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 811-21098
Real Estate Income Fund Inc.
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Smith Barney Fund Management LLC
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 451-2010
Date of fiscal year end: December 31
Date of reporting period: December 31, 2003
ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
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REAL ESTATE
Income Fund Inc.
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Annual Report
December 31, 2003
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WHAT'S INSIDE
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Letter from the Chairman .................................................. 1
Manager Overview .......................................................... 2
Schedule of Investments ................................................... 6
Statement of Assets and Liabilities ....................................... 10
Statement of Operations ................................................... 11
Statements of Changes in Net Assets ....................................... 12
Notes to Financial Statements ............................................. 13
Financial Highlights ...................................................... 20
Independent Auditors' Report .............................................. 22
Financial Data ............................................................ 23
Tax Information ........................................................... 23
Additional Shareholder Information ........................................ 24
Dividend Reinvestment Plan ................................................ 27
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LETTER FROM THE CHAIRMAN
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[PHOTO OMITTED]
R. JAY GERKEN, CFA
Chairman, President and
Chief Executive Officer
Dear Shareholder,
Real estate investment trusts ("REITs")(i) enjoyed a very good year, with each
of the sector's major indices posting double-digit total returns. As the
economic outlook improved during the year, the flow of capital into the REIT
market continued to accelerate, benefiting stock prices. The fund's strongly
positive performance was primarily attributable to good results from its
holdings in the retail, healthcare and triple net lease sectors.
Please read on for a more detailed look at prevailing economic and market
conditions during the fund's fiscal year and to learn how those conditions and
changes made to the portfolio during this time may have affected fund
performance.
Information About Your Fund
In recent months several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The fund's Adviser and some of its
affiliates have received requests for information from various government
regulators regarding market timing, late trading, fees and other mutual fund
issues in connection with various investigations. The fund has been informed
that the Adviser and its affiliates are responding to those information
requests, but are not in a position to predict the outcome of these requests and
investigations.
As always, thank you for your confidence in our stewardship of your assets. We
look forward to helping you continue to
meet your financial goals.
Sincerely,
/s/ R. Jay Gerken
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
January 14, 2004
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Real Estate Income Fund Inc. 1
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MANAGER OVERVIEW
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Performance Review
During the 12 months ended December 31, 2003, the fund returned 39.42%, based on
its New York Stock Exchange ("NYSE") market price and 45.12% based on its net
asset value ("NAV")(ii) per share. In comparison, the fund's Lipper sector
equity closed-end funds category average was 32.91% over the same time
frame.(iii) Please note that Lipper performance returns are based on each fund's
NAV.
During the 12-month period, the fund distributed dividends to shareholders
totaling $1.66 per share. Past performance is not indicative of future results.
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FUND PERFORMANCE
AS OF DECEMBER 31, 2003
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12 Month
Price Per Share Total Return
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$18.21 (NAV) 45.12%
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$17.57 (NYSE) 39.42%
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Total returns are based on changes in NAV or the market price, respectively.
Total returns assume the reinvestment of all dividends and/or capital gains
distributions, if any, in additional shares.
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During 2003, REITs produced some of their strongest total returns in well over a
decade. Investors may have been attracted to the diversification benefits and
stable dividend yields(iv) REITs continued to provide, and foreign investors,
particularly in Japan, showed increased interest in U.S. REITs. In addition,
several REITs were added to various S&P indices during the year, which, in our
view helped support asset flows into the sector. Despite the strong performance
of REITs in 2003, we believe that real estate market fundamentals generally
remained weak.
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2 2003 Annual Report
The fund's performance in 2003 was driven primarily by solid results from its
holdings in the retail, healthcare and triple net lease sectors. Within the
retail sector, The Macerich Co. was among the fund's top performers, as leasing
within the company's redevelopment pipeline is well ahead of schedule. The
healthcare sector was led by Senior Housing Properties Trust, which benefited
from improving business fundamentals for nursing home operators. Within the
triple net lease sector, iStar Financial Inc. performed well as management
gained investor credibility by developing creative financing solutions for its
clients. Triple net lease companies lease to tenants under leases that require
the tenant to pay property taxes, insurance and maintenance in addition to rent.
On the other hand, the hotel and diversified sectors provided the least
attractive returns during 2003. For example, Hospitality Properties Trust posted
a return of approximately 25%, yet it lagged behind the fund's overall returns
for 2003, primarily because many investors shifted their focus away from
companies that favor more stable cash flows toward companies that are more
leveraged toward improving hotel fundamentals. Crescent Real Estate Equities
Co., a diversified REIT, also posted only a modestly positive return amid
lower-than-expected earnings and continued weakness in the Dallas office market.
Despite the fund's strong gains during the reporting period, we made only minor
changes to its composition over the course of the year. Those adjustments were
designed to keep the fund well positioned to provide attractive current income
and solid risk-adjusted returns while maintaining a diversified portfolio of
real estate securities with exposure to all of the major property types.
Looking for Additional Information?
The fund is traded under the symbol "RIT" and its closing market price is
available in most newspapers under the NYSE listings. The daily NAV is available
online under symbol XRITX. Barron's and The Wall Street Journal's Monday
editions carry closed-end fund tables that will provide additional information.
In addition, the fund issues a quarterly allocation press release that can be
found on most major financial web sites as well as
www.citigroupassetmanagement.com.
In a continuing effort to provide information concerning the fund, shareholders
may call 1-888-735-6507, Monday through Friday from 8:00 a.m. to 6:00 p.m.
Eastern Time, for the fund's current net asset value, market price and other
information.
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Real Estate Income Fund Inc. 3
Thank you for your investment in the Real Estate Income Fund Inc. We appreciate
that you have entrusted us to manage your money and value our relationship with
you.
Sincerely,
/s/ Matthew A. Troxell
Matthew A. Troxell, CFA
AEW Management and Advisors, L.P.
January 14, 2004
The information provided is not intended to be a forecast of future events, a
guarantee of future results or investment advice. Views expressed may differ
from those of the firm as a whole.
Portfolio holdings and breakdowns are as of December 31, 2003 and are subject to
change and may not be representative of the portfolio manager's current or
future investments. The fund's top ten holdings as of this date were: HRPT
Properties Trust (8.47%), CarrAmerica Realty Corp. (6.27%), Healthcare Realty
Trust Inc. (4.97%), Hospitality Properties Trust (4.42%), Senior Housing
Properties Trust (4.37%), Camden Property Trust (4.18%), Health Care Property
Investors, Inc. (4.09%), iStar Financial Inc. (3.86%), Highwoods Properties,
Inc. (3.85%), Apartment Investment and Management Co. (3.76%). Please refer to
pages 6 through 9 for a list and percentage breakdown of the fund's holdings.
All index performance reflects no deduction for fees, expenses or taxes.
(i) Real Estate Investment Trusts invest in real estate or loans secured by
real estate and issue shares in such investments, which can be illiquid.
(ii) NAV is a price that reflects the value of the fund's underlying portfolio
plus other assets, less the fund's liabilities. However, the price at
which an investor may buy or sell shares of the fund is at the fund's
market price as determined by supply of and demand for the fund's common
shares, which may be more or less than the fund's NAV.
(iii) Lipper, Inc. is a major independent mutual-fund tracking organization. The
return is based on the 12-month period ended December 31, 2003, calculated
among the 26 funds in the fund's Lipper category including the
reinvestment of dividends and capital gains, if any.
(iv) Dividend yield is determined by dividing a stock's annual cash dividend by
the current market price per share.
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4 2003 Annual Report
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Take Advantage of the Fund's Dividend Reinvestment Plan!
As an investor in the Fund, you can participate in its Dividend
Reinvestment Plan ("Plan"), a convenient, simple and efficient way to reinvest
your dividends and capital gains, if any, in additional shares of the Fund. A
description of the Fund's Plan begins on page 27. Below is a short summary of
how the Plan works.
Plan Summary
If you are a Plan participant who has not elected to receive your
dividends in the form of a cash payment, then your dividend and capital gain
distributions will be reinvested automatically in additional shares of the Fund.
