in the
amount of 0.10% of average daily managed assets. This waiver is voluntary and
may be terminated by the investment adviser at any time without notice.
For the year ended January 31, 2004, the management fee and waiver for the Fund
were as follows:
Gross Waiver of Net Percentage of Average
Management Management Management Daily Managed Assets
---------------------
Fee Fee Fee Gross Net
---------- ---------- ---------- --------- ---------
$ 728,534 $ 318,734 $ 409,800 0.80% 0.45%
b. Accounting and Administrative Expense. CDC IXIS Asset Management Services,
Inc. ("CIS"), a wholly owned subsidiary of CDC IXIS North America, performs
certain accounting and administrative services for the Fund and has
subcontracted with Investors Bank & Trust Company ("IBT") to serve as
subadministrator. The Fund pays CIS a fee for these services based on the Fund's
average daily managed assets, or if higher, the minimum fee set forth below:
10
--------------------------------------------------------------------------------
Notes To Financial Statements (continued)
--------------------------------------------------------------------------------
For the Year Ended January 31, 2004
(1) Percentage of Eligible Average Daily Net Assets
------------------------------------------------
First Over
$300 million $300 million
------------ ------------
0.0600% 0.0575%
or
(2) An annual minimum fee of $150,000.
CIS has currently agreed to voluntarily waive a portion of its administrative
services fee. This waiver is voluntary and may be terminated by CIS at any time
without notice.
For the year ended January 31, 2004, the following was paid to CIS for
accounting and administrative services:
Gross Waiver of Net Percentage of Average
Accounting Accounting Accounting Daily Managed Assets
---------------------
And And And
Administrative Administrative Administrative Gross Net
-------------- -------------- -------------- ----------- --------
$ 150,000 $ 75,000 $ 75,000 0.16% 0.08%
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 CDC IXIS
North America or its affiliates. Each other Trustee 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 and Committee meeting, in excess of four
meetings per year, at the rate of $375 and $200, respectively. Trustees are
reimbursed for travel expenses in connection with attendance at meetings.
d. Publishing Services. CIS performs certain desktop publishing services for
the Fund. Fees for these services are presented in the Statement of Operations
as shareholder reporting. For the year ended January 31, 2004, the amount paid
to CIS as compensation for these services was $859.
6. Shares of Beneficial Interest. The Agreement and Declaration of Trust
permits the Fund's Trustees to issue an unlimited number of common shares,
$0.00001 par value per share. Transactions in common shares were as follows:
For the Period
November 26, 2002 (a)
Year Ended to
January 31, 2004 January 31, 2003
----------------------- ---------------------------
Shares Amount Shares Amount
----------- ---------- ----------- --------------
Shares purchased
by investment adviser -- $ -- 7,000 $ 100,275
Initial Public Offering on
November 26, 2002 (b) -- -- 3,750,000 53,606,250
Purchase of additional shares by
underwriters on January 13, 2003 (c) -- -- 75,000 1,074,000
Shares issued pursuant to the
Fund's dividend reinvestment plan 676 9,467 714 10,017
----------- ---------- ----------- --------------
Net increase 676 9,467 3,832,714 54,790,542
----------- ---------- ----------- --------------
Increase derived from
capital shares transactions 676 $ 9,467 3,832,714 $ 54,790,542
=========== ========== =========== ==============
(a) Commencement of operations
(b) After deduction of underwriting commissions and offering expenses of
$2,643,750.
(c) After deduction of underwriting commissions of $51,000.
11
--------------------------------------------------------------------------------
Notes To Financial Statements (continued)
--------------------------------------------------------------------------------
For the Year Ended January 31, 2004
7. Swap Contracts.
Unrealized
Appreciation/
Notional Amount Expiration Date Description (Depreciation)
------------------- --------------- ----------------------------------- --------------
Interest Rate Swaps
2,800,000 USD 3/1/2006 Agreement with Fleet National Bank $ (11,803)
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 USD 3/3/2008 Agreement with Fleet National Bank 12,372
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 USD 3/1/2010 Agreement with Fleet National Bank 47,378
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.
