UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21206
AEW Real Estate Income Fund
(Exact name of registrant as specified in charter)
399 Boylston Street, Boston, Massachusetts 02116
(Address of principal executive offices) (Zip code)
Coleen Downs Dinneen, Esq.
IXIS Asset Management Advisors, L.P.
399 Boylston Street
Boston, Massachusetts 02116
(Name and address of agent for service)
Registrant's telephone number, including area code: (617) 449-2810
Date of fiscal year end: January 31
Date of reporting period: July 31, 2006
Item 1. Report to Stockholders.
The Registrant's semiannual 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
Semiannual Report
July 31, 2006
AEW Management and Advisors
TABLE OF CONTENTS
Management Discussion
and Performance.........Page 1
Portfolio of InvestmentsPage 6
Financial Statements....Page 8
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.
--------------------------------------------------------------------------------
Common shares American Stock Exchange Symbol:
RIF
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CUSIP Numbers
Common shares:
00104H107
Preferred shares:
00104H206
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July 31, 2006 Market Value Per Common Share:
$19.90
Net Asset Value Per Common Share:
$23.38
Management Discussion
--------------------------------------------------------------------------------
A continued, healthy flow of investor capital into real estate investment
trusts (REITs) had a positive effect on the market value of AEW Real Estate
Income Fund's shares and on the fund's net asset value. Based on the market
price of its common shares, AEW Real Estate Income Fund's total return was
6.56% for the six-month period. These results assume that $0.69 per share in
dividends (a portion of which may be redesignated in accordance with federal
tax regulations as a capital gain distribution or as a return of capital) were
reinvested during the period and reflect the increase in the market price of
fund shares, which rose to $19.90 from $19.35. Changes in the market price of
fund shares reflect investor demand and are not directly linked to the fund's
investment performance. The net asset value of fund shares rose to $23.38 at
July 31, 2006, up from $22.55 at January 31, 2006, so that the fund's total
return based on its investment performance was 7.42% for the fiscal period.
MARKET INFORMATION
The MSCI US REIT Index returned 9.16% for the six months ended July 31, 2006.
The Dow Jones Industrial Average returned 4.13%, and the Standard & Poor's 500
Index was up 0.67% for the same period. The Lehman Aggregate Bond Index (a
broad-based list of U.S. government and corporate bonds) returned 0.61%, while
the Lehman U.S. Treasury Index (Treasury bonds maturing in one year or more)
returned 0.23%.
PORTFOLIO INFORMATION
Both the fund's common stock and preferred holdings posted positive total
returns and solid current yields during the six-month period, 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, Highwoods Properties Inc., which
manages primarily office properties in the southeastern U.S., posted solid
year-to-date operating results and improved occupancy rates across its
portfolio. There is also growing sentiment that the company is being viewed as
a potential acquisition target. Camden Property Trust was the top contributor
to performance during the period. Camden is one of the largest apartment REITs
in the nation, owning a geographically diverse portfolio of properties. The
company's strong performance for the period was primarily driven by high
occupancy levels, solid rental revenue growth, and the slowing demand in the
single-family home and condominium markets.
Among the detractors to performance during the period was regional mall REIT
Glimcher Realty Trust, which posted somewhat lackluster operating results.
Apartment company GMH Communities Trust was also a weak performer due to
uncertainty and concerns regarding a delay in the company's SEC filings.
The fund's use of interest rate swap agreements during the period 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 during the period that were
designed to meet the fund's primary investment objective of generating current
income. We purchased small positions in Nationwide Health Properties, Inc.
(healthcare), Extra Space Storage, Inc. (storage), and Ashford Hospitality
Trust (hotels), each of which we believe represented good relative values at
our entry point. In the office sector, we also liquidated the fund's common
stock position in CarrAmerica Realty and allocated the proceeds to other
companies within the sector that we believe represented better relative values.
As of July 31, 2006, the fund's common and preferred holdings amounted to 70.9%
and 28.8% of total investments, respectively. The ten largest holdings
accounted for 31.6% of the fund's total investments, and no single holding
represented more than 4.2%.
OUTLOOK
Investor demand for commercial property remains strong and property market
fundamentals continue to improve in-step with economic growth. By historic
pricing measures, commercial real estate generally appears expensive. Despite
this, numerous REITs continue to look undervalued to traditional direct
property market investors. We believe strong investor demand for property
should continue at least for the remainder of 2006, but we also believe that
REIT investors should prepare for lower total returns and continued high
volatility.