The number of common stock shares in the Fund you will receive in lieu of
a cash dividend is determined in the following manner. If the market price of
the common stock is equal to or exceeds 98% of the net asset value ("NAV") per
share on the date of determination, you will be issued shares at a price equal
to the greater of (a) 98% of the NAV per share at the close of trading on the
determination date or (b) 95% of the market price per share of the Common Shares
on the determination date.
If 98% of the NAV per share at the time of valuation is greater than the
market price of the common stock on the determination date, the Plan Agent will
buy common stock for your account in the open market or on the New York Stock
Exchange.
If the Plan Agent begins to purchase additional shares in the open market
and the market price of the shares subsequently rises above 98% of the NAV
before the purchases are completed, the Plan Agent will attempt to cancel any
remaining orders and the Fund will issue the remaining dividend or distribution
in shares at the greater of 98% of the NAV per share at the close of trading on
the Exchange on the determination date or 95% of their current market price. In
that case, the number of Fund shares you receive will be based on the weighted
average of prices paid for shares purchased in the open market and the price at
which the Fund issues the remaining shares.
To find out more detailed information about the Plan and about how you can
participate, please call American Stock Transfer & Trust Company at
1-877-366-6441.
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Real Estate Income Fund Inc. 5
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Schedule of Investments December 31, 2003
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SHARES SECURITY VALUE
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COMMON STOCK -- 69.0%
Apartments -- 10.3%
70,000 Apartment Investment and Management Co.,
Class A Shares $ 2,415,000
36,500 Archstone-Smith Trust 1,021,270
190,000 Camden Property Trust 8,417,000
185,000 Gables Residential Trust 6,426,900
100,000 Mid-America Apartment Communities, Inc. 3,358,000
235,000 Summit Properties Inc. 5,644,700
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27,282,870
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Diversified -- 4.8%
75,000 Crescent Real Estate Equities Co. 1,284,750
200,000 iStar Financial Inc. 7,780,000
190,000 Lexington Corporate Properties, Inc. 3,836,100
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12,900,850
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Healthcare -- 8.7%
87,000 Health Care Property Investors, Inc. 4,419,600
280,000 Healthcare Realty Trust Inc. 10,010,000
511,700 Senior Housing Properties Trust 8,816,591
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23,246,191
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Home Financing -- 1.0%
108,500 Municipal Mortgage & Equity, LLC 2,685,375
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Industrial -- 3.4%
185,000 EastGroup Properties, Inc. 5,990,300
161,700 First Potomac Realty Trust* 3,030,258
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9,020,558
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Industrial/Office - Mixed -- 5.3%
2,000 Bedford Property Investors, Inc. 57,260
207,000 Kilroy Realty Corp. 6,779,250
190,000 Liberty Property Trust 7,391,000
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14,227,510
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Lodging/Resorts -- 2.3%
146,000 Hospitality Properties Trust 6,026,880
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Office -- 16.0%
203,000 Arden Realty Group, Inc. 6,159,020
177,000 CarrAmerica Realty Corp. 5,271,060
72,000 Glenborough Realty Trust Inc. 1,436,400
260,000 Highwoods Properties, Inc. 6,604,000
848,700 HRPT Properties Trust 8,563,383
161,000 Mack-Cali Realty Corp. 6,700,820
50,000 Maguire Properties, Inc. 1,215,000
200,000 Prentiss Properties Trust 6,598,000
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42,547,683
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See Notes to Financial Statements.
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6 2003 Annual Report
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Schedule of Investments (continued) December 31, 2003
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SHARES SECURITY VALUE
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Regional Malls -- 4.1%
196,000 Glimcher Realty Trust $ 4,386,480
148,100 The Macerich Co. 6,590,450
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10,976,930
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Retail - Free Standing -- 1.5%
221,900 Commercial Net Lease Realty, Inc. 3,949,820
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Shopping Centers -- 9.5%
250,000 Borealis Retail Real Estate Investment Trust+ 2,257,515
330,000 Cedar Shopping Centers Inc.* 4,098,600
105,000 Equity One, Inc. 1,772,400
233,000 Heritage Property Investment Trust 6,628,850
187,000 New Plan Excel Realty Trust, Inc. 4,613,290
135,000 Ramco-Gershenson Properties Trust 3,820,500
52,000 Tanger Factory Outlet Centers, Inc. 2,116,400
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25,307,555
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Specialty -- 2.1%
30,000 American Financial Realty Trust 511,500
25,000 Correctional Properties Trust 720,000
127,000 Entertainment Properties Trust 4,408,170
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5,639,670
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TOTAL COMMON STOCK
(Cost -- $141,869,830) 183,811,892
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PREFERRED STOCK -- 30.4%
Apartments -- 2.6%
Apartment Investment and Management Co.:
75,000 9.375% Cumulative, Class G 2,029,500
115,000 10.000% Cumulative, Class R 3,124,550
60,000 United Dominion Realty Trust, Inc.,
8.600% Cumulative Redeemable, Series B 1,644,000
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6,798,050
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Diversified -- 1.1%
109,400 Crescent Real Estate Equities Co., 9.500% Cumulative
Redeemable, Series B 3,068,670
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Healthcare -- 1.4%
150,000 Health Care Property Investors, Inc.,
7.100% Cumulative Redeemable, Series F 3,825,000
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Industrial -- 0.9%
75,000 Keystone Property Trust, 9.125% Cumulative
Redeemable, Series D 2,034,750
10,000 ProLogis Trust, 7.920% Cumulative Redeemable, Series D 250,300
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2,285,050
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See Notes to Financial Statements.
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Real Estate Income Fund Inc. 7
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Schedule of Investments (continued) December 31, 2003
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SHARES SECURITY VALUE
================================================================================
Industrial/Office - Mixed -- 1.7%
90,000 Bedford Property Investors, Inc., 8.750% Cumulative
Redeemable, Series A+ $ 4,604,067
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Lodging/Resorts -- 4.6%
220,000 Boykin Lodging Co., 10.500% Cumulative, Class A 6,336,000
90,000 FelCor Lodging Trust Inc., 9.000% Cumulative
Redeemable, Series B 2,255,400
105,000 Hospitality Properties Trust, 8.875% Cumulative
Redeemable, Series B 2,887,500
26,000 LaSalle Hotel Properties, 10.250% Cumulative
Redeemable, Series A 742,300
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12,221,200
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Office -- 6.4%
275,000 CarrAmerica Realty Corp., 7.500% Cumulative
Redeemable, Series E 7,356,250
45,800 Highwoods Properties, Inc., 8.000% Cumulative
Redeemable, Series B 1,156,908
HRPT Properties Trust:
255,600 8.750% Cumulative Redeemable, Series B 7,118,460
50,000 9.875% Cumulative Redeemable, Series A 1,397,000
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17,028,618
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Regional Malls -- 3.0%
85,000 Glimcher Realty Trust, 8.750% Cumulative Redeemable,
Series F 2,271,098
The Mills Corp.:
35,000 8.750% Cumulative Redeemable, Series E 962,500
91,700 9.000% Cumulative Redeemable, Series B 2,525,418
6,000 Pennsylvania Real Estate Investment Trust, 11.000%
Sr. Cumulative 366,000
32,700 Simon Property Group, Inc., 7.890%, Cumulative
Step-Up Premium Rate, Series G 1,783,174
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7,908,190
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Retail - Free Standing -- 0.9%
85,000 Commercial Net Lease Realty, Inc., 9.000% Sr.
Cumulative, Series A 2,329,000
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Self Storage -- 0.3%
35,000 Public Storage, Inc., 8.000% Cumulative, Series R 942,900
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Shopping Centers -- 6.8%
Developers Diversified Realty Corp.:
25,000 8.000% Cumulative Redeemable, Class G 674,500
130,000 8.600% Cumulative Redeemable, Class F 3,471,000
131,000 Federal Realty Investment Trust, 8.500% Cumulative
Redeemable, Series B 3,602,500
75,000 New Plan Excel Realty Trust, Inc., 7.625% Cumulative
Redeemable, Series E 2,000,250
See Notes to Financial Statements.