--------------
$ 47,947
==============
8. Other. On January 5, 2004, the Fund declared three monthly dividends of
$0.115 per common share for the months of January, February and March payable on
January 30, February 27 and March 26, respectively.
12
--------------------------------------------------------------------------------
Report of Independent Auditors
--------------------------------------------------------------------------------
To the Trustees and Shareholders of AEW Real Estate Income Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of AEW Real Estate Income Fund (the
"Fund") at January 31, 2004, and the results of its operations, the changes in
its net assets and the financial highlights for the periods indicated, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which 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 audit, which included
confirmation of securities at January 31, 2004 by correspondence with the
custodian and brokers, provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 10, 2004
13
--------------------------------------------------------------------------------
Dividend reinvestment plan
--------------------------------------------------------------------------------
The Fund has a Dividend Reinvestment Plan (the "Plan") commonly referred to
as an "opt-out" plan. Each Common Shareholder will have all distributions of
dividends and capital gains automatically reinvested in additional Common Shares
by EquiServe Trust Company, N.A., as agent for shareholders pursuant to the Plan
(the "Plan Agent"), unless they elect to receive cash. The Plan Agent will
either (i) effect purchases of Common Shares under the Plan in the open market
or (ii) distribute newly issued Common Shares of the Fund. Shareholders who
elect not to participate in the Plan will receive all distributions in cash paid
by check mailed directly to the shareholder of record (or if the shares are held
in street or other nominee name, then to the nominee) by the Plan Agent, as
dividend disbursing agent. Shareholders whose Common Shares are held in the name
of a broker or nominee should contact the broker or nominee to determine whether
and how they may participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Fund declares a dividend or makes a capital gain distribution,
the Plan Agent will, as agent for the participants, either (i) receive the cash
payment and use it to buy Common Shares in the open market, on the American
Stock Exchange or elsewhere, for the participants' accounts or (ii) distribute
newly issued Common Shares of the Fund on behalf of the participants. The Plan
Agent will receive cash from the Fund with which to buy Common Shares in the
open market if, on the determination date, the net asset value per share exceeds
the market price per share plus estimated brokerage commissions on that date.
The Plan Agent will receive the dividend or distribution in newly issued Common
Shares of the Fund if, on the determination date, the market price per share
plus estimated brokerage commissions equals or exceeds the net asset value per
share of the Fund on that date. The number of shares to be issued will be
computed at a per share rate equal to the greater of (i) the net asset value or
(ii) 95% of the closing market price per share on the payment date.
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a distribution record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole Common Shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a Common Share
credited to such account. In the alternative, upon receipt of the participant's
instructions, Common Shares will be sold and the proceeds sent to the
participant less brokerage commissions and any applicable taxes.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes confirmations of all acquisitions made for the participant. Common
Shares in the account of each Plan participant will be held by the Plan Agent on
behalf of the participant. Proxy material relating to shareholders' meetings of
the Fund will include those shares purchased as well as shares held pursuant to
the Plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
Common Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Common Shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are participants in the Plan.
The Plan Agent's fees for the handling of reinvestment of dividends and
other distributions will be paid by the Fund. Each participant will pay a pro
rata share of brokerage commissions incurred with respect to the Plan Agent's
open market purchases in connection with the reinvestment of distributions.
There are no other charges to participants for reinvesting dividends or capital
gain distributions; however, the Fund reserves the right to amend the Plan to
include a service charge payable by the participants.
The automatic reinvestment of dividends and other distributions will not
relieve participants of any income tax that may be payable or required to be
withheld on such dividends or distributions.
The Fund and the Plan Agent reserve the right to amend or terminate the
Plan. All correspondence concerning the Plan should be directed to the Plan
Agent by telephone at (800) 730-6001.