1
AEW REAL ESTATE INCOME FUND
Investment Results through July 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 -- July 31, 2006
SINCE
INCEPTION/1/
6 MONTHS/1/ 1 YEAR/1/ (11/26/02)
Total return on market value 6.56% 12.49% 18.28%
Total return on net asset value 7.42 10.87 25.28
------------------------------------------------------------------
COMPARATIVE PERFORMANCE
MSCI US REIT Index/2/ 9.16 15.65 26.82/3/
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 7/31/06 1/31/06
------------------------------------------------------
Common Stocks 70.9 70.2
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Preferred Stocks 28.8 29.6
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Short-Term Investments
and Other 0.3 0.2
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% of Investments as of
TEN LARGEST HOLDINGS 7/31/06 1/31/06
------------------------------------------------------
Camden Property Trust 4.2 3.9
------------------------------------------------------
Healthcare Realty Trust, Inc. 3.5 3.7
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Highwoods Properties, Inc. 3.3 2.8
------------------------------------------------------
HRPT Properties Trust 3.2 3.0
------------------------------------------------------
iStar Financial, Inc. 3.1 2.9
------------------------------------------------------
Senior Housing Properties Trust 3.1 3.0
------------------------------------------------------
Mack-Cali Realty Corp. 3.0 2.8
------------------------------------------------------
Liberty Property Trust 2.9 2.7
------------------------------------------------------
Kilroy Realty Corp. 2.8 2.6
------------------------------------------------------
Urstadt Biddle Properties, Inc. 2.5 2.5
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% of Investments as of
FIVE LARGEST INDUSTRIES 7/31/06 1/31/06
------------------------------------------------------
REITs - Office 22.2 23.8
------------------------------------------------------
REITs - Healthcare 14.5 13.2
------------------------------------------------------
REITs - Apartments 12.8 12.1
------------------------------------------------------
REITs - Triple Net Lease 11.4 11.3
------------------------------------------------------
REITs - Shopping Centers 10.8 11.4
------------------------------------------------------
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, 2006 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
BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
The Board of Trustees, including the Independent Trustees, considers matters
bearing on the Fund's advisory agreement (the "Agreement") at most of its
meetings throughout the year. Once a year, usually in the spring, the Contract
Review and Governance Committee of the Board meets to review the Agreement to
determine whether to recommend that the full Board approve the continuation of
the Agreement for an additional one-year period. After the Committee has made
its recommendation, the full Board, including the Independent Trustees,
determines whether to approve the continuation of the Agreement.
In connection with these meetings, the Trustees receive materials that the
Fund's investment adviser believes to be reasonably necessary for the Trustees
to evaluate the Agreement. These materials generally include, among other
items, (i) information on the investment performance of the Fund and the
performance of a peer group of funds and the Fund's performance benchmark,
(ii) information on the Fund's advisory fees, and other expenses, including
information comparing the Fund's expenses to those of a peer group of funds and
information about any applicable expense caps and fee "breakpoints,"
(iii) information about the profitability of the Agreement to the Fund's
adviser (the "Adviser"), and (iv) information obtained through the completion
of a questionnaire by the Adviser (the Trustees are consulted as to the
information requested through that questionnaire). The Board of Trustees,
including the Independent Trustees, also consider other matters such as (i) the
Adviser's financial results and financial condition, (ii) the Fund's investment
objective and strategies and the size, education and experience of the
Adviser's investment staff and its use of technology, external research and
trading cost measurement tools, (iii) the procedures employed to determine the
value of the Fund's assets, (iv) the allocation of the Fund's brokerage, if
any, including allocations to brokers affiliated with the Adviser and the use
of "soft" commission dollars to pay Fund expenses and to pay for research and
other similar services, (v) the resources devoted to, and the record of
compliance with, the Fund's investment policies and restrictions, policies on
personal securities transactions and other compliance policies, and (vi) the
general economic outlook with particular emphasis on the mutual fund industry.
Throughout the process, the Trustees are afforded the opportunity to ask
questions of and request additional materials from the Adviser.
The Board of Trustees most recently approved the continuation of the Agreement
at their meeting held in May, 2006. In considering whether to approve the
continuation of the Agreement, the Board of Trustees, including the Independent
Trustees, did not identify any single factor as determinative. Matters
considered by the Trustees, including the Independent Trustees, in connection
with their approval of the Agreement included the following:
The nature, extent and quality of the services provided to the Fund under the
Agreement. The Trustees considered the nature, extent and quality of the
services provided by the Adviser and its affiliates to the Fund and the
resources dedicated to the Fund by the Adviser and its affiliates. They also
took note of the competitive market for talented personnel, in particular, for
personnel who have contributed to the generation of strong investment
performance. They also considered the need for the Adviser to offer competitive
compensation in order to attract and retain capable personnel. The Trustees
also considered the benefits to shareholders of investing in a mutual fund that
is part of a family of funds offering a variety of investment disciplines and
providing for a variety of fund and shareholder services. After reviewing these
and related factors, the Trustees concluded, within the context of their
overall conclusions regarding the Agreement, that the nature, extent and
quality of services provided supported the renewal of the Agreement.
Investment performance of the Fund and the Adviser. As noted above, the
Trustees received information about the performance of the Fund over various
time periods, including information which compared the performance of the Fund
to the performance of a peer group of funds and the Fund's performance
benchmark. In addition, the Trustees also reviewed data prepared by an
independent third party which analyzed the performance of the Fund using a
variety of performance metrics, including metrics which also measured the
performance of the Fund on a risk adjusted basis. After reviewing this
information, the Board concluded that the Fund's performance supported the
renewal of the Agreement.
The Trustees also considered the Adviser's performance and reputation
generally, the performance of the fund family generally, and the historical
responsiveness of the Adviser to Trustee concerns about performance and the
willingness of the Adviser to take steps intended to improve performance.
After reviewing these and related factors, the Trustees concluded, within the
context of their overall conclusions regarding the Agreement, that the
performance of the Fund and the Adviser supported the renewal of the Agreement.