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8 2003 Annual Report
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Schedule of Investments (continued) December 31, 2003
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SHARES SECURITY VALUE
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Shopping Centers -- 6.8% (continued)
65,000 Ramco-Gershenson Properties Trust,
9.500% Cumulative Redeemable, Series B $ 1,823,250
63,000 Urstadt Biddle Properties Inc., 8.500% Sr.
Cumulative Redeemable, Series C+ 6,453,562
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18,025,062
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Specialty -- 0.7%
70,000 Capital Automotive REIT, 7.500% Cumulative
Redeemable, Series A 1,787,191
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TOTAL PREFERRED STOCK
(Cost -- $75,349,391) 80,822,998
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FACE
AMOUNT SECURITY VALUE
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REPURCHASE AGREEMENT -- 0.6%
$1,489,000 Merrill Lynch & Co., Inc., 0.820% due 1/2/04;
Proceeds at maturity -- $1,489,068; (Fully
collateralized by U.S. Treasury Notes and Bonds,
6.125% to 8.125% due 8/15/07 to 2/15/23; Market
value -- $1,518,784) (Cost -- $1,489,000) 1,489,000
================================================================================
TOTAL INVESTMENTS -- 100.0%
(Cost -- $218,708,221**) $266,123,890
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* Non-income producing security.
+ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is $218,736,882.
See Notes to Financial Statements.
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Real Estate Income Fund Inc. 9
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Statement of Assets and Liabilities December 31, 2003
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ASSETS:
Investments, at value (Cost -- $218,708,221) $ 266,123,890
Cash 838
Dividends and interest receivable 1,601,485
Receivable for securities sold 144,877
Prepaid expenses 1,467
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Total Assets 267,872,557
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LIABILITIES:
Unrealized depreciation of open interest rate swap contracts (Note 6) 1,010,178
Management fee payable 131,227
Payable for securities purchased 57,220
Interest payable on swap contracts (Note 6) 36,470
Dividends payable to Taxable Auction Rate Preferred Stockholders 2,371
Accrued expenses 112,429
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Total Liabilities 1,349,895
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Series M Taxable Auction Rate Preferred Stock (2,600 shares authorized,
issued and outstanding at $25,000 per share) (Note 5) 65,000,000
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Total Net Assets $ 201,522,662
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NET ASSETS:
Par value of capital shares $ 11,069
Capital paid in excess of par value 154,384,803
Undistributed net investment income 749,769
Accumulated net realized loss from investment transactions (28,661)
Net unrealized appreciation of investments, foreign currencies
and swap contracts 46,405,682
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Total Net Assets
(Equivalent to $18.21 per share on 11,069,242 capital shares of $0.001
par value outstanding; 100,000,000 capital shares authorized) $ 201,522,662
===========================================================================================
See Notes to Financial Statements.
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10 2003 Annual Report
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Statement of Operations For the Year Ended December 31, 2003
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INVESTMENT INCOME:
Dividends $ 13,239,004
Interest 30,260
Less: Foreign withholding tax (13,107)
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Total Investment Income 13,256,157
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EXPENSES:
Management fee (Note 2) 2,132,730
Auction participation fees (Note 5) 170,684
Audit and legal 125,814
Shareholder communications 94,044
Directors' fees 53,850
Stock exchange listing fees 35,285
Custody 20,493
Shareholder servicing fees 16,679
Rating agency fees 11,000
Other 8,500
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Total Expenses 2,669,079
Less: Management fee waiver (Note 2) (758,304)
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Net Expenses 1,910,775
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Net Investment Income 11,345,382
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REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
FOREIGN CURRENCIES AND SWAP CONTRACTS (NOTES 3 AND 6):
Net Realized Gain From:
Investment transactions and swap contracts 4,538,150
REIT distributions 884,536
Foreign currency transactions 16,511
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Net Realized Gain 5,439,197
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Increase in Net Unrealized Appreciation 48,936,469
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Net Gain on Investments, Foreign Currencies and Swap Contracts 54,375,666
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Dividends Paid to Taxable Auction Rate Preferred Stockholders
From Net Investment Income (826,346)
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Increase in Net Assets From Operations $ 64,894,702
================================================================================
See Notes to Financial Statements.
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Real Estate Income Fund Inc. 11
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Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Year Ended December 31, 2003
and the Period Ended December 31, 2002
2003 2002+#
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OPERATIONS:
Net investment income $ 11,345,382 $ 4,046,618
Net realized gain 5,439,197 599,370
Change in net unrealized appreciation (depreciation) 48,936,469 (2,467,433)
Dividends Paid to Taxable Auction Rate
Preferred Stockholders from net investment income (826,346) (281,955)
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Increase in Net Assets From Operations 64,894,702 1,896,600
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DISTRIBUTIONS PAID TO COMMON STOCK
SHAREHOLDERS FROM:
Net investment income (8,815,072) (3,319,261)
Net realized gains (6,785,795) (745,891)
Capital (2,589,027) (491,641)
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Decrease in Net Assets From Distributions Paid to
Common Stock Shareholders (18,189,894) (4,556,793)
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FUND SHARE TRANSACTIONS (NOTE 7):
Underwriting commissions and offering expenses for the
issuance of Taxable Auction Rate Preferred Stock (Note 5) 13,177 (953,750)
Net proceeds from sale of shares -- 152,956,500
Net asset value of shares issued for reinvestment of dividends 4,417,073 945,047
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Increase in Net Assets From Fund Share Transactions 4,430,250 152,947,797
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Increase in Net Assets 51,135,058 150,287,604
NET ASSETS:
Beginning of year 150,387,604 100,000
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End of year* $ 201,522,662 $ 150,387,604
===================================================================================================
* Includes undistributed net investment income of: $ 749,769 $ 1,446,853
===================================================================================================
+ For the period July 31, 2002 (commencement of operations) to December 31,
2002.
# Certain amounts have been reclassified among net investment income, net
realized gains and net unrealized depreciation in order to conform to
current year presentation of swap contracts and REIT distributions. These
reclassifications had no impact on the net assets of the Fund or the
amount and character of distributions (Note 1).
See Notes to Financial Statements.
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12 2003 Annual Report
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Notes to Financial Statements
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1. Significant Accounting Policies
The Real Estate Income Fund Inc. ("Fund"), a Maryland corporation, is registered
under the Investment Company Act of 1940, as amended, as a non-diversified,
closed-end management investment company.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets or,
if there were no sales during the day, at the mean between the bid and asked
prices; securities primarily traded on foreign exchanges are generally valued at
the preceding closing values of such securities on their respective exchanges;
over-the-counter securities are valued on the basis of the bid price at the
close of business on each day; securities listed on the NASDAQ National Market
System for which market quotations are available are valued at the official
closing price or, if there is no official closing price on that day, at the last
sale price; however, when a significant event occurs subsequent to the time a
value was so established and is likely to have significantly changed the value,
then the fair value of those securities will be determined by consideration of
other factors by or under the direction of the Board of Directors or its
delegates; (c) fixed-income securities are valued at the mean between the quoted
bid and asked prices provided by an independent pricing service that are based
on transactions in corporate obligations, quotations from corporate bond
dealers, market transactions in comparable securities and various relationships
between securities; (d) securities maturing within 60 days or less are valued at
cost plus accreted discount, or minus amortized premium, which approximates
value; (e) gains or losses on the sale of securities are calculated by using the
specific identification method; (f) dividend income is recorded by the Fund on
the ex-dividend date; the Fund pays dividends to shareholders monthly from net
investment income and capital gains, if any, at least annually. Foreign dividend
income is recorded on the ex-dividend date or as soon as practical after the
Fund determines the existence of a dividend declaration after exercising
reasonable due diligence; (g) interest income, adjusted for amortization of
premium and accretion of discount, is recorded by the Fund on an accrual basis;
(h) dividends and distributions to shareholders are recorded monthly by the Fund
on the ex-dividend date for the shareholders of common stock. The holders of the
Taxable Auction Rate Preferred Stock shall be entitled to receive dividends in
accordance with an auction that will normally be held weekly and out of funds
legally available to shareholders; (i) the accounting records are maintained in
U.S. dollars. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars on the date of valuation. Purchases and sales of
securities and income and expenses are translated at the rate of exchange quoted
on the respective date that such transactions are recorded. Differences between
income or expense amounts recorded and collected or paid are adjusted when
reported by the custodian; (j) in accordance with
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Real Estate Income Fund Inc. 13
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Statement of Position 93-2 Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies, book/tax basis differences relating to shareholder
distributions and other permanent book/tax differences are reclassified to
paid-in capital. In addition, the character of income and gains to be
distributed is determined in accordance with income tax regulations which may
differ from accounting principles generally accepted in the United States of
America. At December 31, 2003, reclassifications were made to the Fund's capital
accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations; (k) the Fund's policy
is to pass through to its shareholders substantially all REIT distributions and
other income it receives, less operating expenses. The character of REIT
distributions received from portfolio securities held by the Fund is generally
comprised of investment income, short- and long-term capital gains, and return
of REIT capital. At December 31, 2003, the Fund estimated these amounts within
the Statement of Operations since the information is not available from the
REITs until after the Fund's fiscal year ends. The character of distributions
paid to shareholders is disclosed within the Statement of Changes and is also
based on these estimates. All estimates are based upon REIT information sources
available to the Fund together with actual IRS Forms 1099 received to date.
