UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-09117
Morgan Stanley Real Estate Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: November 30, 2003
Date of reporting period: May 31, 2003
Item 1. Report to Shareholders
Morgan Stanley Real Estate Fund
LETTER TO THE SHAREHOLDERS - MAY 31, 2003
Dear Shareholder:
This semiannual report to shareholders of Morgan Stanley Real Estate Fund covers
the six-month period ended May 31, 2003. The period can be broken into two
distinct phases. From December 2002 through mid-March 2003, the real estate
sector posted modest losses, although real estate investment trusts (REITs)
outperformed the wider equity market. From mid March through the end of May the
sector rallied, along with the wider market.
Because real estate has historically been a lagging participant in economic
recoveries, we had been concerned that REITs would not participate in a rally if
investors believed it to be part of the beginning of an economic recovery. In
our opinion, REITs were able to maintain their relative performance primarily
due to a flow of funds from a number of constituents. First, the major pension
plans implemented a favorable shift to real estate in asset allocation models,
as a result of what they considered diversification attributes and attractive
returns for REITs. Further, retail investors were attracted to the dividends
REITs have paid, in a market in which investors are starved for yield. Finally,
some investors remained attracted to REITs because these trusts own hard assets
that trade in the private market, which may provide support for their
valuations. In fact, the direct property markets have also experienced a surge
in demand resulting from institutional and retail investors' increased
allocations to real estate. In addition, there are few distressed sellers of
real estate. The 10-year Treasury ended the period with a yield of 3.35 percent,
which allows buyers to finance purchases with highly attractive mortgage debt.
Despite firm property values, it is important to note that an absence of
meaningful tenant demand -- a result of a weak economy and an absence of job
growth -- continued to have a negative effect on real estate fundamentals. As a
result, owners of apartments, office and industrial buildings and hotels
experienced, for the most part, deterioration in property cash flow. Only the
owners of retail properties were immune from deteriorating fundamentals as
retailers continued to expand despite a weak sales environment.
At this writing there is some investor concern that the REIT market may need to
take a breather after continuing to post strong returns in the face of
still-deteriorating fundamentals for many of the companies. The public market
pricing reflects a sector that is trading at a 7.5 percent premium to its
current private real estate valuation, which is modestly in excess of its
historical average. Typically, this level of pricing encourages REITs to issue
equity. Most REITs have, however, been reluctant to issue equity to date, as
they have not had a need for the proceeds. This is primarily because they have
not been successful in acquiring properties in the face of more-aggressive
private buyers. A more-active equity-offering calendar often serves as a signal
that
Morgan Stanley Real Estate Fund
LETTER TO THE SHAREHOLDERS - MAY 31, 2003 continued
the market is more fully priced. Bullish REIT proponents argue that REIT stocks
are behaving similarly to the pattern in the broad market in that their stocks
are rallying ahead of an expected improvement in their fundamentals, despite
little evidence of improvement. In addition, they expect that the favorable fund
flows will continue to support REIT share prices.
Performance and Portfolio Strategy
For the six-month period ended May 31, 2003, the Fund's Class A, B, C and D
shares produced total returns of 13.65 percent, 13.18 percent, 13.18 percent and
13.79 percent, respectively, versus 12.28 percent for the NAREIT Equity Index*
and 12.99 percent for the Lipper Real Estate Fund Index.** The performance of
the Fund's four share classes varies because each has different expenses. The
total return figures given assume the reinvestment of all distributions but do
not reflect the deduction of any applicable sales charges. If sales charges were
included, performance would be lower. Past performance is no guarantee of future
results.
We attribute the Fund's strong relative performance to our core philosophy of
seeking to own stocks that provide the best valuation relative to their
underlying real estate values, regardless of dividend yield or perceived
earnings stability. We were pleased with performance in the manufactured-home
sector, where one company was the recipient of an all-cash offer at a large
premium to its prevailing share price. Despite difficulties in this sector, our
weighting reflected our conviction that the stock was priced at a steep discount
to the value of its underlying real estate.