The costs of the services to be provided and profits to be realized by the
Adviser and its affiliates from their respective relationships with the Fund.
The Trustees considered the fees charged to the Fund for advisory services as
well as the total expense levels of the Fund. This information included
comparisons (provided both by management and also by an independent third
party) of the Fund's advisory
4
BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
fees and total expense levels to those of their peer groups and information
about the advisory fees charged by the Adviser to comparable accounts. In
considering the fees charged to comparable accounts, the Trustees considered,
among other things, management's representations about the differences between
managing mutual funds as compared to other types of accounts, including the
additional resources required to effectively manage mutual fund assets. In
evaluating the Fund's advisory fees, the Trustees also took into account the
demands, complexity and quality of the investment management of the Fund. The
Trustees considered that over the past several years, management had made
recommendations regarding reductions in advisory fee rates, implementation of
advisory fee breakpoints and the institution of advisory fee waivers and
expense caps. They noted that currently the Fund has an expense cap in place,
and they considered the amounts waived or reimbursed by the Adviser under this
cap. The Trustees noted that the Fund was significantly smaller than its peers,
which negatively affected its expense ratio when compared to its peers.
The Trustees also considered the compensation directly or indirectly received
by the Adviser and its affiliates from their relationships with the Fund. The
Trustees reviewed information provided by management as to the profitability of
the Adviser and its affiliates' relationships with the Fund, and information
about the allocation of expenses used to calculate profitability. In this
regard, the Fund, at the request of the Independent Trustees, retained an
independent accounting firm to review the cost allocation methods used by the
Adviser to determine profitability, and engaged in extensive discussions with
the Adviser regarding such methods and Adviser profitability generally. The
Trustees also considered that IXIS Advisors had proposed changes to the Fund's
transfer agency and custodial arrangements which, although beneficial to the
Fund, had resulted in increased costs and/or decreased revenues to IXIS
Advisors. They also reviewed information provided by management about the
effect of distribution costs and Fund growth on Adviser profitability. When
reviewing profitability, the Trustees also considered information about court
cases in which adviser profitability was an issue, the performance of the Fund,
the expense levels of the Fund, and whether the Adviser had implemented
breakpoints and/or an expense cap with respect to the Fund.
After reviewing these and related factors, the Trustees concluded, within the
context of their overall conclusions regarding the Agreement, that the advisory
fees charged to the Fund were fair and reasonable, and that the costs of these
services generally and the related profitability of the Adviser and its
affiliates in respect of their relationships with the Fund supported the
renewal of the Agreement.
Economies of Scale. The Trustees considered the existence of any economies of
scale in the provision of services by the Adviser and whether those economies
are shared with the Fund through breakpoints in their investment advisory fees
or other means, such as expense waivers. The Trustees noted that the Fund is
subject to an expense cap. In considering these issues, the Trustees also took
note of the costs of the services provided (both on an absolute and a relative
basis) and the profitability to the Adviser and its affiliates of their
relationships with the Fund, as discussed above.
After reviewing these and related factors, the Trustees considered, within the
context of their overall conclusions regarding the Agreement, that the extent
to which economies of scale were shared with the Fund supported the renewal of
the Agreement.
The Trustees also considered other factors, which included but were not limited
to the following:
.. whether the Fund has operated in accordance with its investment objective
and the Fund's record of compliance with its investment restrictions, and
the compliance programs of the Fund and the Adviser. They also considered
the compliance related resources the Adviser and its affiliates were
providing to the Fund.
.. the nature, quality, cost and extent of administrative and shareholder
services performed by the Adviser and its affiliates, both under the
Agreement and under separate agreements covering transfer agency and
administrative services.
.. so-called "fallout benefits" to the Adviser, such as the engagement of
affiliates of the Adviser to provide distribution, brokerage and transfer
agency services to the Fund, and the benefits of research made available to
the Adviser by reason of brokerage commissions generated by the Fund's
securities transactions. The Trustees also considered the fact that IXIS
Advisors' parent company benefits from the retention of affiliated Advisers.
The Trustees considered the possible conflicts of interest associated with
these fallout and other benefits, and the reporting, disclosure and other
processes in place to disclose and monitor such possible conflicts of
interest.
Based on their evaluation of all factors that they deemed to be material,
including those factors described above, and assisted by the advice of
independent counsel, the Trustees, including the Independent Trustees,
concluded that the existing advisory agreement should be continued through
June 30, 2007.