After all applicable REITs have informed the Fund of the actual breakdown of
distributions paid to the Fund during its fiscal year, the Fund adjusts to
actual, estimates previously recorded; (l) the Fund intends to comply with the
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
(m) the net asset value of the Fund's Common Stock is determined no less
frequently than the close of business on the Fund's last business day of each
week (generally Friday). It is determined by dividing the value of the Fund's
net assets by the total number of Common Shares outstanding; (n) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ; (o) as
a result of a recent FASB Emerging Issues Task Force consensus and subsequent
related SEC staff guidance, the Fund has reclassified periodic payments made
under interest rate swap agreements, previously included within interest income,
as a component of realized gain (loss) in the statement of operations; and (p)
certain amounts in the 2002 statement of changes in net assets and financial
highlights have been reclassified to conform to current year presentation of
swap contracts and distributions received from REIT investments.
- --------------------------------------------------------------------------------
14 2003 Annual Report
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
2. Management Agreement and Other Transactions
Citi Fund Management Inc. ("CFM"), an affiliate of Citigroup Inc. ("Citigroup"),
acts as the investment manager of the Fund. The Fund pays CFM a management fee
calculated at an annual rate of 0.90% of the Fund's Managed Assets (which
includes assets attributable to Fund Preferred Shares). This fee is calculated
daily and paid monthly.
In addition, CFM has contractually agreed to waive a portion of its management
fee in the amount of 0.32% of the Fund's Managed Assets through July 31, 2007,
0.20% of Managed Assets for the 12-month period ending July 31, 2008, and 0.10%
of Managed Assets for the 12-month period ending July 31, 2009. The waiver will
be eliminated on August 1, 2009. For the year ended December 31, 2003, CFM
waived a portion of its management fee amounting to $758,304.
CFM has entered into a sub-investment advisory agreement with AEW Management and
Advisors, L.P. ("AEW"). AEW is primarily responsible for overseeing the
day-to-day investment operations of the Fund. CFM pays AEW a fee at an annual
rate equal to: (a) for the first 5 years of the Fund's operation, 0.40% of the
first $100 million of the Fund's Managed Assets (which includes assets
attributable to Preferred shares), 0.35% of the next $100 million of the Fund's
Managed Assets and 0.30% of the Fund's Managed Assets in excess of $200 million;
and (b) starting 5 years after the commencement of the Fund's operations, 50% of
the management fee paid by the Fund to CFM net of any waivers. For the year
ended December 31, 2003, AEW waived a portion of their fees pending recoupment
of certain costs incurred by CFM in connection with the initial public offering
of the Fund.
For the year ended December 31, 2003, Citigroup Global Markets Inc. ("CGM")
(formerly known as Salomon Smith Barney Inc.), an indirect wholly-owned
subsidiary of Citigroup, received brokerage commissions of $9,495.
All officers but one and one Director of the Fund are employees of Citigroup or
its affiliates.
- --------------------------------------------------------------------------------
Real Estate Income Fund Inc. 15
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Investments
During the year ended December 31, 2003, the aggregate cost of purchases and
proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments) were as follows:
================================================================================
Purchases $63,882,889
- --------------------------------------------------------------------------------
Sales 64,020,423
================================================================================
At December 31, 2003, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
================================================================================
Gross unrealized appreciation $ 47,712,541
Gross unrealized depreciation (325,533)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 47,387,008
================================================================================
4. Repurchase Agreements
The Fund purchases (and the custodian takes possession of) U.S. government
securities from securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value (plus accrued interest) of the collateral in amounts at
least equal to the repurchase price.
5. Taxable Auction Rate Preferred Stock
The underwriting discount of $650,000 and offering expenses of $303,750
associated with the Taxable Auction Rate Preferred Stock ("TARPS") offering were
recorded as a reduction of the capital paid in excess of par value of common
stock. The TARPS' dividends are cumulative at a rate determined at an auction
and the dividend period is typically seven days. The dividend rates ranged from
1.03% to 1.46% for the year ended December 31, 2003. At December 31, 2003, the
current dividend rate was 1.30%.
The Fund is required to maintain certain asset coverages with respect to the
TARPS. If the Fund fails to maintain these coverages and does not cure any such
failure within the required time period, the Fund is required to redeem a
requisite number of the TARPS at a redemption price equal to $25,000 per share
plus accumulated and unpaid dividends in order to meet the applicable
requirement. The TARPS have a liquidation preference of $25,000 per share plus
accumulated and unpaid dividends. Additionally, failure to meet the foregoing
asset coverage requirements would restrict the Fund's ability to pay dividends
to common shareholders.
- --------------------------------------------------------------------------------
16 2003 Annual Report
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
CGM also currently acts as a broker/dealer in connection with the auction of
TARPS. After each auction, the auction agent will pay to each participating
broker/dealer, from monies the Fund provides, a participation fee at the annual
rate of 0.25% of the purchase price of the TARPS that the broker/dealer places
at the auction. For the year ended December 31, 2003, CGM earned $162,684 as a
participating broker/dealer.
6. Swap Contracts
The Fund has entered into interest rate swap agreements with Merrill Lynch
Capital Services, Inc. The Fund will record the difference between a
predetermined fixed interest rate and the closing value on the One-Month LIBOR.
These differences are netted out in a cash settlement made monthly, with the
Fund receiving or paying, as the case may be, only the net amount of the two
differences. The Fund is exposed to credit loss in the event of nonperformance
by the swap counterparty.
As of December 31, 2003, the Fund held the following interest rate swap
agreements:
Swap Counterparty: Merrill Lynch Capital Services, Inc.
Effective Date: 11/25/02
Notional Amount: $6,500,000
Payments Made by Fund: Fixed Rate, 2.9325%
Payments Received by Fund: Floating Rate (One-Month LIBOR)
Termination Date: 11/25/05
Unrealized Depreciation as of 12/31/03: $(114,868)
==========
Swap Counterparty: Merrill Lynch Capital Services, Inc.
Effective Date: 11/25/02
Notional Amount: $26,000,000
Payments Made by Fund: Fixed Rate, 3.6335%
Payments Received by Fund: Floating Rate (One-Month LIBOR)
Termination Date: 11/25/07
Unrealized Depreciation as of 12/31/03: $(522,688)
==========
Swap Counterparty: Merrill Lynch Capital Services, Inc.