We continue to shape the portfolio with companies offering attractive
fundamental valuations relative to their underlying real estate value. Thus, the
top-down weightings in the portfolio reflect this preference. In the office
sector, we continue to have a weaker than consensus outlook for the prospects of
a recovery in rental rates. However, within the sector we favor a number of
companies that provide exposure to the larger Central Business District (CBD)
office markets as opposed to suburban markets. We believe that the disparity in
pricing of CBD versus suburban office assets in the private real estate market
is significantly wider than the pricing of the stocks in
- ---------------------
*The NAREIT Equity Index measures the performance of real estate securities,
which will fluctuate with changes in the values of their underlying
properties. The Index is an unmanaged benchmark of real estate investment
trusts compiled by the National Association of Real Estate Investment Trusts
and the returns do not include any sales charges or fees. Such costs would
lower performance. It is not possible to invest directly in an index.
**The Lipper Real Estate Fund Index is an equally weighted performance index of
the largest qualifying funds (based on net assets) in the Lipper Real Estate
Funds classification. The Index, which is adjusted for capital gains
distributions and income dividends, is unmanaged and should not be considered
an investment. There are currently 30 funds represented in this Index.
2
Morgan Stanley Real Estate Fund
LETTER TO THE SHAREHOLDERS - MAY 31, 2003 continued
the public market. Our preference for stocks of CBD owners led to the Fund's
outperformance in this sector.
Although the hotel sector fared extremely poorly, the Fund benefited from a few
key holdings that are owners of major urban hotel assets, have superior balance
sheets and are affiliated with a major brand. The retail sector continued to
outperform in this period. We favored the owners of malls over strip centers as
a result of their good relative valuations. Our overweighting of mall stocks
more than offset our underweighting of strip centers, leading to outperformance
in this sector. Finally, we continued to underweight health-care stocks,
believing these companies trade at significant premiums to asset value, perhaps
because of the perceived stability of their earnings. This sector weakened in
the period as a result of concerns with regard to a number of their tenants.
We appreciate your ongoing support of Morgan Stanley Real Estate Fund and look
forward to continuing to serve your investment needs.
<Table>
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /S/ MITCHELL M. MERIN
Charles A. Fiumefreddo Mitchell M. Merin
Chairman of the Board President
</Table>
PROXY VOTING POLICIES AND PROCEDURES
A description of the Fund's policies and procedures with respect to the voting
of proxies relating to the Fund's portfolio securities is available without
charge, upon request, by calling (800) 869-NEWS. This information is also
available on the Securities and Exchange Commission's website at
http://www.sec.gov.
3
Morgan Stanley Real Estate Fund
FUND PERFORMANCE - MAY 31, 2003
AVERAGE ANNUAL TOTAL RETURNS - PERIOD ENDED MAY 31, 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
CLASS A SHARES*
- ---------------------------------------------------
1 Year 2.60%(1) (2.79)%(2)
Since Inception (4/28/99) 9.46%(1) 8.02 %(2)
<Caption>
CLASS B SHARES**
- ---------------------------------------------------
1 Year 1.76%(1) (3.11)%(2)
Since Inception (4/28/99) 8.58%(1) 8.20 %(2)
</Table>
<Table>
<Caption>
CLASS C SHARES+
- ---------------------------------------------------
1 Year 1.86%(1) 0.88%(2)
Since Inception (4/28/99) 8.59%(1) 8.59%(2)
<Caption>
CLASS D SHARES++
- ---------------------------------------------------
1 Year 2.87%(1)
Since Inception (4/28/99) 9.75%(1)
</Table>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH
LESS THAN THEIR ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES
THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND
SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL VARY
DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES.
- ---------------------
<Table>
(1) Figure shown assumes reinvestment of all distributions and
does not reflect the deduction of any sales charges.
(2) Figure shown assumes reinvestment of all distributions and
the deduction of the maximum applicable sales charge. See
the Fund's current prospectus for complete details on fees
and sales charges.
* The maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for
Class B is 5.0%. The CDSC declines to 0% after six years.
+ The maximum CDSC for Class C is 1.0% for shares redeemed
within one year of purchase.
++ Class D has no sales charge.