14
--------------------------------------------------------------------------------
Trustees' Information
--------------------------------------------------------------------------------
The Fund is governed by a Board of Trustees, which is responsible for generally
overseeing the conduct of Fund business and for protecting the interests of
shareholders. The trustees meet periodically throughout the year to oversee the
Fund's activities, review contractual arrangements with companies that provide
services to the Fund and review the Fund's performance.
Position(s) Held with Number of Portfolios in
Name, Age and Address Fund/1/, Length of Time Principal Occupation(s) Fund Complex Overseen and
INDEPENDENT TRUSTEES Served and Term of Office/1/ During Past 5 Years Other Directorships held
--------------------------- ----------------------------- ---------------------------- ----------------------------
Graham T. Allison, Jr. (63) Trustee (2); Douglas Dillon Professor 40;
399 Boylston Street Since Inception and Director for the Belfer Director,Taubman Centers,
Boston, MA 02116 (October 2002) Center of Science and Inc.; Board Member, USEC
(Class I) International Affairs, Inc.
John F. Kennedy School
of Government, Harvard
University
Edward A. Benjamin (65) Trustee (1); Retired; formerly, Partner, 40;
399 Boylston Street Less than 1 year Ropes & Gray (law firm) Director, Coal, Energy
Boston, MA 02116 Investments &
(Class II) Management; Director,
Precision Optics Corporation
optics manufacturer)
Daniel M. Cain (59) Trustee, President and CEO, Cain 40;
452 Fifth Avenue Committee Chairman (1); Brothers & Company, Trustee for Universal Health
New York, NY 10018 Since Inception Incorporated (investment Realty Income Trust;
(Class II) (October 2002) banking) Director, Sheridan
Healthcorp
Paul G. Chenault (70) Trustee (2); Retired; formerly, 40;
5852 Pebble Beach Way Less than 1 year Trustee, First Variable Director, Mailco Office
San Luis Obispo, CA 93401 Life (variable life Products, Inc.
(Class I) insurance)
Kenneth J. Cowan (71) Trustee, Retired 40;
399 Boylston Street Committee Chairman (2); None
Boston, MA 02116 Since Inception
(Class II) (October 2002)
Richard Darman (60) Trustee (2); Partner, The Carlyle 40;
399 Boylston Street Since Inception (investments); Director and Chairman,
Boston, MA 02116 (October 2002) Chairman of the Board AES Corporation
(Class I) of Directors of AES
Corporation (interna-
tional power company);
formerly, Professor,
John F. Kennedy School
of Government, Harvard
University
Sandra O. Moose (62) Trustee (1); President, Strategic 40;
399 Boylston Street Since Inception Advisory Services; Director, Verizon
Boston, MA 02116 (October 2002) formerly, Senior Vice Communications;
(Class III) President and Director, Director, Rohm and Haas
The Boston Consulting Company
Group, Inc. (management
consulting)
15
--------------------------------------------------------------------------------
Trustees' Information (continued)
--------------------------------------------------------------------------------
Name, Age and Address Position(s) Held with Number of Portfolios in
INDEPENDENT TRUSTEES Fund/1/, Length of Time Principal Occupation(s) Fund Complex Overseen and
(Continued) Served and Term of Office/1/ During Past 5 Years Other Directorships held
--------------------------- ----------------------------- ---------------------------- ----------------------------
John A. Shane (71) Trustee (2); President, Palmer 40;
200 Unicorn Park Drive Since Inception Service Corporation Director, Gensym
Woburn, MA 01801 (October 2002) (venture capital Corporation; Director,
(Class III) organization) Overland Storage, Inc.;
Director, Abt Associates
INTERESTED TRUSTEES Inc.