Effective Date: 11/25/02
Notional Amount: $19,500,000
Payments Made by Fund: Fixed Rate, 4.1170%
Payments Received by Fund: Floating Rate (One-Month LIBOR)
Termination Date: 11/25/09
Unrealized Depreciation as of 12/31/03: $(372,622)
==========
At December 31, 2003, the Fund had total unrealized depreciation of $1,010,178
from swap contracts.
- --------------------------------------------------------------------------------
Real Estate Income Fund Inc. 17
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Capital Shares
Capital stock transactions were as follows:
Year Ended Period Ended
December 31, 2003 December 31, 2002+
----------------------- --------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------
Shares sold -- -- 10,706,995 $152,956,500
Shares issued on reinvestment 292,538 $4,417,073 69,709 945,047
- -------------------------------------------------------------------------------------------
Net Increase 292,538 $4,417,073 10,776,704 $153,901,547
- -------------------------------------------------------------------------------------------
+ For the period July 31, 2002 (commencement of operations) to December 31,
2002.
8. Income Tax Information and Distributions to Shareholders
The tax character of distributions paid during the period ended December 31 was:
2003 2002
================================================================================
Ordinary income $12,323,327 $3,990,089
Long term capital gains 4,103,886 357,018
Capital 2,589,027 491,641
- --------------------------------------------------------------------------------
Total $19,016,240 $4,838,748
================================================================================
The tax basis components of distributable earnings at December 31 were:
2003 2002
================================================================================
Unrealized appreciation (depreciation) $46,377,021 $(2,532,422)
================================================================================
For the years ended December 31, 2003 and December 31, 2002, the differences
between book basis and tax basis unrealized appreciation (depreciation) were
attributable primarily to wash sale loss deferrals.
- --------------------------------------------------------------------------------
18 2003 Annual Report
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
9. Additional Information
The Fund has received the following information from Citigroup Asset Management
("CAM"), the Citigroup business unit which includes the Fund's Investment
Manager and other investment advisory companies, all of which are indirect,
wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry, through an
affiliate, into the transfer agent business in the period 1997-1999. As CAM
currently understands the facts, at the time CAM decided to enter the transfer
agent business, CAM sub-contracted for a period of five years certain of the
transfer agency services to a third party and also concluded a revenue guarantee
agreement with this sub-contractor providing that the sub-contractor would
guarantee certain benefits to CAM or its affiliates (the "Revenue Guarantee
Agreement"). In connection with the subsequent purchase of the sub-contractor's
business by an affiliate of the current sub-transfer agent (PFPC Inc.) used by
CAM on many of the funds it manages, this Revenue Guarantee Agreement was
amended eliminating those benefits in exchange for arrangements that included a
one-time payment from the sub-contractor.
The Boards of CAM-managed funds (the "Boards") were not informed of the Revenue
Guarantee Agreement with the sub-contractor at the time the Boards considered
and approved the transfer agent arrangements. Nor were the Boards informed of
the subsequent amendment to the Revenue Guarantee Agreement when that occurred.
CAM has begun to take corrective actions. CAM will pay to the applicable funds
approximately $17 million (plus interest) that CAM and its affiliates received
from the Revenue Guarantee Agreement and its amendment. The Fund did not
implement the contractual arrangement described above and therefore will not
receive any portion of the payment. CAM also plans an independent review to
verify that the transfer agency fees charged by CAM were fairly priced as
compared to competitive alternatives. CAM is instituting new procedures and
making changes designed to ensure no similar arrangements are entered into the
future.
CAM has briefed the SEC, the New York State Attorney General and other
regulators with respect to this matter, as well as the U.S. Attorney who is
investigating the matter. CAM is cooperating with governmental authorities on
this matter, the ultimate outcome of which is not yet determinable.
The Fund's transfer agent is American Stock Transfer & Trust Company, which is
not affiliated with CAM or PFPC Inc.
- --------------------------------------------------------------------------------
Real Estate Income Fund Inc. 19
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year ended December 31,
unless otherwise indicated:
2003 2002(1)(2)
============================================================================================
Net Asset Value, Beginning of Year $ 13.95 $ 14.30
- --------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 1.04 0.38
Net realized and unrealized gain (loss) 4.96 (0.18)
Dividends Paid to Taxable Auction
Rate Preferred Stockholders
from net investment income (0.08) (0.03)
- --------------------------------------------------------------------------------------------
Total Income From Operations 5.92 0.17
- --------------------------------------------------------------------------------------------
Underwriting Commissions and Expenses for the Issuance
of Taxable Auction Rate Preferred Stock 0.00* (0.09)
- --------------------------------------------------------------------------------------------
Distributions Paid To Common Stock Shareholders From:
Net investment income (0.80) (0.31)
Net realized gains (0.62) (0.07)
Capital (0.24) (0.05)
- --------------------------------------------------------------------------------------------
Total Distributions (1.66) (0.43)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 18.21 $ 13.95
- --------------------------------------------------------------------------------------------
Total Return, Based on Market Price(4) 39.42% (3.59)%++
- --------------------------------------------------------------------------------------------
Total Return, Based on Net Asset Value(4) 45.12% 0.69%++
- --------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 201,523 $ 150,388
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets(5):
Expenses(3) 1.11% 1.11%+
Net investment income 6.60 6.66+
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 27% 13%
- --------------------------------------------------------------------------------------------
Market Price, End of Year $ 17.57 $ 14.01
============================================================================================
(1) For the period July 31, 2002 (commencement of operations) to December 31,
2002.
(2) Certain amounts have been reclassified among net investment income and net
realized and unrealized gain (loss) in order to conform to current year
presentation. Without the effect of these reclassifications, the net
investment income and net realized and unrealized gain (loss) would have
been $0.51 and $(0.31), respectively. In addition, the ratio of net
investment income to average net assets would have been 8.91%. These
reclassifications had no impact on the net asset value of the Fund or the
amount and character of distributions.
(3) The Manager has agreed to waive a portion of its management fees for the
year ended December 31, 2003 and for the period ended December 31, 2002.
In addition, the manager has reimbursed the Fund for $20,000 in expenses
for the period ended December 31, 2002. If such fees were not waived
and/or expenses reimbursed, the per share decrease to net investment
income and the actual expense ratios would have been as follows:
Expense Ratios Without
Per Share Decreases to Fees Waivers and/or
Net Investment Income Reimbursement
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
$0.07 $0.03 1.55% 1.55%+
(4) The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan. Performance figures
may reflect fee waivers and/or expense reimbursements. Past performance is
no guarantee of future results. In the absence of fee waivers and/or
expense reimbursements, the total return would be reduced.
(5) Calculated on the basis of average net assets of common stock
shareholders. Ratios do not reflect the effect of dividend payments to
preferred shareholders.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
20 2003 Annual Report
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
The table below sets out information with respect to Taxable Auction Rate
Preferred Stock:
2003
================================================================================
Taxable Auction Rate Preferred Stock(1):
Total Amount Outstanding (000s) $ 65,000
Asset Coverage Per Share 102,509
Involuntary Liquidating Preference Per Share(2) 25,000
Average Market Value Per Share(2) 25,000
================================================================================
(1) On September 30, 2002, the Fund issued 2,600 shares of Taxable Auction
Rate Preferred Stock at $25,000 a share.
(2) Excludes accrued interest or accumulated undeclared dividends.