5
AEW REAL ESTATE INCOME FUND -- PORTFOLIO OF INVESTMENTS
Investments as of July 31, 2006 (Unaudited)
Shares Description Value (a)
--------------------------------------------------------------------
Common Stocks -- 90.1% of Net Assets
Real Estate Investment Trusts -- 90.1%
REITs - Apartments -- 12.3%
40,000 Archstone-Smith Trust $ 2,098,800
63,000 Camden Property Trust 4,816,350
55,000 GMH Communities Trust 689,700
40,000 Mid-America Apartment Communities, Inc. 2,284,800
41,500 Municipal Mortgage & Equity LLC 1,132,950
---------------
11,022,600
---------------
REITs - Healthcare -- 15.1%
65,000 Health Care Property Investors, Inc. 1,782,300
121,000 Healthcare Realty Trust, Inc. 4,003,890
40,800 Nationwide Health Properties, Inc. 967,776
110,000 Omega Healthcare Investors, Inc. 1,469,600
190,500 Senior Housing Properties Trust 3,541,395
50,000 Ventas, Inc. 1,786,500
---------------
13,551,461
---------------
REITs - Hotels -- 3.5%
30,000 Ashford Hospitality Trust 352,500
63,000 Hospitality Properties Trust 2,744,910
---------------
3,097,410
---------------
REITs - Industrial -- 7.0%
25,000 EastGroup Properties, Inc. 1,175,750
62,400 First Potomac Realty Trust 1,765,296
70,500 Liberty Property Trust 3,302,925
---------------
6,243,971
---------------
REITs - Office -- 22.8%
85,400 Brandywine Realty Trust, Inc. 2,702,056
77,000 Glenborough Realty Trust, Inc. 1,709,400
100,000 Highwoods Properties, Inc. 3,724,000
311,300 HRPT Properties Trust 3,657,775
43,000 Kilroy Realty Corp. 3,177,270
70,000 Mack-Cali Realty Corp. 3,381,700
45,500 Parkway Properties, Inc. 2,068,885
---------------
20,421,086
---------------
REITs - Regional Malls -- 7.0%
62,000 Glimcher Realty Trust 1,466,300
35,000 Macerich Co. (The) 2,546,250
150,000 Primaris Retail, 144A 2,293,011
---------------
6,305,561
---------------
REITs - Shopping Centers -- 7.3%
140,000 Cedar Shopping Centers, Inc. 2,122,400
30,000 Equity One, Inc. 656,100
37,000 Heritage Property Investment Trust 1,335,330
39,000 Ramco-Gershenson Properties Trust 1,147,770
40,000 Tanger Factory Outlet Centers, Inc. 1,316,000
---------------
6,577,600
---------------
REITs - Storage -- 0.9%
48,500 Extra Space Storage, Inc. 772,604
---------------
REITs - Triple Net Lease -- 14.2%
30,600 CentraCore Properties Trust 788,256
27,000 Entertainment Properties Trust 1,149,390
90,000 iStar Financial, Inc. 3,578,400
70,000 Lexington Corporate Properties Trust 1,394,400
Shares Description Value (a)
------------------------------------------------------------------------------
REITs - Triple Net Lease -- continued
100,000 National Retail Properties $ 2,084,000
65,000 Realty Income Corp. 1,487,200
96,900 Spirit Finance Corp. 1,075,590
90,000 Trustreet Properties, Inc. 1,197,900
---------------
12,755,136
---------------
Total Common Stocks (Identified Cost $52,249,293) 80,747,429
---------------
Preferred Stocks -- 36.6%
Real Estate Investment Trusts -- 36.6%
REITs - Apartments -- 3.9%
50,000 Apartment Investment & Management Co., Series G 1,323,000
42,000 Apartment Investment & Management Co., Series U 1,053,360
45,000 Apartment Investment & Management Co., Series Y 1,140,750
---------------
3,517,110
---------------
REITs - Diversified -- 4.1%
54,800 Crescent Real Estate Equities Co., Series B 1,426,444
50,000 Vornado Realty Trust, Series G 1,186,000
43,800 Vornado Realty Trust, Series H 1,054,266
---------------
3,666,710
---------------
REITs - Factory Outlets -- 0.2%
6,677 Mills Corp. (The), Series E 152,503
---------------
REITs - Healthcare -- 3.3%
50,000 Health Care Property Investors, Inc., Class F 1,235,000
65,400 Omega Healthcare Investors, Inc., Series D 1,683,396
---------------
2,918,396
---------------
REITs - Hotels -- 6.2%
75,000 Boykin Lodging Co., Series A 1,941,000
25,000 Felcor Lodging Trust, Inc., Series C 614,500
71,900 Hospitality Properties Trust, Series B 1,855,020
15,000 LaSalle Hotel Properties, Series A 393,000
30,000 Strategic Hotel Capital, Inc., Series B 752,400
---------------
5,555,920
---------------
REITs - Industrial -- 3.6%
70,000 Duke Realty Corp., Series M 1,725,500
60,000 PS Business Parks, Inc., Series O 1,508,400
---------------
3,233,900
---------------
REITs - Office -- 5.3%
40,000 Corporate Office Properties Trust 1,014,000
90,400 HRPT Properties Trust, Series B 2,335,032
30,000 LBA Realty Fund LP(c) 1,450,800
---------------
4,799,832
---------------
REITs - Regional Malls -- 3.4%
75,000 Glimcher Realty Trust, Series F 1,920,000
45,000 Taubman Centers, Inc., Series H 1,132,650
---------------
3,052,650
---------------
REITs - Shopping Centers -- 6.3%
27,000 Cedar Shopping Centers, Inc., Series A 706,050
42,200 Developers Diversified Realty Corp., Series F 1,080,742
21,300 Developers Diversified Realty Corp., Series G 546,984
13,000 Federal Realty Investment Trust, Series B 326,950
6,700 Ramco-Gershenson Properties Trust, Series B 172,324
27,000 Urstadt Biddle Properties, Inc., Series C 2,848,500
---------------
5,681,550
---------------
See accompanying notes to financial statements.