-------------------
Robert J. Blanding/3/ (56) Trustee; President, Chairman, 40;
555 California Street Less than 1 year Director, and Chief None
San Francisco, CA 94104 Executive Officer,
(Class I) Chief Loomis Sayles,
Executive Officer -
Loomis Sayles Funds II;
President and CEO -
Loomis Sayles Funds I
John T. Hailer/4/ (43) President and Chief President and Chief 40;
399 Boylston Street Executive Officer, Trustee; Executive Officer, CDC None
Boston, MA 02116 Since Inception IXIS Asset Management
(Class II) (October 2002) Distributors, L.P.;
President, Loomis
Sayles Funds II;
Executive Vice
President - Loomis
Sayles Funds I, for-merly,
Senior Vice President,
Fidelity Investments
Peter S. Voss/5/ (57) Chairman of the Board, Director, President and 40;
399 Boylston Street Trustee; Chief Executive Officer, CDC Trustee of Harris
Boston, MA 02116 Since Inception IXIS Asset Management Associates Investment
(Class III) (October 2002) North America, L.P. Trust/6/
16
--------------------------------------------------------------------------------
Trustees' Information (continued)
--------------------------------------------------------------------------------
Position(s) Held with Number of Portfolios in
Fund/1/, Length of Time Principal Occupation(s) Fund Complex Overseen and
Name, Age and Address Served and Term of Office/1/ During Past 5 Years Other Directorships held
--------------------------- ----------------------------- ---------------------------- ----------------------------
OFFICERS
--------
Nicholas H. Palmerino (38) Treasurer; Senior Vice President, Not Applicable;
399 Boylston Street Not Applicable CDC IXIS Asset None
Boston, MA 02116 Management Services,
Inc.; Senior Vice
President, CDC IXIS
Asset Management
Advisers, L.P.;
formerly, Vice
President, Loomis,
Sayles & Company, L.P.
John E. Pelletier (39) Secretary, Senior Vice President, Not Applicable;
399 Boylston Street Chief Legal Officer; General Counsel, None
Boston, MA 02116 Not Applicable Secretary and Clerk,
CDC IXIS Distribution
Corporation; Senior
Vice President, General
Counsel, Secretary and
Clerk, CDC IXIS Asset
Management Distributors,
L.P.; Senior Vice President,
General Counsel,
Secretary and Clerk,
CDC IXIS Asset
Management Advisers,
L.P.; Executive Vice
President, General
Counsel, Secretary,
Clerk, and Director,
CDC IXIS Asset
Management Services,
Inc.
James J. Finnegan (43) Chief Operating Officer; General Counsel, Not Applicable;
399 Boylston Street Not Applicable Managing Director, Vice None
Boston, MA 02116 President and Clerk,
AEW Management and
Advisors, L.P.; General
Counsel and Principal,
for-merly, Assistant
General Counsel and
Vice President, AEW
Capital Management,
L.P.; Managing Director
and Vice President, AEW
Advisors, Inc.; Vice
President and Assistant
Clerk, AEW Investment
Group, Inc.; Vice
President and Assistant
Clerk, AEW Real Estate
Advisors, Inc.
17
--------------------------------------------------------------------------------
Trustees' Information (continued)
--------------------------------------------------------------------------------
Position(s) Held with Number of Portfolios in
Fund/1/, Length of Time Principal Occupation(s) Fund Complex Overseen and
Name, Age and Address Served and Term of Office/1/ During Past 5 Years Other Directorships held
--------------------------- ----------------------------- ---------------------------- ----------------------------
OFFICERS (continued)
--------------------
Frank A. LoPiccolo (50) Anti-Money Senior Vice President, Not Applicable;
399 Boylston Street Laundering Officer; CDC IXIS Asset None
Boston, MA 02116 Not Applicable Management Services,
Inc.
(1) Member of Audit Committee.
(2) Member of Contract Review and Governance Committee.