</Table>
4
Morgan Stanley Real Estate Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2003 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Common Stocks (95.4%)
Home Building (0.7%)
69,260 Brookfield Homes
Corp. .................. $ 1,205,817
------------
Hotels/Resorts/
Cruiselines (7.2%)
277,500 Hilton Hotels Corp. ..... 3,846,150
6,745 Interstate Hotels
Corp.*.................. 32,578
261,993 Starwood Hotels & Resorts
Worldwide, Inc. ........ 7,592,557
313,200 Wyndham International,
Inc. (Class A)*......... 84,564
------------
11,555,849
------------
Real Estate - Industrial/
Office (5.3%)
392,700 Brookfield Properties
Corp. (Canada).......... 8,494,101
------------
Real Estate - Other
(0.0%)
166,300 Frontline Capital
Group*.................. 0
------------
Real Estate Retail (0.6%)
22,100 Forest City Enterprise,
Inc. (Class A).......... 889,525
------------
REIT - Diversified (2.0%)
77,000 Vornado Realty Trust..... 3,249,400
------------
REIT - Healthcare (1.8%)
125,381 Nationwide Health
Properties, Inc. ....... 1,907,045
67,200 Ventas, Inc. ............ 950,880
------------
2,857,925
------------
REIT - Industrial/ Office
(24.1%)
185,200 AMB Property Corp. ...... 5,076,332
213,200 Arden Realty, Inc. ...... 5,511,220
161,300 Boston Properties,
Inc. ................... 6,761,696
326,195 Equity Office Properties
Trust................... 8,777,908
74,500 Mack-Cali Realty
Corp. .................. 2,560,565
225,510 ProLogis Trust........... 6,063,964
</Table>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
52,600 Reckson Associates Realty
Corp. .................. $ 1,065,150
47,800 SL Green Realty Corp. ... 1,651,012
138,200 Trizec Properties
Inc. ................... 1,510,526
------------
38,978,373
------------
REIT - Lodging/ Resorts
(3.6%)
112,000 FelCor Lodging Trust,
Inc.*................... 950,880
531,900 Host Marriot Corp.*...... 4,787,100
21,400 Innkeepers USA Trust..... 165,422
------------
5,903,402
------------
REIT - Residential
(23.6%)
43,000 Amli Residential
Properties Trust........ 979,110
104,200 Apartment Investment &
Management Co. (Class
A)...................... 3,670,966
308,107 Archstone-Smith Trust.... 7,320,622
199,600 Avalonbay Communities,
Inc. ................... 8,369,228
126,350 Chateau Communities,
Inc. ................... 3,787,973
237,500 Equity Residential
Properties Trust........ 6,289,000
63,000 Essex Property Trust,
Inc. ................... 3,590,370
57,100 Manufactured Home
Communities, Inc. ...... 1,913,421
34,400 Post Properties, Inc. ... 920,888
67,300 Summit Properties
Inc. ................... 1,346,673
------------
38,188,251
------------
REIT - Retail (21.5%)
106,300 Burnham Pacific
Properties, Inc.*....... 103,111
1,300 Chealsea Property Group,
Inc. ................... 54,028
147,400 Federal Realty Investment
Trust................... 4,864,200
87,500 General Growth
Properties, Inc. ....... 5,131,875
11,500 Macerich Co. (The)....... 396,750
58,700 Regency Centers Corp. ... 1,994,626
174,200 Rouse Co. (The).......... 6,466,304
</Table>
See Notes to Financial Statements
5
Morgan Stanley Real Estate Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2003 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
302,700 Simon Property Group,
Inc. ................... $ 11,387,574
225,800 Taubman Centers, Inc. ... 4,380,520
------------
34,778,988
------------
REIT - Self Storage
(5.0%)
183,900 Public Storage, Inc. .... 6,283,863
53,600 Shurgard Storage Centers,
Inc. (Class A).......... 1,815,968
------------
8,099,831
------------
Total Common Stocks
(Cost $139,541,788)...... 154,201,462
------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
Short-Term Investment (5.1%)
Repurchase Agreement
$ 8,206 Joint repurchase
agreement account 1.325%
due 06/02/03 (dated
05/30/03; proceeds
$8,206,906) (a)
(Cost $8,206,000)....... 8,206,000
------------
</Table>
<Table>
<Caption>
VALUE
- ------------------------------------------------------
Total Investments
(Cost $147,747,788) (b)..... 100.5% $162,407,462
Liabilities in Excess of
Other Assets................ (0.5) (795,559)
----- ------------
Net Assets.................. 100.0% $161,611,903
===== ============
</Table>
- ---------------------------------------------------
<Table>
REIT Real Estate Investment Trust.
