Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Radnor, PA 19087
ING Clarion Global Real Estate Income Fund
201 King of Prussia Road
Radnor, PA 19087
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Table of Contents
Table of Contents
Dear Shareholder:
| We are pleased to deliver the 2007 annual report for the ING Clarion Global Real Estate Income Fund (the “Fund”). |
Performance Review
| The Fund delivered disappointing results to its shareholders in the past year because of a very challenging market environment. For the first time since 1998, global real estate stocks fell in 2007. In local currencies, global real estate stocks were down -11%. Though returns in 2007 for global real estate stocks were generally positive most months, the trend was interrupted by two sharp downturns of 12-13%, one in June-July and the second in November-December. Real estate stocks came under severe pressure late in the year and the S&P Citigroup World Property Index (“S&P WPI“)(1) fell -10% during the fourth quarter. In local currency terms, European real estate stocks were by far the worst performers in 2007 declining over 30%. U.K. real estate stocks went from being the best performers in 2006 to the worst performers in 2007, declining 37%. North American real estate stocks were down over 16% as both the U.S. and Canadian companies fell. In the U.S., REITs suffered one of the worst years ever, falling almost 17% (much of it during the fourth quarter) despite the receipt of a healthy 4%+ dividend. Asia-Pacific was the only region to deliver positive returns (+6.5%), but only because of Hong Kong (up 57%) and Singapore (up 9%). Hong Kong listed property companies were the only major geography to record positive total returns during the fourth quarter. Japan real estate stocks were off 13% for the year; Australian real estate stocks fell 8% for the year due to a terrible December. Even returns to REIT preferred stocks, ordinarily a “safe haven” in difficult markets, fell -13% in 2007. | |
| The NAV return for the Fund was down 15.82% for the year. The market return (change in share price plus dividends) was down much more (-32.34%) because the Fund’s share price moved from an 8% premium to a -15% discount to NAV during the year — a swing of -23%! Since its inception, the Fund has issued $910 million of preferred stock to raise investment capital in addition to that obtained from its common equity offering in 2004. The “leverage” of the preferred stock, which has a priority claim on the Fund’s assets, magnified the negative returns on our total portfolio of investments. The effect was especially acute during the fourth quarter when the NAV per share fell -15.34%. Though it may be of no comfort, the NAV decline of the Fund for the year was much less than those experienced by other real estate closed end Funds. | |
| Unfortunately, we were not able to mitigate the negative market returns through either asset allocation or security selection. Our REIT preferred stock positions fell -13.1% on average which was marginally behind the -12.5% performance of the Morgan Stanley REIT Preferred Index(1). Our common stock positions in the Fund trailed the index returns by a little less than 1% (-7.3% versus -7.9%) stemming in part from our yield bias given the Fund’s primary objective of delivering high dividends. The very low yields available on real estate stocks in Asia ex-Australia lead us to underweight these countries in our portfolio. Our underweighting to Hong Kong and Singapore were a significant drag on performance relative to the S&P WPI. However we were able to offset much of this drag related to yield orientation with good stock selection in Australia and Canada. Our overweight to Canada was both a source of yield and relative performance in 2007. We also had good country weightings in Europe which added value (including an under weight of Austria, Germany, Italy and Spain which all fell -20% or more). A modest overweight to the U.S. and some poor performance from some of our U.S. stock selection in the office and industrial property sectors also hurt performance. | |
| Despite a difficult investment climate last year, the Fund made its regular monthly dividends and some large special distributions in order to payout all income and realized gains received during the year. In addition to the regular monthly dividends of $0.115 per month, the Fund paid two special dividends in 2007 (one in September and one in December) totaling $1.84 per share. The special distributions were equivalent to 8% of the beginning of the year NAV. | |