6
AEW REAL ESTATE INCOME FUND -- PORTFOLIO OF INVESTMENTS (continued)
Investments as of July 31, 2006 (Unaudited)
Shares Description Value (a)
----------------------------------------------------------------------------------------------------
REITs - Triple Net Lease -- 0.3%
9,000 Realty Income Corp., Series D $ 229,410
---------------
Total Preferred Stocks (Identified Cost $32,443,277) 32,807,981
---------------
Principal
Amount
----------------------------------------------------------------------------------------------------
Short-Term Investments -- 0.3%
$ 289,941 Tri-Party Repurchase Agreement with Fixed Income Clearing
Corporation, dated 7/31/2006 at 3.45% to be repurchased at
$289,969 on 8/1/2006, collateralized by $300,000
U.S. Treasury Note, 4.500% due 2/28/2011 valued at $306,071,
including accrued interest (Identified Cost $289,941) 289,941
---------------
Total Investments -- 127.0%
(Identified Cost $84,982,511)(b) 113,845,351
---------------
Auction Market Preferred Shares plus
cumulative unpaid dividends -- (31.3)% (28,027,608)
Other Assets Less Liabilities -- 4.3% 3,810,752
---------------
Net Assets -- 100% $ 89,628,495
===============
(a) See Note 2a of Notes to Financial Statements.
(b) Federal Tax Information: (Amounts exclude certain adjustments
made at the end of the Fund's fiscal year for tax purposes. Such
adjustments are primarily due to wash sales.):
At July 31, 2006, the net unrealized appreciation on investments
based on cost of $84,982,511 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 $ 29,360,921
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (498,081)
---------------
Net unrealized appreciation $ 28,862,840
===============
(c) Non-income producing security.
REITs Real Estate Investment Trusts
144A Security exempt from registration under Rule 144A of the Securities Act of 1933. This
security may be resold in transactions exempt from registration, normally to qualified
institutional buyers. At July 31, 2006, the value of this security amounted to
$2,293,011 or 2.6% of net assets
Holdings at July 31, 2006 as a Percentage of Net Assets
Office 28.1%
Healthcare 18.4
Apartments 16.2
Triple Net Lease 14.5
Shopping Centers 13.6
Industrial 10.6
Regional Malls 10.4
Hotels 9.7
Diversified 4.1
Others, less than 2% each 1.1
See accompanying notes to financial statements.
7
STATEMENT OF ASSETS & LIABILITIES
July 31, 2006 (Unaudited)
ASSETS
Investments at cost $ 84,982,511
Net unrealized appreciation 28,862,840
------------
Investments at value 113,845,351
Receivable for securities sold 2,500,000
Dividends and interest receivable 501,306
Receivable for open swap agreements
(Note 8) 914,665
------------
TOTAL ASSETS 117,761,322
------------
LIABILITIES
Management fees payable 44,433
Administrative fees payable 6,250
Other accounts payable and accrued
expenses 54,536
------------
TOTAL LIABILITIES 105,219
------------
Auction Market Preferred Shares (1,120
shares outstanding) at liqudation
value plus cumulative unpaid
dividends 28,027,608
------------
NET ASSETS $ 89,628,495
============
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
Overdistributed net investment income (1,224,004)
Accumulated net realized gain on
investments, foreign currency
transactions and swap agreements 7,074,600
Net unrealized appreciation on
investments, foreign currency
translations and swap agreements 29,777,551
------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 89,628,495
============
COMPUTATION OF NET ASSET VALUE PER
COMMON SHARE:
Net assets $ 89,628,495
============
Common shares issued and outstanding 3,833,390
============
Net asset value per share
($89,628,495/3,833,390 shares of
beneficial interest) $ 23.38
============
Market Value (closing price on
American Stock Exchange) $ 19.90
============
See accompanying notes to financial statements.
8
STATEMENT OF OPERATIONS
For the Six Months Ended July 31, 2006 (unaudited)
INVESTMENT INCOME
Dividends $2,525,331
Interest 8,787
Less net foreign taxes withheld (11,286)
----------
2,522,832
----------
Expenses
Management fees 455,852
Trustees' fees and expenses 27,159
Administrative fees 74,382
Custodian fees and expenses 7,818
Transfer agent fees 5,467
Audit fees 15,194
Legal fees 17,385
Shareholder reporting expenses 18,569
Preferred stock auction fees 35,194
Rating agency fees 5,455
American Stock Exchange fees 7,439
Miscellaneous expenses 11,086
----------
Total expenses 681,000
Less reimbursement/waiver (Note 4) (236,625)
----------
Net expenses 444,375
----------
Net investment income 2,078,457
----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS, FOREIGN CURRENCY
TRANSACTIONS AND SWAP AGREEMENTS
Realized gain on:
Investments - net 2,219,052
Capital gain distributions received
(Note 2) 611,574
Swap agreements - net 187,846
Foreign currency transactions - net 214
Change in unrealized appreciation
(depreciation) on:
Investments - net 1,337,506
Swap agreements - net 71,838
Foreign currency translations - net (14)
----------
Net realized and unrealized gain on
investments, foreign currency
transactions and swap agreements 4,428,016
----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 6,506,473
----------
LESS DISTRIBUTIONS TO PREFERRED
SHAREHOLDERS FROM:
Net investment income (657,422)
----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS APPLICABLE TO COMMON
SHAREHOLDERS $5,849,051
==========
See accompanying notes to financial statements.