* Non-income producing security.
(a) Collateralized by federal agency and U.S. Treasury
obligations.
(b) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes.
The aggregate gross unrealized appreciation is
$21,000,907 and the aggregate gross unrealized
depreciation is $6,341,233, resulting in net
unrealized appreciation of $14,659,674.
</Table>
See Notes to Financial Statements
6
Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
May 31, 2003 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $147,747,788)....................................... $162,407,462
Cash........................................................ 82,716
Receivable for:
Shares of beneficial interest sold...................... 405,771
Dividends............................................... 142,042
Prepaid expenses and other assets........................... 68,987
------------
Total Assets............................................ 163,106,978
------------
Liabilities:
Payable for:
Investments purchased................................... 1,054,352
Shares of beneficial interest redeemed.................. 163,840
Investment management fee............................... 133,124
Distribution fee........................................ 92,057
Accrued expenses and other payables......................... 51,702
------------
Total Liabilities....................................... 1,495,075
------------
Net Assets.............................................. $161,611,903
============
Composition of Net Assets:
Paid-in-capital............................................. $147,792,153
Net unrealized appreciation................................. 14,659,674
Undistributed net investment income......................... 1,275,100
Accumulated net realized loss............................... (2,115,024)
------------
Net Assets.............................................. $161,611,903
============
Class A Shares:
Net Assets.................................................. $6,330,302
Shares Outstanding (unlimited authorized, $.01 par value)... 542,989
Net Asset Value Per Share............................... $11.66
============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)....... $12.31
============
Class B Shares:
Net Assets.................................................. $98,013,955
Shares Outstanding (unlimited authorized, $.01 par value)... 8,439,700
Net Asset Value Per Share............................... $11.61
============
Class C Shares:
Net Assets.................................................. $10,103,897
Shares Outstanding (unlimited authorized, $.01 par value)... 869,554
Net Asset Value Per Share............................... $11.62
============
Class D Shares:
Net Assets.................................................. $47,163,749
Shares Outstanding (unlimited authorized, $.01 par value)... 4,042,778
Net Asset Value Per Share............................... $11.67
============
</Table>
See Notes to Financial Statements
7
Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended May 31, 2003 (unaudited)
<Table>
Net Investment Income:
Income
Dividends (net of $11,244 foreign withholding tax).......... $ 5,137,784
Interest.................................................... 6,747
-----------
Total Income............................................ 5,144,531
-----------
Expenses
Investment management fee................................... 720,345
Distribution fee (Class A shares)........................... 7,143
Distribution fee (Class B shares)........................... 460,180
Distribution fee (Class C shares)........................... 45,679
Transfer agent fees and expenses............................ 188,321
Registration fees........................................... 28,264
Professional fees........................................... 25,307
Shareholder reports and notices............................. 13,231
Custodian fees.............................................. 7,092
Trustees' fees and expenses................................. 5,562
Other....................................................... 2,647
-----------
Total Expenses.......................................... 1,503,771
-----------
Net Investment Income................................... 3,640,760
-----------
Net Realized and Unrealized Gain (Loss):
Net realized loss........................................... (1,295,893)
Net change in unrealized appreciation....................... 16,269,593
-----------
Net Gain................................................ 14,973,700
-----------
Net Increase................................................ $18,614,460
===========
</Table>
See Notes to Financial Statements
8
Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2003 NOVEMBER 30, 2002
------------ -----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 3,640,760 $ 2,797,521
Net realized gain (loss).................................... (1,295,893) 2,876,930
Net change in unrealized appreciation (depreciation)........ 16,269,593 (8,589,201)
------------ ------------
Net Increase (Decrease)................................. 18,614,460 (2,914,750)
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income
Class A shares.......................................... (106,402) (190,865)
Class B shares.......................................... (1,399,525) (1,758,242)
Class C shares.......................................... (137,784) (157,574)
Class D shares.......................................... (721,949) (690,840)
Net realized gain*
Class A shares.......................................... (71,883) (448,167)
Class B shares.......................................... (1,182,155) (4,988,791)
Class C shares.......................................... (114,700) (433,743)