| The board is reviewing the sustainability of our regular monthly dividend in light of the substantial dividends that have been paid out over the last two years and the difficult market environment. The Fund made substantial total distributions in each of the last two years which were well above the regular dividend level of $1.38 per year. The total payouts, $3.22 per share in 2007 and $3.265 per share in 2006, were necessary given the high level of income and capital gains achieved. The payouts have been a boon to our shareholders but have been a drain on the Fund’s assets which affects its ability to generate income for future dividends. In past years, a rising market has restored the capital value of the fund even as we made large special distributions and paid out the income we received on our investments. The sharp declines last year in REIT stock prices and REIT preferred stock prices have created a more difficult environment for funds focused on delivering consistent income payments to shareholders. |
| (1) | The S&P/Citigroup World Property Index is an unmanaged market-weighted total return index which consists of over 450 real estate companies from 18 developed markets with a free float total market capitalization of at least U.S. $100 million that derive more than 60% of their revenue from real estate development, management, rental and/or direct investment in physical property. The Morgan Stanley REIT Preferred Index is a preferred stock market capitalization weighted index of all exchange traded preferred securities of equity REITS. |
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| As in the past, the Fund’s dividends will be established by the board at regular intervals with consideration of the level of investment income and realized gains expected for the year. We strive to establish a level regular dividend that by the end of the year will meet our requirement to pay out all income and realized gains with a minimum of special distributions. Accordingly, we must consider both the income from our investments and the expected realized gains. The current market environment makes it difficult to predict how much capital appreciation of the Fund’s investments might occur and be ”harvested” over the course of the year as realized gains. | |
| The task is further complicated by our current monthly dividend policy given that there are limits on how many times we can distribute capital gains. We have been seeking permission from the SEC to implement a Managed Dividend policy which would effectively allow us to make multiple capital gain distributions during the year and spread income and capital gains distributions smoothly over all our dividends. If we get a positive decision from the SEC, we will have more flexibility to maintain our level monthly dividend. In light of all this, the board will continue to review the Fund’s dividend considering a range of possible scenarios for real estate stocks in 2008. |
Portfolio Review
| Over the course of the year the Fund’s portfolio allocation changed very little as we remain primarily invested in real estate companies’ common stock (89%). Our investments in preferred stocks stayed constant at 11% of the portfolio. The geographic exposure of the Fund shifted even though at the regional level there was only a modest shift of 2% from the Americas to the Asia-Pacific region. The shifts within region were more meaningful though, as we decreased exposure to the US by almost 4% and increased our investments in Canada by more than a percent. We also initiated a small but promising 1% position in Brazilian property stocks. In Asia, we decreased our weight in Australia by a little over 2% but increased our Hong Kong/ China exposure by 5%. During the year we increased our exposure to owners of health care, retail, and diversified property portfolio owners while trimming exposure to office, apartment, hotels and industrial property portfolios. The Fund’s investments remain well diversified by geography and by property type as shown in the pie charts below. |
| Total preferred stock and debt declined by $147 million from $1,057 million at the start of the year to $910 million at year-end. We issued $200 million of additional preferred shares in January to raise equity capital to pay down line loan borrowings. All debt borrowings of the Fund were eliminated over the course of the year, most of it early in the year. Unfortunately the negative returns to the Fund’s investments and significant distributions to shareholders caused the “leverage” ratio of the Fund to actually increase to 35% of total assets despite the significant debt repayments. With rates expected to fall, we decided not to replace one of two interest rate swap agreements when it expired in April 2007. We still have one swap arrangement in place which provides a fixed rate of 4.32% on $200 million through 7/01/2009. |
| (2) | Percentages presented are based on managed fund assets and are subject to change. |
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Market Commentary