9
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended
July 31, Year Ended
2006 January 31,
(unaudited) 2006
---------------- -----------
FROM OPERATIONS:
Net investment income $ 2,078,457 $ 3,937,358
Net realized gain on investments,
foreign currency transactions and
swap agreements 3,018,686 8,367,985
Net change in unrealized appreciation
(depreciation) on investments,
foreign currency translations and
swap agreements 1,409,330 5,259,851
----------- -----------
Net increase in net assets resulting
from operations 6,506,473 17,565,194
----------- -----------
LESS DISTRIBUTIONS TO PREFERRED
SHAREHOLDERS FROM:
Net investment income (657,422) (472,513)
Short-term capital gains -- (84,580)
Long-term capital gains -- (411,299)
----------- -----------
(657,422) (968,392)
----------- -----------
Increase in assets from operations
applicable to common shareholders 5,849,051 16,596,802
----------- -----------
LESS DISTRIBUTIONS TO COMMON
SHAREHOLDERS FROM:
Net investment income (2,645,039) (3,531,588)
Short-term capital gains -- (632,156)
Long-term capital gains -- (3,074,079)
----------- -----------
Total distributions (2,645,039) (7,237,823)
----------- -----------
Net increase in net assets 3,204,012 9,358,979
----------- -----------
NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS
Beginning of the period 86,424,483 77,065,504
----------- -----------
End of the period $89,628,495 $86,424,483
=========== ===========
OVERDISTRIBUTED NET INVESTMENT INCOME $(1,224,004) $ --
=========== ===========
See accompanying notes to financial statements.
10
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period.
Year Ended January 31,
------------------------------------------------------------------
For the Period
Six Months Ended November 26, 2002*
June 30, through January 31,
2006 2006 2005 2004 2003
---------------- -------- ------- ------- -------------------
(unaudited)
Net asset value, beginning of period
(common shares) $ 22.55 $ 20.10 $ 19.70 $ 14.03 $ 14.33(a)
Income from investment operations:
Net investment income(b) 0.54 1.03 1.12 0.99 0.09
Net realized and unrealized gain
(loss) on investments 1.15 3.56 0.90 6.71 (0.24)
-------- -------- ------- ------- -------
Total from investment operations 1.69 4.59 2.02 7.70 (0.15)
-------- -------- ------- ------- -------
Less distributions to preferred
shareholders from:
Net investment income (0.17)(k) (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) --
-------- -------- ------- ------- -------
Total distributions to preferred
shareholders (0.17) (0.25) (0.12) (0.08) --
-------- -------- ------- ------- -------
Total from investment operations
applicable to common shareholders 1.52 4.34 1.90 7.62 (0.15)
-------- -------- ------- ------- -------
Less distributions to common
shareholders from:
Net investment income (0.69)(k) (0.92) (1.03) (1.00) (0.09)
Short-term gain -- (0.17) (0.00)(f) (0.72) (0.00)(f)
Long-term gain -- (0.80) (0.44) (0.07) (0.01)
Tax return of capital -- -- (0.03) -- (0.02)
-------- -------- ------- ------- -------
Total distributions to common
shareholders (0.69) (1.89) (1.50) (1.79) (0.12)
-------- -------- ------- ------- -------
Common shares offering costs charged to
paid-in capital -- -- -- -- (0.03)
-------- -------- ------- ------- -------
Preferred shares underwriting
commissions and offering costs -- -- -- (0.16) --
-------- -------- ------- ------- -------
Net asset value, end of period (common
shares) $ 23.38 $ 22.55 $ 20.10 $ 19.70 $ 14.03
======== ======== ======= ======= =======
Market value, end of period (common
shares) $ 19.90 $ 19.35 $ 17.40 $ 17.87 $ 14.55
======== ======== ======= ======= =======
Total return on market value (%)(j) 6.56 23.03 6.11 37.45 (2.23)(c)
Total return on net asset value
(%) (i)(j) 7.42 24.12 11.19 56.84 (1.29)(c)
Ratio of expenses to average net assets
applicable to common shares, before
waivers (%)(e) 1.58 1.65 1.81 2.00 1.85
Ratio of expenses to average net assets
applicable to common shares, after
waivers (%)(d)(e) 1.03 1.09 1.23 1.38 1.37
Ratio of net investment income to
average net assets applicable to
common shares, before waivers (%)(e) 4.27 4.20 5.11 5.35 2.80
Ratio of net investment income to
average net assets applicable to
common shares, after waivers (%)(e) 4.82 4.76 5.69 5.97 3.28
Portfolio turnover rate (%) 7 15 8 31 1
Net assets applicable to common shares,
end of period (000's) $ 89,628 $ 86,424 $77,066 $75,503 $53,776
Auction market preferred shares:
Total shares outstanding 1,120 1,120 1,120 1,120 --
Asset coverage per share(g) $105,050 $102,168 $93,820 $92,414 $ --
Involuntary liquidation preference per
share(h) $ 25,000 $ 25,000 $25,000 $25,000 $ --
Approximate market value per share $ 25,000 $ 25,000 $25,000 $25,000 $ --
* Commencement of operations.