1 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 the Class I Trustees expire in 2006, the
terms of the Class II Trustees expire in 2004, and the terms of the Class III
Trustees expire in 2005. It is currently expected that, in accordance with the
Board's current retirement policy, Mr. Cowan will retire as a Trustee prior to
the 2007 Annual Meeting. The current retirement age is 72. Officers hold office
at the pleasure of the Fund's Board and until their successors are appointed and
qualified or until their earlier resignation or removal.
2 Mr. Blanding is deemed an "interested person" of the Fund because he holds
the following positions with affiliated persons of the Fund: President,
Chairman, Director and Chief Executive Officer of Loomis, Sayles & Company, L.P.
("Loomis Sayles").
3 Mr. Hailer is an "interested person" of the Fund because he holds the
following positions with affiliated persons of the Fund: Director and Executive
Vice President of CDC IXIS Asset Management Distribution Corporation; President
and Chief Executive Officer of CDC IXIS Asset Management Distributors, L.P.
("CDC IXIS Distributors").
4 Mr. Voss is an "interested person" of the Fund because he holds the
following positions with entities that may be considered to be affiliated
persons of the Fund: Director of CDC IXIS Asset Management Services, Inc.;
Director of CDC IXIS Asset Management Distribution Corporation; Director and
Chairman of CDC IXIS Asset Management Associates, Inc.; Director of AEW Capital
Management, Inc; Director of Harris Associates, Inc; Director of Loomis, Sayles
& Company, Inc.; Member of Reich & Tang Asset Management, LLC; Director of
Westpeak Global Advisors, Inc.; Director of Vaughan Nelson Investment
Management, Inc.; Director, Hansberger Group, Inc.; Member, Board of Managers,
Harris Alternatives L.L.C.; and Director and Member of Executive Board of CDC
IXIS Asset Management.
5 As of December 31, 2003, Harris Associates Investment Trust has seven
series that were overseen by its Board of Trustees.
18
--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------
It is currently anticipated that the Fund's 2005 annual meeting of Shareholders
will be held in May 2005. Shareholders submitting any proposals for the Fund
intended to be presented at the 2005 annual meeting must ensure that such
proposals are received by the Fund, in good order and in compliance with all
applicable legal requirements and the requirements of the Fund's Bylaws, no
later than February 9, 2005 and not earlier than January 25, 2005. If a
Shareholder who wishes to present a proposal fails to notify the Fund within
these dates, the proxies solicited for the meeting will have discretionary
authority to vote on the Shareholder's proposal if it is properly brought before
the meeting. The submission by a Shareholder of a proposal for inclusion in the
proxy materials does not guarantee that it will be included. Shareholder
proposals are subject to certain requirements under the federal securities laws
and must be submitted in accordance with the Fund's Bylaws. Shareholder
proposals should be addressed to the attention of the Secretary of the Fund.
In accordance with Section 23(c) of the Investment Company Act of 1940, as
amended, the Fund hereby gives notice that it may, from time to time, repurchase
its shares in the open market at the option of the Board of Trustees and on such
terms as the Board of Trustees shall determine.
Shareholder Meeting (unaudited). At the annual meeting (the "Meeting") of
shareholders held on May 15, 2003, shareholders of the AEW Real Estate Income
Fund voted for the following proposal:
1. ELECTION OF TRUSTEES
For Against Abstained* Total Votes
(01) Graham T. Allison 1,852,684 11,445 0 1,864,129
(02) Richard Darman 1,850,992 13,137 0 1,864,129
(03) Pendleton P. White 1,850,992 13,137 0 1,864,129
* Includes Broker Non-Votes (if any).
Messrs. Daniel M. Cain, Kenneth J. Cowan, John A. Shane, John T. Hailer and
Peter S. Voss and Ms. Sandra O. Moose, Trustees of the Fund, each have terms of
office as Trustee that continued after the Meeting. Messrs. Edward A. Benjamin,
Paul G. Chenault and Robert J. Blanding became Trustees of the Fund in June
2003.