| We start 2008 with plenty of pessimism about the economy and the prospects for real estate even though commercial real estate fundamentals are generally pretty healthy. New construction starts are low. Vacancy levels are not high in most property types and countries around the world. The key to real estate returns in the coming year is the economy. Real estate demand is a function of economic growth. There is reason for concern. For example, we expect a significant slowdown in the U.S. economy, probably even a mild recession. The U.K. economy could be very similar. However, overall it seems reasonable to assume that other of the world’s economies will avoid recession and continue to grow, especially in the Asia-Pacific region. If central bankers and governments remain vigilant and committed to mitigating the effects of the present financial crisis on wider economic activity, we expect a recovery in the second half of the year. In our opinion, real estate stocks already incorporate an economic slowdown including a U.S. recession scenario. As we head into a downturn in the economy, the commercial real estate sector is in pretty good shape (in contrast to the housing sector in the U.S. and some parts of Europe). The poor performance of real estate stocks in 2007 cannot be explained by disappointing earnings. Earnings growth was better than long term averages. Earnings for global real estate companies grew by more than 11% in 2007 over 2006, including 15% in the Asia-Pacific region, 10% in the Americas, and a still respectable 9% in Europe. Generally speaking, real estate companies’ earnings held up well despite rising debt costs and slowing economic conditions. Earnings are expected to grow again in 2008 despite a more challenging economic environment. | |
| The decline in real estate stock prices is related to worry about the possibility of significantly slower earnings growth in the future. The listed markets have already factored in more bad news ahead. Real estate is much cheaper in most parts of the world now in the public market versus the private market. Private market values remain a very relevant reference point as almost 90% of the world’s real estate is still owned privately away from the public market. At the end of 2007, the average discount to private market value or Net Asset Value is at 14% worldwide, with only Hong Kong and Japanese REITs still trading at premiums. | |
| Real estate stock dividends now offer yields that are competitive with and in many cases higher than long-term government bonds. Furthermore, these dividends are for the most part secure as the average payout ration of dividends to operating earnings is only 56%. Said differently, on average, dividends are 180% covered by current earnings, which should provide investors in real estate stocks a degree of comfort regarding the integrity of dividend payments. We expect real estate company dividends, in the aggregate, to grow in the year ahead. | |
| If there is a silver lining to the storm clouds that gathered over the property sector in 2007, it is that real estate stocks are beginning to look “cheap” again. We look for a better year for real estate stocks in 2008, but positive returns may be back-end loaded. They say that “hope springs eternal,” but it is apparent that investors’ expectations for real estate are gloomy as we start 2008. Furthermore, the flow of negative news will likely continue about private market real estate. More headlines about declining home prices, sub-prime mortgage write-offs and higher residential mortgage delinquencies are a virtual certainty, which will affect the general mood about real estate of all types: residential and commercial. More directly relevant to the commercial real estate companies we invest in will be the flow of data suggesting that private market real estate values are coming down. Unwinding overleveraged real estate deals done before the current credit market turmoil and redemptions in open-end real estate Funds that cause forced sales may create some pressure on cap rates and produce some sensational headlines about real estate value declines. Considering all of this suggests it will be hard for real estate stocks to mount a sustainable and meaningful rally early-on in 2008. Accordingly, we expect volatility to stay with us for the early part of the year. But value should eventually win out and it appears that the bad news is already more than priced into real estate stocks. | |
| We appreciate your continued faith and confidence. | |
| Sincerely, |
 |
 |
|
| T. Ritson Ferguson | Steven D. Burton | |
|
President and
|
Co-Portfolio Manager | |
|
Chief Executive Officer
|
| The views expressed represent the opinion of ING Clarion Real Estate Securities and are subject to change, and are not intended as a forecast or guarantee of future results. This material is for informational purposes only, does not constitute investment advice, and is not intended as an endorsement of any specific investment. Information and opinions are derived from proprietary and non-proprietary sources. |