Class D shares.......................................... (431,259) (903,604)
------------ ------------
Total Dividends and Distributions....................... (4,165,657) (9,571,826)
------------ ------------
Net increase from transactions in shares of beneficial
interest.................................................. 2,639,195 40,818,445
------------ ------------
Net Increase............................................ 17,087,998 28,331,869
Net Assets:
Beginning of period......................................... 144,523,905 116,192,036
------------ ------------
End of Period
(Including undistributed net investment income of $1,275,100
and $0, respectively)....................................... $161,611,903 $144,523,905
============ ============
- ---------------------
* Includes short-term gains of:
Class A shares -- $ 71,043
Class B shares -- 827,678
Class C shares -- 72,195
Class D shares -- 172,208
------------ ------------
Total short-term gains -- $ 1,143,124
============ ============
</Table>
See Notes to Financial Statements
9
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Real Estate Fund (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a non-diversified, open-end
management investment company. The Fund's investment objective is to provide
high current income and long-term capital appreciation. The Fund seeks to
achieve its objective by investing primarily in equity securities of companies
that are principally engaged in the U.S. real estate industry, including real
estate investment trusts. The Fund was organized as a Massachusetts business
trust on November 23, 1998 and commenced operations on April 28, 1999.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York or American Stock Exchange or other exchange is valued at its
latest sale price prior to the time when assets are valued; if there were no
sales that day, the security is valued at the mean between the last reported bid
and asked price; (2) an equity portfolio security listed or traded on the Nasdaq
is valued at the Nasdaq Official Closing Price; if there were no sales that day,
the security is valued at the mean between the last reported bid and asked
price; (3) all other equity portfolio securities for which over-the-counter
market quotations are readily available are valued at the mean between the last
reported bid and asked price. In cases where a security is traded on more than
one exchange, the security is valued on the exchange designated as the primary
market; (4) for equity securities traded on foreign exchanges, the last reported
sale price or the latest bid price may be used if there were no sales on a
particular day; (5) when market quotations are not readily available or Morgan
Stanley Investment Advisors Inc. (the "Investment Manager") or Morgan Stanley
Investment Management Inc. (the "Sub-Advisor"), an affiliate of the Investment
Manager, determines that the latest sale price, the bid price or the mean
between the last reported bid and asked price do not reflect a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Fund's Trustees; (6) certain portfolio securities may be valued by an outside
pricing service approved by the Fund's Trustees; and (7) short-term debt
securities having a
10
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003 (UNAUDITED) continued
maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. Multiple Class Allocations -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date. The amount of dividends and
distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
either considered temporary or permanent in nature. To the extent these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require
11
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003 (UNAUDITED) continued
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent they exceed
net investment income and net realized capital gains for tax purposes, they are
reported as distributions of paid-in-capital.
G. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. Investment Management and Sub-Advisory Agreements
Pursuant to an Investment Management Agreement, the Fund pays the Investment
Manager a management fee, accrued daily and payable monthly, by applying the
annual rate of 1.0% to the net assets of the Fund determined as of the close of
each business day.
Under a Sub-Advisory Agreement between the Sub-Advisor and the Investment
Manager, the Sub-Advisor provides the Fund with investment advice and portfolio
management relating to the Fund's investments. As compensation for its services
provided pursuant to the Sub-Advisory Agreement, the Investment Manager pays the
Sub-Advisor monthly compensation equal to 40% of its monthly compensation.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager and Sub-Advisor. The Fund
has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the
Act. The Plan provides that the Fund will pay the Distributor a fee which is
accrued daily and paid monthly at the following annual rates: (i) Class A -- up
to 0.25% of the average daily net assets of Class A; (ii) Class B -- 1.0% of the
average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the
average daily net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if
12
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003 (UNAUDITED) continued
for any reason the Plan is terminated, the Trustees will consider at that time
the manner in which to treat such expenses. The Distributor has advised the Fund
that such excess amounts totaled $6,417,234 at May 31, 2003.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended May 31, 2003, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.25% and 1.0%,
respectively.