The statement of additional information includes additional information about
Trustees of the Fund and is available, without change, upon request, by calling
(800) 862-4863.
Tax Information (unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the Fund designated
$686,193 as capital gain dividends paid during the year ended January 31, 2004.
During the period ended January 31, 2004, the tax character of distributions
paid was $6,509,592 from ordinary income and $686,193 from long-term capital
gains.
19
--------------------------------------------------------------------------------
Privacy Policy
--------------------------------------------------------------------------------
CDC IXIS Asset Management Services, Inc.
AEW Real Estate Income Fund
Notice of Privacy Policies and Practices
We/1/ consider shareholder relationships to be the hallmark of our business and
are dedicated to protecting the confidentiality of any nonpublic personal
information provided by our customers/2/. We understand the trust that our
customers place in us and are committed to earning that trust well into the
future.
Types of Information Gathered
We collect personal information on applications, forms, documents, transaction
histories and correspondence (electronic, written and telephonic) with
customers. Through our Web sites we gather information about visitors and their
needs submitted through answers to surveys, data input to calculators and
information entered onto forms. This information includes but is not limited to
name, postal address, e-mail address and social security number. Much of the
data collected is statistical in nature and is not generally attributable to any
specific customer.
How We Use the Information
We use the information gathered to service your account and to provide you with
additional information about products and services. We do not disclose any
nonpublic information about current or former customers to any unaffiliated
third party except as permitted by law, or at the specific request of the
customer. The information we collect, as described above, may be shared with our
corporate affiliates in the financial services industry in order to enhance and
improve customer communications, services, and products designed to meet our
customers' needs. We may disclose some or all of the above information to
affiliated and unaffiliated companies that perform marketing and other services
(such as preparing and mailing prospectuses, reports and account statements,
conducting research on client satisfaction, and gathering votes for shareholder
proxies) on our or the Funds' behalf or to other financial institutions with
whom we have joint marketing agreements. These parties that are not affiliated
with us have agreed not to use this information for any other purpose.
Policies and Practices to Protect Confidential Information
Only those employees that have a business need for personally identifiable data
about our customers are given access to that information. We maintain physical,
electronic and procedural safeguards that comply with federal standards to
protect your nonpublic personal information. For example, we take precautions to
help keep our information systems secure, including the use of firewalls for our
Internet-based systems. We also use, when appropriate, encryption technologies,
user authentication systems and access control mechanisms.
/1/ For purposes of this notice the term "We" includes AEW Real Estate Income
Fund and CDC IXIS Asset Management Services, Inc.
/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.
20
This Page Intentionally Left Blank
This Page Intentionally Left Blank
[LOGO] AEW
Item 1. Reports to Stockholders.
The Registrant's semi-annual report transmitted to shareholders pursuant to Rule
30e-1 under the Investment Company Act of 1940 is as follows:
AEW Real Estate Income Fund
Item 2. Code of Ethics.
The Trust has adopted a code of Ethics that applies to the Trust's principal
executive officer, principal financial officer and persons performing similar
functions.
Item 3. Audit Committee Financial Expert.
The Board of Trustees of the Trust has established an audit committee. Ms.
Sandra O. Moose, and Messrs. Edward A. Benjamin and Daniel M. Cain, all members
of the audit committee, have been designated financial experts. Each of these
individuals is also an Independent Trustee of the Trust.
Item 4. Principal Accountant Fees and Services.
Fees paid to Principal Accountant by the Funds. The table below sets forth fees
billed by the principal accountant, PricewaterhouseCoopers LLP, for the past two
fiscal years for professional services rendered in connection with a) the audit
of the Trust's annual financial statements and services provided in connection
with regulatory filings; b) audit-related services (including services that are
reasonably related to the performance of the audit of the registrant's financial
statements and but not reported under "Audit Fees"); c) tax compliance, tax
advice and tax planning and d) all other fees billed for professional services
rendered by the principal accountant to the Trust, other than the services
provided reported as a part of (a) through (c) of this Item.