(a)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.00 offering
price.
(b)Calculated using the average common shares outstanding during the period.
(c)Total return on net asset value is calculated assuming a purchase at the
offering price of $15.00 less the sales load of $0.675 paid by the
shareholder on the first day and the ending net asset value per share. Total
return on market value is calculated assuming a purchase at the offering
price of $15.00 on the first day and a sale at the current market price of
the last day of the period.
(d)The investment adviser and the Fund's administrator agreed to waive a
portion of their fees during the period. Without these waivers, expense
ratios would have been higher. 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.
(k)A portion of distributions from net investment income may be redesignated in
accordance with federal tax regulations as a capital gain distribution or as
a return of capital. See Note 2.
See accompanying notes to financial statements.
11
NOTES TO FINANCIAL STATEMENTS
July 31, 2006 (Unaudited)
1. Organization. AEW Real Estate Income Fund (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "1940 Act"), as a
non-diversified closed-end management investment company. The Fund is organized
under the laws of the Commonwealth of Massachusetts by an Amended and Restated
Agreement and Declaration of Trust dated October 10, 2002. The Fund's primary
investment objective is high current income; the Fund's secondary investment
objective is capital appreciation. The Fund seeks to achieve its 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 value, as reported by pricing services
recommended by the investment adviser's pricing committee and approved by the
Board of Trustees. Such pricing services generally use the security's last sale
price on the exchange or market where primarily traded or, if there is no
reported sale during the day, the closing bid price. Securities traded on the
NASDAQ National Market are valued at the NASDAQ Official Closing Price
("NOCP"), or if lacking a 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 60 days are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith by the
Fund's investment adviser using consistently applied procedures under the
general supervision of the Board of Trustees.
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 equity 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. 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 applicable. 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, other than investment securities, 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 price of such securities may be more volatile than those
of comparable U.S. companies and the U.S. government.
12
NOTES TO FINANCIAL STATEMENTS (continued)
July 31, 2006 (Unaudited)
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 six months ended July 31, 2006, the dividend rates for AMPS
ranged from 4.30% to 5.10%. The dividend rate for AMPS on July 31, 2006 was
5.07%. 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 in accordance with federal
tax regulations, which may differ from accounting principles generally accepted
in the United States of America. When the Fund identifies the character of
distributions paid by REITs in the previous calendar year, certain
distributions to Fund shareholders may be redesignated as capital gain
distributions or, if in excess of taxable income, as a return of capital. For
the year ended January 31, 2006, 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. For the six
months ended July 31, 2006, no redesignations have been made with respect to
distributions paid as disclosed within the Statement of Changes in Net Assets.
Permanent differences are primarily due to differing treatments for book and
tax purposes of items such as foreign currency transactions and swap
agreements. 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. Temporary differences between book
and tax distributable earnings are primarily due to wash sales.
Tax characterization of distributions are determined on an annual basis. The
tax character of distributions paid for the year ended January 31, 2006 was as
follows:
2006
- ----
Distributions from:
Ordinary income $4,720,837
Long-term capital gains 3,485,378
----------
$8,206,215
==========
Differences between these amounts and those reported in the Statement of
Changes in Net Assets are primarily attributable to different book and tax
treatment for interest rate swaps agreements and short-term capital gains.
f. Swap Agreements. The Fund may enter into swap agreements to manage its
exposure to the financial markets. A swap is an agreement to exchange the
return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate, total return and forward
swap spread lock swap agreements to manage its exposure to interest rates.
Interest rate swap agreements involve the exchange by the Fund with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal.
Swaps are marked to market daily based upon quotations from market makers and
the change in value, if any, is recorded as unrealized gain or loss in the
Statement of Operations. Payments received or made at the end of the
measurement period are recorded as realized gain or loss in the Statement of
Operations. These financial instruments are not actively traded on financial
markets. The values assigned to these instruments are based upon the best
available information and because of the uncertainty of the valuation, these
values may differ significantly from the values that would have been realized
had a ready market for these instruments existed, and the differences could be
material. Entering into these agreements involves, to varying degrees, elements
of credit, legal, market and documentation risk in excess of the amounts
recognized 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 July 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 on behalf of 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.
13
NOTES TO FINANCIAL STATEMENTS (continued)
July 31, 2006 (Unaudited)
i. New Accounting Pronouncement. In July 2006, Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement 109 (FIN 48) was issued and is effective for
fiscal years beginning after December 15, 2006. FIN 48 sets forth a threshold
for financial statement recognition, measurement and disclosure of a tax
position taken or expected to be taken on a tax return. Management is currently
evaluating the impact, if any, the adoption of FIN 48 will have on the Fund's
net assets and results of operations.