The Distributor has informed the Fund that for the six months ended May 31,
2003, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $1,658, $139,835
and $3,095, respectively and received $13,147 in front-end sales charges from
sales of the Fund's Class A shares. The respective shareholders pay such charges
which are not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended May 31, 2003 aggregated
$18,498,996 and $18,359,416, respectively.
Morgan Stanley Trust, an affiliate of the Investment Manager, Sub-Advisor and
Distributor, is the Fund's transfer agent.
13
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2003 (UNAUDITED) continued
5. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2003 NOVEMBER 30, 2002
------------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
CLASS A SHARES
Sold.............................................. 81,554 $ 888,347 379,660 $ 4,393,913
Reinvestment of dividends and distributions....... 15,714 162,799 53,889 598,518
Redeemed.......................................... (158,954) (1,699,027) (518,859) (5,867,771)
---------- ------------ ---------- ------------
Net decrease - Class A............................ (61,686) (647,881) (85,310) (875,340)
---------- ------------ ---------- ------------
CLASS B SHARES
Sold.............................................. 750,015 7,991,134 4,723,339 54,060,012
Reinvestment of dividends and distributions....... 204,220 2,109,667 501,362 5,546,652
Redeemed.......................................... (1,555,496) (16,357,375) (3,799,230) (42,048,728)
---------- ------------ ---------- ------------
Net increase (decrease) - Class B................. (601,261) (6,256,574) 1,425,471 17,557,936
---------- ------------ ---------- ------------
CLASS C SHARES
Sold.............................................. 93,803 1,009,852 455,920 5,132,718
Reinvestment of dividends and distributions....... 21,394 221,170 46,720 517,261
Redeemed.......................................... (110,785) (1,183,029) (297,883) (3,274,738)
---------- ------------ ---------- ------------
Net increase - Class C............................ 4,412 47,993 204,757 2,375,241
---------- ------------ ---------- ------------
CLASS D SHARES
Sold.............................................. 1,319,658 14,253,955 2,555,893 28,768,194
Reinvestment of dividends and distributions....... 93,223 966,063 122,547 1,366,471
Redeemed.......................................... (546,962) (5,724,361) (760,131) (8,374,057)
---------- ------------ ---------- ------------
Net increase - Class D............................ 865,919 9,495,657 1,918,309 21,760,608
---------- ------------ ---------- ------------
Net increase in Fund.............................. 207,384 $ 2,639,195 3,463,227 $ 40,818,445
========== ============ ========== ============
</Table>
6. Federal Income Tax Status
As of November 30, 2002, the Fund had temporary book/tax differences
attributable to capital loss deferrals on wash sales.