- --------------------------------------------------------------------------------
Real Estate Income Fund Inc. 21
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Real Estate Income Fund Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Real Estate Income Fund Inc. ("Fund") as of
December 31, 2003, and the related statement of operations for the year then
ended, the statements of changes in net assets and financial highlights for the
year then ended December 31, 2003 and for the period from July 31, 2002
(commencement of operations) to December 31, 2002. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003 by correspondence with the custodian
and broker. As to securities purchased or sold but not yet received or
delivered, we performed other appropriate auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of December 31, 2003, and the results of its operations for the year
then ended, the changes in its net assets and financial highlights for the year
ended December 31, 2003 and for the period from July 31, 2002 (commencement of
operations) to December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPGM LLP
New York, New York
February 13, 2004
- --------------------------------------------------------------------------------
22 2003 Annual Report
- --------------------------------------------------------------------------------
Financial Data (unaudited)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
Dividend
NYSE Net Asset Dividends Reinvestment
Record Date Closing Price Value Paid Price
================================================================================
Fiscal Year 2002
September 24 $13.89 $14.11 $0.1063 $13.83
October 22 12.57 13.00 0.1063 12.67
November 25 13.64 13.75 0.1063 13.48
December 23 13.94 13.82 0.1063 13.54
Fiscal Year 2003
January 28 13.40 13.34 0.1063 13.07
February 25 14.13 13.59 0.1063 13.42
March 25 14.21 14.00 0.1063 13.72
April 22 14.65 14.75 0.1063 14.46
May 27 14.88 15.42 0.1063 15.03
June 24 14.87 15.33 0.1090 15.02
July 22 15.02 16.21 0.1090 15.55
August 26 15.06 16.19 0.1090 15.62
September 23 15.60 16.86 0.1090 15.72
October 28 16.56 17.15 0.1090 16.81
November 24 16.25 17.65 0.1090 17.02
December 22 16.92 18.02 0.4771 17.52
================================================================================
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 2003:
o Total long-term capital gain distributions paid of $4,103,886.
- --------------------------------------------------------------------------------
Real Estate Income Fund Inc. 23
- --------------------------------------------------------------------------------
Additional Information (unaudited)
- --------------------------------------------------------------------------------
Information about Directors and Officers
The business and affairs of Real Estate Income Fund Inc. ("Fund") are managed
under the direction of the Board of Directors. Information pertaining to the
Directors and Officers of the Fund is set forth below.
Number of
Term of Portfolios Other
Office* Principal in Fund Board
Position(s) and Length Occupation(s) Complex Memberships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
- ----------------------------------------------------------------------------------------------------------------------------------
Non-Interested Directors:
Allan J. Bloostein Director Since President of Allan J. 34 Taubman Centers Inc.
27 West 67th Street 2002 Bloostein Associates, a
New York, NY 10023 consulting firm; former
Age 74 Director of CVS Corp.
Dwight B. Crane Director Since Professor, Harvard 49 None
Harvard Business School 2002 Business School
Soldiers Field Road
Morgan Hall #375
Boston, MA 02163
Age 66
Paolo M. Cucchi Director Since Vice President and Dean 7 None
Drew University 2002 of College of Liberal Arts
108 Brothers College at Drew University
Madison, NJ 07940
Age 62
Robert A. Frankel Director Since Managing Partner of 24 None
1961 Deergrass Way 2002 Robert A. Frankel
Carlsbad, CA 92009 Management Consultants
Age 76
Paul Hardin Director Since Chancellor Emeritus and 34 None
12083 Morehead 2002 Professor of Law at the
Chapel Hill, NC 27514 University of North
Age 72 Carolina at Chapel Hill
William R. Hutchinson Director Since President of WR Hutchinson 42 Associated Bank and
Suite 1012 2002 & Associates, Inc.; Associated Banc-Corp
535 N. Michigan formerly Group Vice
Chicago, IL 60611 President, Mergers &
Age 61 Acquisitions BP Amoco
George M. Pavia Director Since Senior Partner of Pavia 7 None
600 Madison Avenue 2002 & Harcourt Attorneys
New York, NY 10022
Age 75
- --------------------------------------------------------------------------------
24 2003 Annual Report
- --------------------------------------------------------------------------------
Additional Information (unaudited) (continued)
- --------------------------------------------------------------------------------
Number of
Term of Portfolios Other
Office* Principal in Fund Board
Position(s) and Length Occupation(s) Complex Memberships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
- ----------------------------------------------------------------------------------------------------------------------------------
Interested Director:
R. Jay Gerken, CFA** Chairman, Since Managing Director of 221 None
Citigroup Asset President and 2002 Citigroup Global
Management ("CAM") Chief Markets Inc. ("CGM");
399 Park Avenue Executive Chairman, President and
4th Floor Officer Chief Executive Officer
New York, NY 10022 of Smith Barney Fund
Age 52 Management LLC ("SBFM"),
Travelers Investment
Adviser, Inc. ("TIA") and
Citi Fund Management Inc.
("CFM"); President and
Chief Executive Officer of
certain mutual funds
associated with Citigroup
Inc. ("Citigroup");
Formerly, Portfolio
Manager of Smith Barney
Allocation Series Inc.
(from 1996 to 2001) and
Smith Barney Growth and
Income Fund (from 1996 to
2000)
Officers:
Andrew B. Shoup Senior Vice Since Director of CAM; Senior N/A N/A
CAM President and 2003 Vice President and Chief
125 Broad Street Chief Administrative Officer of
10th Floor Administrative mutual funds associated
New York, NY 10004 Officer with Citigroup; Treasurer
Age 47 of certain mutual funds
associated with Citigroup;
Head of International
Funds Administration of
CAM (from 2001 to 2003);
Director of Global Funds
Administration of CAM
(from 2000 to 2001); Head
of U.S. Citibank Funds
Administration of CAM
(from 1998 to 2000)
- --------------------------------------------------------------------------------
Real Estate Income Fund Inc. 25
- --------------------------------------------------------------------------------
Additional Information (unaudited) (continued)
- --------------------------------------------------------------------------------
Number of
Term of Portfolios Other
Office* Principal in Fund Board
Position(s) and Length Occupation(s) Complex Memberships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
- ----------------------------------------------------------------------------------------------------------------------------------
Richard L. Peteka Chief Since Director of CGM; Chief N/A N/A
CAM Financial 2002 Financial Officer and
125 Broad Street Officer Treasurer of certain
11th Floor and mutual funds affiliated
New York, NY 10004 Treasurer with Citigroup; Director
Age 42 and Head of Internal
Control for CAM U.S.
Mutual Fund Administration
(from 1999 to 2002); Vice
President, Head of Mutual
Fund Administration and
Treasurer at Oppenheimer
Capital (from 1996 to
1999)
Kevin Kennedy Vice Since Managing Director of CAM N/A N/A
CAM President 2002
399 Park Avenue and
4th Floor Investment
New York, NY 10022 Officer
Age 48
Mathew A. Troxell, CFA Investment Since Principal and Portfolio N/A N/A
AEW Capital Officer 2002 Manager, AEW (since 2000);
Management, L.P. ("AEW") Director and Portfolio
World Trade Center East Manager, AEW prior to 2000
Two Seaport Lane
Boston, MA 02210
Age 45
Kaprel Ozsolak Controller Since Vice President of CGM; N/A N/A
CAM 2002 Controller of certain
125 Broad Street mutual funds associated
11th Floor with Citigroup
New York, NY 10004
Age 38
Robert I. Frenkel Secretary Since Managing Director and N/A N/A
CAM and Chief 2003 General Counsel of Global
300 First Stamford Place Legal Mutual Funds for CAM
4th Floor Officer and its predecessor
Stamford, CT 06902 (since 1994); Secretary of
Age 48 CFM; Secretary and Chief
Legal Officer of mutual
funds associated with
Citigroup
- ----------
* Directors are elected for a term of three years.
** Mr. Gerken is a director who is an "interested person" of the Fund as
defined in the Investment Company Act of 1940, as amended, because Mr.
Gerken is an officer of SBFM and certain of its affiliates.
- --------------------------------------------------------------------------------
26 2003 Annual Report
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited)
- --------------------------------------------------------------------------------
Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose shares
of Common Stock are registered in his own name will have all distributions from
the Fund reinvested automatically by American Stock Transfer & Trust Company
("AST"), as agent under the Plan, unless the shareholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "street name") will be reinvested by the broker or
nominee in additional shares under the Plan, unless the service is not provided
by the broker or nominee or the shareholder elects to receive distributions in
cash. Investors who own Common Stock registered in street name should consult
their broker-dealers for details regarding reinvestment. All distributions to
Fund shareholders who do not participate in the Plan will be paid by check
mailed directly to the record holder by or under the direction of AST as
dividend-paying agent.