Audit-related All other
Audit fees fees/1/ Tax fees/2/ fees
--------------------------------------------------------------------------------------------------
2002 2003 2002 2003 2002 2003 2002 2003
--------------------------------------------------------------------------------------------------
AEW Real Estate Income Fund $ 24,500 $ 20,000 $ 9,500 $ 14,000 $ 7,000 $ 7,000 $ 0 $ 0
--------------------------------------------------------------------------------------------------
1. The audit related fees for 2002 and 2003 consist of $5,000 and 10,000
respectively, related to rating agency procedures reports. The remaining
audit related fees for 2002 of $4,500 related to review and consent related
to preferred offering. The remaining audit related fees for 2003 of $4,000
related to the performance of agreed-upon procedures relating to the
Trust's semi-annual financial statements in accordance with SAS 100.
2. The tax fees consist of a review of the Trust's tax returns.
Aggregate fees billed to the Trust for non-audit services for 2003 and 2002 were
$21,000 and $16,500, 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 CDC IXIS Asset Management Advisers, L.P. and entities
controlling, controlled by or under common control with CDC IXIS Asset
Management Advisers, L.P. that provide ongoing services to the Trust ("Control
Affiliates") for the last two fiscal years.
Audit-related
fees/1/ Tax fees All other fees
------------------------------------------------------------------------
2002 2003 2002 2003 2002 2003
------------------------------------------------------------------------
Control Affiliates $ 96,000 $ 107,000 n/a n/a n/a n/a
------------------------------------------------------------------------
1. The audit related fees consist of performing SAS 70 internal examinations
for a Trust affiliate, review of anti-money laundering procedures for the
investment adviser and review of 12b-1 expenditures for the Trust's
distributor.
Aggregate fees billed to Control Affiliates for non-audit services during 2003
and 2002 were $195,000 and $184,000, respectively
None of the services described above were approved pursuant to (c)(7)(i)(C) of
Regulation S-X.
Audit Committee Pre Approval Policies.
Annually, the Trust's Audit Committee reviews the audit, audit-related, tax
and other non-audit services together with the projected fees, for services
proposed to be rendered to the Trust and/or other entities for which
pre-approval is required during the upcoming year. Any subsequent revisions to
already pre-approved services or fees (including fee increases) and requests for
pre-approval of new services would be presented for consideration quarterly as
needed.
If, in the opinion of management, a proposed engagement by the Trust's
independent accountants needs to commence before the next regularly scheduled
Audit Committee meeting, any member of the Audit Committee who is an independent
Board member is authorized to pre-approve the engagement, but only for
engagements to provide audit, audit related and tax services. This approval is
subject to review of the full Audit committee at its next quarterly meeting. All
other engagements require the approval of all the members of the audit
committee.
Items 5 and 6. [Reserved]
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. [Reserved.]
Item 9. Controls and Procedures
The Trust's principal executive officer and principal financial officer have
concluded that the Trust's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Trust 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 significant changes or corrective actions that occurred during the
Trust's last fiscal half-year with regard to significant deficiencies or
material weaknesses in the Trust's internal controls or in other factors that
have materially affected, or are reasonably likely to materially affect the
Trust's internal controls subsequent to the date of their evaluation.
Item 10. Exhibits.
(a) Code of Ethics.
(b) Certifications of Principal Executive Officer and Principal Financial
Officer.
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 16, 2004
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 16, 2004
By: /S/ NICHOLAS H. PALMERINO
------------------------------------
Name: Nicholas H. Palmerino
Title: Treasurer
Date: March 16, 2004
EXHIBIT INDEX
(a) Code of Ethics of CDC Nvest Companies Trust I
(b)(1) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2 under the Investment Company Act of
1940
(b)(2) Certifications of principal executive officer and principal financial
officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.