14
Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<Table>
<Caption>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30, APRIL 28, 1999*
MONTHS ENDED ----------------------------------- THROUGH
MAY 31, 2003 2002 2001 2000 NOVEMBER 30, 1999
------------ ------- ------- ------- -----------------
(unaudited)
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period......... $10.59 $11.39 $10.51 $ 8.63 $10.00
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income++.................. 0.29 0.29 0.35 0.31 0.21
Net realized and unrealized gain
(loss)................................... 1.11 (0.17) 0.93 2.00 (1.38)
------ ------ ------ ------ ------
Total income (loss) from investment
operations.................................. 1.40 0.12 1.28 2.31 (1.17)
------ ------ ------ ------ ------
Less dividends and distributions from:
Net investment income.................... (0.20) (0.28) (0.35) (0.33) (0.20)
Net realized gain........................ (0.13) (0.64) (0.05) (0.04) --
Paid-in-capital.......................... -- -- -- (0.06) --
------ ------ ------ ------ ------
Total dividends and distributions............ (0.33) (0.92) (0.40) (0.43) (0.20)
------ ------ ------ ------ ------
Net asset value, end of period............... $11.66 $10.59 $11.39 $10.51 $ 8.63
====== ====== ====== ====== ======
Total Return+................................ 13.65%(1) 0.88% 12.38% 27.46% (11.88)%(1)
Ratios to Average Net Assets(3):
Expenses..................................... 1.63%(2) 1.63% 1.54% 1.71% 1.81 %(2)
Net investment income........................ 5.51%(2) 2.52% 3.19% 3.20% 3.59 %(2)
Supplemental Data:
Net assets, end of period, in thousands...... $6,330 $6,401 $7,860 $9,943 $5,634
Portfolio turnover rate...................... 13%(1) 28% 40% 57% 27 %(1)
</Table>
- ---------------------
<Table>
* Commencement of operations.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
See Notes to Financial Statements
15
Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30, APRIL 28, 1999*
MONTHS ENDED -------------------------------------- THROUGH
MAY 31, 2003 2002 2001 2000 NOVEMBER 30, 1999
------------ -------- -------- -------- -----------------
(unaudited)
Class B Shares
Selected Per Share Data:
Net asset value,
beginning of period.... $10.55 $11.36 $10.49 $ 8.62 $10.00
------ ------ ------ ------ ------
Income (loss) from
investment operations:
Net investment
income++............ 0.25 0.20 0.27 0.24 0.16
Net realized and
unrealized gain
(loss).............. 1.10 (0.17) 0.92 1.99 (1.37)
------ ------ ------ ------ ------
Total income (loss) from
investment
operations............. 1.35 0.03 1.19 2.23 (1.21)
------ ------ ------ ------ ------
Less dividends and
distributions from:
Net investment
income.............. (0.16) (0.20) (0.27) (0.27) (0.17)
Net realized gain... (0.13) (0.64) (0.05) (0.04) --
Paid-in-capital..... -- -- -- (0.05) --
------ ------ ------ ------ ------
Total dividends and
distributions.......... (0.29) (0.84) (0.32) (0.36) (0.17)
------ ------ ------ ------ ------
Net asset value, end of
period................. $11.61 $10.55 $11.36 $10.49 $ 8.62
====== ====== ====== ====== ======
Total Return+........... 13.18%(1) 0.15% 11.41% 26.41% (12.27)%(1)
Ratios to Average Net
Assets(3):
Expenses................ 2.38%(2) 2.38% 2.36% 2.46% 2.56 %(2)
Net investment income... 4.76%(2) 1.77% 2.37% 2.45% 2.84 %(2)
Supplemental Data:
Net assets, end of
period, in thousands... $98,014 $95,343 $86,479 $75,101 $59,645
Portfolio turnover
rate................... 13%(1) 28% 40% 57% 27 %(1)
</Table>
- ---------------------
<Table>
* Commencement of operations.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
See Notes to Financial Statements
16
Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30, APRIL 28, 1999*
MONTHS ENDED -------------------------------------- THROUGH
MAY 31, 2003 2002 2001 2000 NOVEMBER 30, 1999
------------ -------- -------- -------- -----------------
(unaudited)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of
period.............................. $10.55 $11.36 $10.50 $ 8.62 $10.00
------ ------ ------ ------ ------
Income (loss) from investment
operations:
Net investment income++.......... 0.25 0.20 0.27 0.26 0.16
Net realized and unrealized gain
(loss)........................... 1.11 (0.17) 0.91 1.98 (1.38)
------ ------ ------ ------ ------
Total income (loss) from investment
operations.......................... 1.36 0.03 1.18 2.24 (1.22)
------ ------ ------ ------ ------
Less dividends and distributions
from:
Net investment income............ (0.16) (0.20) (0.27) (0.27) (0.16)
Net realized gain................ (0.13) (0.64) (0.05) (0.04) --