If the Fund declares a dividend or capital gains distribution payable either in
Common Shares or in cash, shareholders who are not Plan participants will
receive cash, and Plan participants will receive the equivalent amount in Common
Shares. When the market price of the Common Shares is equal to or exceeds 98% of
the net asset value per share of the Common Shares on the Determination Date (as
defined below), Plan participants will be issued Common Shares valued at a price
equal to the greater of (a) 98% of the net asset value per share at the close of
trading on the Determination Date or (b) 95% of the market price per share of
the common stock on the Determination Date. The Determination Date is the
dividend or capital gains distribution record date or, if that date is not a New
York Stock Exchange ("NYSE") trading day, the immediately preceding trading day.
If 98% of the net asset value per share of the Common Shares exceeds the market
price of the Common Shares on determination date, the Plan Agent will receive
the dividend or distribution in cash and will buy Common Shares in the open
market, on the Exchange or elsewhere, for your account as soon as practicable
commencing on the trading day following the determination date and terminating
no later than the earlier of (a) 30 days after the dividend or distribution
payment date, or (b) the record date for the next succeeding dividend or
distribution to be made to the Common Shareholders; except when necessary to
comply with applicable provisions of the federal securities laws. If during this
period: (i) the market price rises so that it equals or exceeds 98% of the net
asset value per share of the Common Shares at the close of trading on the
Exchange on the determination date before the Plan Agent has completed the open
market purchases or (ii) if the Plan Agent is unable to invest the full amount
eligible to be reinvested in open market purchases, the Plan agent will cease
purchasing Common Shares in the open market and the Fund shall issue the
remaining Common Shares at a price per share equal to the greater of (a) 98% of
the net asset value per share at the close of trading on the Exchange on the
determination date or (b) 95% of the then current market price per share. You
may withdraw from the Plan by notifying the Plan Agent in writing atP.O. Box 922
Wall Street Station, New York, New York 10269-0560, by logging
- --------------------------------------------------------------------------------
Real Estate Income Fund Inc. 27
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited) (continued)
- --------------------------------------------------------------------------------
onto your account and following the directions at www.Investpower.com or by
calling the Plan Agent at 1-877-366-6441. Such withdrawal will be effective
immediately if notice is received by the Plan Agent not less than ten business
days prior to any dividend or distribution record date; otherwise such
withdrawal will be effective as soon as practicable after the Plan Agent's
investment of the most recently declared dividend or distribution on the Common
Shares.
AST will maintain all shareholder accounts in the Plan and will furnish written
confirmations of all transactions in each account, including information needed
by a shareholder for personal and tax records. The automatic reinvestment of
dividends and capital gains distributions will not relieve Plan participants of
any income tax that may be payable on the dividends or capital gains
distributions. Common Shares in the account of each Plan participant will be
held by AST on behalf of the Plan participant, and each shareholder's proxy will
include those shares purchased pursuant to the Plan.
Plan participants are subject to no charge for reinvesting dividends and capital
gains distributions. AST's fees for handling the reinvestment of dividends and
capital gains distributions will be paid by the Fund. No brokerage charges apply
with respect to Common Shares issued directly by the Fund as a result of
dividends or capital gains distributions payable either in Common Shares or in
cash. Each Plan participant will, however, bear a proportionate share of
brokerage commissions incurred with respect to open market purchases made in
connection with the reinvestment of dividends or capital gains distributions.
Experience under the Plan may indicate that changes to it are desirable. The
Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by AST, with the Fund's prior written consent, on at least 30 days'
written notice to Plan participants. Upon any termination, you will be sent a
certificate or certificates for the full Common Shares held for you under the
Plan and cash for any fractional Common Shares. You may elect to notify the Plan
Agent in advance of such termination to have the Plan Agent sell part or all of
your shares on your behalf. The Plan Agent is authorized to deduct brokerage
commissions actually incurred for this transaction from the proceeds. All
correspondence concerning the Plan should be directed by mail to American Stock
Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038, by logging
onto your account and following the directions at www.Investpower.com or by
telephone at 1-877-366-6441.
--------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase
shares of its common stock in the open market.
- --------------------------------------------------------------------------------
28 2003 Annual Report
- --------------------------------------------------------------------------------
REAL ESTATE
- ----------------
Income Fund Inc.
DIRECTORS
Allan J. Bloostein
Dwight B. Crane
Paolo M. Cucchi
Robert A. Frankel
R. Jay Gerken, CFA
Chairman
Paul Hardin
William R. Hutchinson
George M. Pavia
OFFICERS
R. Jay Gerken, CFA
President and
Chief Executive Officer
Andrew B. Shoup
Senior Vice President and
Chief Administrative Officer
Richard L. Peteka
Chief Financial Officer
and Treasurer
Kevin Kennedy
Vice President and
Investment Officer
Matthew A. Troxell, CFA
Investment Officer
Kaprel Ozsolak
Controller
Robert I. Frenkel
Secretary and
Chief Legal Officer
INVESTMENT MANAGER
Citi Fund Management Inc.
100 First Stamford Place
Stamford, Connecticut 06902
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
This report is intended only for the shareholders of the Real Estate Income Fund
Inc. It is not a Prospectus, circular or representation intended for use in the
purchase or sale of shares of the Fund or of any securities mentioned in the
report.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by telephoning the fund (toll-free) at 1-800-451-2010 and by
visiting the SEC's web site at www.sec.gov.
REAL ESTATE INCOME
FUND INC.
125 Broad Street
10th Floor, MF-2
New York, New York 10004
FD02709 2/04
04-6114
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that William R.
Hutchinson, a member of the Board's Audit Committee, possesses the
technical attributes identified in Instruction 2(b) of Item 3 to Form
N-CSR to qualify as an "audit committee financial expert," and has
designated Mr. Hutchinson as the Audit Committee's financial expert.
Mr. Hutchinson is an "independent" Director pursuant to paragraph
(a)(2) of Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees for Real Estate Income Fund Inc. of $40,000 and
$40,000 for the years ended 12/31/03 and 12/31/02.
(b) Audit-Related Fees for Real Estate Income Fund Inc. of $24,000 and
$23,500 for the years ended 12/31/03 and 12/31/02. These amounts
represent procedures performed and prepared for agreed upon
procedures letter in accordance with the terms of the Supplementary
Articles.
(c) Tax Fees for Real Estate Income Fund Inc. of $3,500 and $0 for the
years ended 12/31/03 and 12/31/02. These amounts represent aggregate
fees paid for tax compliance, tax advice and tax planning services,
which include (the filing and amendment of federal, state and local
income tax returns, timely RIC qualification review and tax
distribution and analysis planning) rendered by the Accountant to
Real Estate Income Fund Inc.
(d) There were no all other fees for Real Estate Income Fund Inc. for
the years ended 12/31/03 and 12/31/02.
(e) (1) Audit Committee's pre-approval policies and procedures described
in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
The Charter for the Audit Committee (the "Committee") of the Board
of each registered investment company (the "Fund") advised by Smith
Barney Fund Management LLC or Salomon Brothers Asset Management Inc.
or one of their affiliates (each, an "Adviser") requires that the
Committee shall approve (a) all audit and permissible non-audit
services to be provided to the Fund and (b) all permissible
non-audit services to be provided by the Fund's independent auditors
to the Adviser and any Covered Service Providers if the engagement
relates directly to the operations and financial reporting of the
Fund. The Committee may implement policies and procedures by which
such services are approved other than by the full Committee.