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 six months ended July 31, 2006,
purchases and sales of securities (excluding short-term investments) were
$7,607,243 and $10,033,239, 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. 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 six months ended July 31, 2006, management fees and waivers for the
Fund were as follows:
Percentage of Average Daily Managed Assets
- ------------------------------------------
Gross Management Waiver of Net Management
Fee Management Fee Fee Gross Net
---------------- -------------- -------------- ----- ---
$455,852 $199,434 $256,418 0.80% 0.45%
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"), 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.
b. Administrative Expense. IXIS Asset Management Advisors, L.P. ("IXIS
Advisors"), a wholly-owned subsidiary of IXIS US Group, performs certain
administrative services for the Fund and has subcontracted with State Street
Bank and Trust Company ("State Street Bank") to serve as sub-administrator. 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.
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.
14
NOTES TO FINANCIAL STATEMENTS (continued)
July 31, 2006 (Unaudited)
For the six months ended July 31, 2006, the following was paid to IXIS Advisors
for administrative services:
Percentage of Average Daily Managed Assets
- ------------------------------------------
Gross Management Waiver of Net Management
Fee Management Fee Fee Gross Net
---------------- -------------- -------------- ----- ---
$74,382 $37,191 $37,191 0.13% 0.065%
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
Advisors, 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.
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 included in realized gains in the Statement of
Operations. For the six months ended July 31, 2006, $1,271 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 six months ended
July 31, 2006 and the year ended January 31, 2006, there were no transactions
in common shares.
8. Swap Agreements. Open swap agreements as of July 31, 2006 are as follows:
Notional Expiration Unrealized
Amount Date Description Appreciation
-------- ---------- ---------------------------------------------------- ------------
Interest Rate Swaps
$14,000,000 3/3/2008 Agreement with Bank of America dated 2/28/2003 to $469,894
pay the notional amount multiplied by 3.104% and to
receive the notional amount multiplied by the 1 week
Floating Rate London Interbank Offering Rate
("LIBOR") adjusted by a specific spread.
$8,400,000 3/1/2010 Agreement with Bank of America dated 2/28/2003 to 444,771
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.
--------
$914,665
========
9. Other. On July 3, 2006, the Fund declared three monthly dividends of $0.115
per common share for the months of July, August and September payable on
July 28, August 25, and September 29, respectively. Characterization of the
dividends for tax purposes, determined annually may result in a portion of the
dividends being designated as a capital gain distribution or 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.
15
SHAREHOLDER PROXY RESULTS
It is currently anticipated that the Fund's 2007 annual meeting of Shareholders
will be held in May 2007. Shareholders submitting any proposals for the Fund
intended to be presented at the 2007 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 14, 2007 and not earlier than February 28, 2007. Shareholders
that wish for the Fund to include a proposal in the proxy statement for next
year's annual meeting of Shareholders must submit their proposal so that it is
received by the Fund no later than December 29, 2006. 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 14, 2006,
shareholders of the AEW Real Estate Income Fund voted for the following
proposal:
1. Election of Trustees
For Against Abstained* Total Votes
- --- ------- ---------- -----------
Graham T. Allison, Jr. 2,750,938.73 44,662 0 2,795,600.73
Robert Blanding 2,752,138.73 43,462 0 2,795,600.73
Paul Chenault 2,751,398.73 44,202 0 2,795,600.73
Richard Darman 2,749,958.73 45,642 0 2,795,600.73
* Includes Broker Non-Votes (if any).
Messrs Charles D. Baker, Edward A. Benjamin, Daniel M. Cain, Kenneth J. Cowan,
John T. Hailer and John A. Shane and Mses. Sandra O. Moose and Cynthia L.
Walker, Trustees of the Fund, each have terms of office as Trustee that
continued after the Meeting.
The statement of additional information includes additional information about
Trustees of the Fund and is available, without charge, upon request, by calling
(800) 862-4863.
16
[LOGO] AEW
CEAEW58-0706
Item 2. Code of Ethics.
Not applicable
Item 3. Audit Committee Financial Expert.
Not applicable
Item 4. Principal Accountant Fees and Services.
Not applicable
Item 5. Audit Committee of Listed Registrants.
Not applicable
Item 6. Schedule of Investments.
Included as part of the Report to Shareholders filed as Item 1 herewith.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers.
(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 February 28..... 1,209.490 19.13 1,209.490 N/A
March 1 through March 31........... 1,168.106 19.63 1,168.106 N/A
April 1 through April 30........... 936.779 19.81 936.779 N/A
May 1 through May 31............... 996.556 19.17 996.556 N/A
June 1 through June 30............. 971.019 18.69 971.019 N/A
July 1 through July 31............. 946.351 19.29 946.351 N/A
TOTAL.............................. 6,228.301 -- 6,228.301 --
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) Not applicable.
(a) (2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to 30a-2 under the Investment Company Act of 1940
(17 CFR 270.30a-2), are filed herewith as exhibits (a)(2)(1) and
(a)(2)(2), respectively.
(a) (3) Not applicable.
(b) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Section 906 of Sarbanes-Oxley Act of2002 are filed
herewith as Exhibit (b).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AEW Real Estate Income Fund
By: /s/ John T. Hailer
------------------------------
Name: John T. Hailer
Title: President and Chief Executive
Officer
Date: September 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: September 27, 2006
By: /s/ Michael C. Kardok
------------------------------
Name: Michael C. Kardok
Title: Treasurer
Date: September 27, 2006