Paid-in-capital.................. -- -- -- (0.05) --
------ ------ ------ ------ ------
Total dividends and distributions.... (0.29) (0.84) (0.32) (0.36) (0.16)
------ ------ ------ ------ ------
Net asset value, end of period....... $11.62 $10.55 $11.36 $10.50 $ 8.62
====== ====== ====== ====== ======
Total Return+........................ 13.18%(1) 0.15% 11.39% 26.50% (12.29)%(1)
Ratios to Average Net Assets(3):
Expenses............................. 2.38%(2) 2.38% 2.36% 2.46% 2.56 %(2)
Net investment income................ 4.76%(2) 1.77% 2.37% 2.45% 2.84 %(2)
Supplemental Data:
Net assets, end of period, in
thousands........................... $10,104 $9,129 $7,504 $6,759 $7,698
Portfolio turnover rate.............. 13%(1) 28% 40% 57% 27 %(1)
</Table>
- ---------------------
<Table>
* Commencement of operations.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
See Notes to Financial Statements
17
Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE PERIOD
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30, APRIL 28, 1999*
MONTHS ENDED -------------------------------------- THROUGH
MAY 31, 2003 2002 2001 2000 NOVEMBER 30, 1999
------------ -------- -------- -------- -----------------
(unaudited)
Class D Shares
Selected Per Share Data:
Net asset value,
beginning of period.... $10.59 $11.40 $10.53 $ 8.64 $10.00
------ ------ ------ ------ ------
Income (loss) from
investment operations:
Net investment
income++............ 0.30 0.30 0.37 0.27 0.15
Net realized and
unrealized gain
(loss).............. 1.12 (0.16) 0.93 2.08 (1.30)
------ ------ ------ ------ ------
Total income (loss) from
investment
operations............. 1.42 0.14 1.30 2.35 (1.15)
------ ------ ------ ------ ------
Less dividends and
distributions from:
Net investment
income.............. (0.21) (0.31) (0.38) (0.36) (0.21)
Net realized gain... (0.13) (0.64) (0.05) (0.04) --
Paid-in-capital..... -- -- -- (0.06) --
------ ------ ------ ------ ------
Total dividends and
distributions.......... (0.34) (0.95) (0.43) (0.46) (0.21)
------ ------ ------ ------ ------
Net asset value, end of
period................. $11.67 $10.59 $11.40 $10.53 $ 8.64
====== ====== ====== ====== ======
Total Return+........... 13.79%(1) 1.14% 12.58% 27.88% (11.69)%(1)
Ratios to Average Net
Assets(3):
Expenses................ 1.38%(2) 1.38% 1.36% 1.46% 1.56 %(2)
Net investment income... 5.76%(2) 2.77% 3.37% 3.45% 3.84 %(2)
Supplemental Data:
Net assets, end of
period, in thousands... $47,164 $33,652 $14,349 $5,193 $26
Portfolio turnover
rate................... 13%(1) 28% 40% 57% 27 %(1)
</Table>
- ---------------------
<Table>
* Commencement of operations.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Calculated based on the net asset value as of the last
business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
See Notes to Financial Statements
18
(This Page Intentionally Left Blank)
(This Page Intentionally Left Blank)
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Joseph J. McAlinden
Vice President
Frances Smith
Vice President and Chief Financial Officer
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
SUB-ADVISOR
Morgan Stanley Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they
do not express an opinion thereon.
This report is submitted for the general information of shareholders of the
Fund. For more detailed information about the Fund, its fees and
expenses and other pertinent information, please read its Prospectus.
The Fund's Statement of Additional Information contains additional
information about the Fund, including its trustees. It is available, without
charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc.,member SIPC.
Morgan Stanley Funds are distributed by Morgan Stanley Distributors Inc.
Morgan Stanley Distributors Inc., member NASD.
MORGAN STANLEY
REAL ESTATE FUND
Semiannual Report
May 31, 2003
36068RPT-11446F03-AP-6/03
Item 9 - Controls and Procedures
The Fund's principal executive officer and principal financial officer
have concluded that the Fund's disclosure controls and procedures are sufficient
to ensure that information required to be disclosed by the Fund 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 with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
Item 10b Exhibits
A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
Items 2 - 8 and Item 10a are not applicable
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.
Morgan Stanley Real Estate Fund
Ronald E. Robison
Principal Executive Officer
July 22, 2003
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.
Ronald E. Robison
Principal Executive Officer
July 22, 2003
Francis Smith
Principal Financial Officer
July 22, 2003
2