The Committee shall not approve non-audit services that the
Committee believes may impair the independence of the auditors. As
of the date of the approval of this Audit Committee Charter,
permissible non-audit services include any professional services
(including tax services), that are not prohibited services as
described below, provided to the Fund by the independent auditors,
other than those provided to the Fund in connection with an audit or
a review of the financial statements of the Fund. Permissible
non-audit services may not include: (i) bookkeeping or other
services related to the accounting records or financial statements
of the Fund; (ii) financial information systems design and
implementation; (iii) appraisal or valuation services, fairness
opinions or contribution-in-kind reports; (iv) actuarial services;
(v) internal audit outsourcing services; (vi) management functions
or human resources; (vii) broker or dealer, investment adviser or
investment banking services; (viii) legal services and expert
services unrelated to the audit; and (ix) any other service the
Public Company Accounting Oversight Board determines, by regulation,
is impermissible.
Pre-approval by the Committee of any permissible non-audit services
is not required so long as: (i) the aggregate amount of all such
permissible non-audit services provided to the Fund, the Adviser and
any service providers controlling, controlled by or under common
control with the Adviser that provide ongoing services to the Fund
("Covered Service Providers") constitutes not more than 5% of the
total amount of revenues paid to the independent auditors during the
fiscal year in which the permissible non-audit services are provided
to (a) the Fund, (b) the Adviser and (c) any entity controlling,
controlled by or under common control with the Adviser that provides
ongoing services to the Fund during the fiscal year in which the
services are provided that would have to be approved by the
Committee; (ii) the permissible non-audit services were not
recognized by the Fund at the time of the engagement to be non-audit
services; and (iii) such services are promptly brought to the
attention of the Committee and approved by the Committee (or its
delegate(s)) prior to the completion of the audit.
(2)
(f) N/A
(g) Non-audit fees billed - $100,000 and $1.2 million for the years
ended 12/31/2003 and 12/31/2002.
(h) Yes. The Real Estate Income Fund Inc.'s Audit Committee has
considered whether the provision of non-audit services that were
rendered to Service Affiliates which were not pre-approved (not
requiring pre-approval) is compatible with maintaining the
Accountant's independence. All services provided by the Accountant
to the Real Estate Income Fund Inc. or to Service Affiliates which
were required to be pre-approved were pre-approved as required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Board of Directors of the Fund has delegated the authority to
develop policies and procedures relating to proxy voting to the
Manager. The Manager is part of Citigroup Asset Management ("CAM"), a
group of investment adviser affiliates of Citigroup, Inc.
("Citigroup"). Along with the other investment advisers that comprise
CAM, the Manager has adopted a set of proxy voting policies and
procedures (the "Policies") to ensure that the Manager votes proxies
relating to equity securities in the best interest of clients.
In voting proxies, the Manager is guided by general fiduciary
principles and seeks to act prudently and solely in the best interest
of clients. The Manager attempts to consider all factors that could
affect the value of the investment and will vote proxies in the manner
that it believes will be consistent with efforts to maximize
shareholder values. The Manager may utilize an external service
provider to provide it with information and/or a recommendation with
regard to proxy votes. However, such recommendations do not relieve the
Manager of its responsibility for the proxy vote.
In the case of a proxy issue for which there is a stated position in
the Policies, CAM generally votes in accordance with such stated
position. In the case of a proxy issue for which there is a list of
factors set forth in the Policies that CAM considers in voting on such
issue, CAM votes on a case-by-case basis in accordance with the general
principles set forth above and considering such enumerated
factors. In the case of a proxy issue for which there is no stated
position or list of factors that CAM considers in voting on such issue,
CAM votes on a case-by-case basis in accordance with the general
principles set forth above. Issues for which there is a stated position
set forth in the Policies or for which there is a list of factors set
forth in the Policies that CAM considers in voting on such issues fall
into a variety of categories, including election of directors,
ratification of auditors, proxy and tender offer defenses, capital
structure issues, executive and director compensation, mergers and
corporate restructurings, and social and environmental issues. The
stated position on an issue set forth in the Policies can always be
superseded, subject to the duty to act solely in the best interest of
the beneficial owners of accounts, by the investment management
professionals responsible for the account whose shares are being voted.
Issues applicable to a particular industry may cause CAM to abandon a
policy that would have otherwise applied to issuers generally. As a
result of the independent investment advisory services provided by
distinct CAM business units, there may be occasions when different
business units or different portfolio managers within the same business
unit vote differently on the same issue.
In furtherance of the Manager's goal to vote proxies in the best
interest of clients, the Manager follows procedures designed to
identify and address material conflicts that may arise between the
Manager's interests and those of its clients before voting proxies on
behalf of such clients. To seek to identify conflicts of interest, CAM
periodically notifies CAM employees (including employees of the
Manager) in writing that they are under an obligation (i) to be aware
of the potential for conflicts of interest with respect to voting
proxies on behalf of client accounts both as a result of their personal
relationships and due to special circumstances that may arise during
the conduct of CAM's and the Manager's business, and (ii) to bring
conflicts of interest of which they become aware to the attention of
compliance personnel. The Manager also maintains and considers a list
of significant relationships that could present a conflict of interest
for the Manager in voting proxies. The Manager is also sensitive to the
fact that a significant, publicized relationship between an issuer and
a non-CAM affiliate might appear to the public to influence the manner
in which the Manager decides to vote a proxy with respect to such
issuer. Absent special circumstances or a significant, publicized
non-CAM affiliate relationship that CAM or the Manager for prudential
reasons treats as a potential conflict of interest because such
relationship might appear to the public to influence the manner in
which the Manager decides to vote a proxy, the Manager generally takes
the position that non-CAM relationships between Citigroup and an issuer
(e.g. investment banking or banking) do not present a conflict of
interest for the Manager in voting proxies with respect to such issuer.
Such position is based on the fact that the Manager is operated as an
independent business unit from other Citigroup business units as well
as on the existence of information barriers between the Manager and
certain other Citigroup business units.
CAM maintains a Proxy Voting Committee, of which the Manager personnel
are members, to review and address conflicts of interest
brought to its attention by compliance personnel. A proxy issue that
will be voted in accordance with a stated position on an issue or in
accordance with the recommendation of an independent third party is not
brought to the attention of the Proxy Voting Committee for a conflict
of interest review because the Manager's position is that to the extent
a conflict of interest issue exists, it is resolved by voting in
accordance with a pre-determined policy or in accordance with the
recommendation of an independent third party. With respect to a
conflict of interest brought to its attention, the Proxy Voting
Committee first determines whether such conflict of interest is
material. A conflict of interest is considered material to the extent
that it is determined that such conflict is likely to influence, or
appear to influence, the Manager's decision-making in voting proxies.
If it is determined by the Proxy Voting Committee that a conflict of
interest is not material, the Manager may vote proxies notwithstanding
the existence of the conflict.
If it is determined by the Proxy Voting Committee that a conflict of
interest is material, the Proxy Voting Committee is responsible for
determining an appropriate method to resolve such conflict of interest
before the proxy affected by the conflict of interest is voted. Such
determination is based on the particular facts and circumstances,
including the importance of the proxy issue and the nature of the
conflict of interest. Methods of resolving a material conflict of
interest may include, but are not limited to, disclosing the conflict
to clients and obtaining their consent before voting, or suggesting to
clients that they engage another party to vote the proxy on their
behalf.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal
financial officer have concluded that the registrant's disclosure
controls and procedures (as defined in Rule 30a- 3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act")) are
effective as of a date within 90 days of the filing date of this
report that includes the disclosure required by this paragraph,
based on their evaluation of the disclosure controls and
procedures required by Rule 30a-3(b) under the 1940 Act and
15d-15(b) under the Securities Exchange Act of 1934.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940
Act) that occurred during the registrant's last fiscal half-year
(the registrant's second fiscal half-year in the case of an
annual report) that have materially affected, or are likely to
materially affect the registrant's internal control over
financial reporting.
ITEM 10. EXHIBITS.
(a) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(b) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.906CERT Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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, there unto duly authorized.
Real Estate Income Fund Inc.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
Real Estate Income Fund Inc.
Date: March 11, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
Real Estate Income Fund Inc.
Date: March 11, 2004
By: /s/ Richard L. Peteka
Richard L. Peteka
Chief Financial Officer of
Real Estate Income Fund Inc.
Date: March 11, 2004