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| U.S. $ | ||||||||
| Shares | Value | |||||||
| Common Stock – 132.1% | ||||||||
| Real Estate Investment Trusts (“REIT”) – 132.1% | ||||||||
| Australia – 13.4% | ||||||||
| 29,967,000 | DB RREEF Trust | $ | 52,625,063 | |||||
| 14,384,178 | Macquarie CountryWide Trust | 20,839,551 | ||||||
| 11,059,530 | Goodman Group | 47,485,924 | ||||||
| 5,522,427 | Westfield Group | 101,828,335 | ||||||
| 222,778,873 | ||||||||
| Brazil – 0.9% | ||||||||
| 1,132,100 | BR Malls Participacoes SA (a) | 15,264,270 | ||||||
| Canada – 12.7% | ||||||||
| 1,761,900 | Boardwalk Real Estate Investment Trust | 79,530,518 | ||||||
| 200,100 | Calloway Real Estate Investment Trust | 4,965,245 | ||||||
| 264,600 | Calloway Real Estate Investment Trust (b) | 6,565,737 | ||||||
| 500,000 | Crombie Real Estate Investment Trust (b) | 5,638,584 | ||||||
| 884,800 | H&R Real Estate Investment Trust | 17,786,546 | ||||||
| 2,282,900 | InnVest Real Estate Investment Trust | 24,842,541 | ||||||
| 440,000 | InnVest Real Estate Investment Trust (b) | 4,788,085 | ||||||
| 700,000 | Primaris Retail Real Estate Investment Trust (b) | 12,979,381 | ||||||
| 2,447,000 | RioCan Real Estate Investment Trust | 54,099,539 | ||||||
| 211,196,176 | ||||||||
| Finland – 1.9% | ||||||||
| 2,528,457 | Citycon Oyj | 13,493,069 | ||||||
| 1,470,267 | Sponda Oyj | 17,562,267 | ||||||
| 31,055,336 | ||||||||
| France – 11.3% | ||||||||
| 403,500 | Societe de la Tour Eiffel | 55,371,514 | ||||||
| 598,078 | Unibail-Rodamco | 131,093,064 | ||||||
| 186,464,578 | ||||||||
| Hong Kong – 12.5% | ||||||||
| 37,700,000 | Agile Property Holdings Ltd. | 68,656,219 | ||||||
| 14,611,500 | China Overseas Land & Investment Ltd. | 30,207,169 | ||||||
| 8,133,000 | Hang Lung Properties Ltd. | 36,819,312 | ||||||
| 3,062,900 | Hongkong Land Holdings Ltd. | 15,130,726 | ||||||
| 2,500,000 | Sun Hung Kai Properties Ltd. | 53,094,621 | ||||||
| 1,153,000 | The Link REIT | 2,496,042 | ||||||
| 206,404,089 | ||||||||
| Japan – 4.7% | ||||||||
| 2,388 | Japan Retail Fund Investment Corp. | 17,036,530 | ||||||
| 1,105,000 | Mitsubishi Estate Co., Ltd. | 26,656,895 | ||||||
| 968,000 | Mitsui Fudosan Co., Ltd. | 21,055,722 | ||||||
| 934 | Nippon Building Fund, Inc. | 13,126,080 | ||||||
| 77,875,227 | ||||||||
| Netherlands – 12.0% | ||||||||
| 116,780 | Corio NV | 9,458,898 | ||||||
| 357,401 | Eurocommercial Properties NV | 18,445,600 | ||||||
| 1,136,730 | Nieuwe Steen Investments NV | 29,333,531 | ||||||
| 417,161 | VastNed Retail NV | 40,071,111 | ||||||
| 934,400 | Wereldhave NV | 102,077,965 | ||||||
| 199,387,105 | ||||||||
| New Zealand – 0.6% | ||||||||
| 9,050,000 | Goodman Property Trust | 10,098,418 | ||||||
| Singapore – 0.1% | ||||||||
| 500,000 | Capitaland Ltd. | 2,177,915 | ||||||
| United Kingdom – 9.9% | ||||||||
| 1,367,200 | British Land Co. Plc | 25,718,637 | ||||||
| 945,400 | Great Portland Estates Plc | 8,844,994 | ||||||
| 1,209,242 | Hammerson Plc | 24,672,955 | ||||||
| 1,902,400 | Land Securities Group Plc | 57,030,988 | ||||||
| 603,400 | Liberty International Plc | 12,936,151 | ||||||
| 45,000 | Mapeley Ltd. | 1,357,092 | ||||||
| 3,621,876 | Segro Plc | 33,885,626 | ||||||
| 164,446,443 | ||||||||
| United States – 52.1% | ||||||||
| 115,300 | Acadia Realty Trust | 2,952,833 | ||||||
| 197,300 | AMB Property Corp. | 11,356,588 | ||||||
| 898,200 | American Campus Communities, Inc. | 24,116,670 | ||||||
| 285,800 | BioMed Realty Trust, Inc. | 6,621,986 | ||||||
| 518,200 | Boston Properties, Inc. | 47,575,942 | ||||||
| 1,215,230 | Brandywine Realty Trust | 21,789,074 | ||||||
| 848,300 | Camden Property Trust | 40,845,645 | ||||||
| 1,231,800 | Cedar Shopping Centers, Inc. | 12,601,314 | ||||||
| 219,900 | Douglas Emmet, Inc. | 4,971,939 | ||||||
| 1,208,500 | Extra Space Storage, Inc. | 17,269,465 | ||||||
| 294,000 | Federal Realty Investment Trust | 24,152,100 | ||||||
| 1,211,100 | First Industrial Realty Trust, Inc. | 41,904,060 | ||||||
| 1,655,400 | GMH Communities Trust | 9,137,808 | ||||||
| 675,000 | Gramercy Capital Corp. | 16,409,250 | ||||||
| 941,484 | HRPT Properties Trust | 7,277,671 | ||||||
| 856,200 | Health Care REIT, Inc. | 38,263,578 | ||||||
| 371,000 | Hersha Hospitality Trust | 3,524,500 | ||||||
| 475,000 | Highwoods Properties, Inc. | 13,955,500 | ||||||
| 13,000 | Home Properties, Inc. | 583,050 | ||||||
| 755,400 | iStar Financial, Inc. | 19,678,170 | ||||||
| 1,260,990 | Liberty Property Trust | 36,329,122 | ||||||
| 2,004,100 | Maguire Properties, Inc. | 59,060,827 | ||||||
| 637,700 | Mid-America Apartment Communities, Inc. | 27,261,675 | ||||||
| 570,700 | National Retail Properties, Inc. | 13,342,966 | ||||||
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| U.S. $ | ||||||||
| Shares | Value | |||||||
| Common Stock (continued) | ||||||||
| United States (continued) | ||||||||
| 2,784,400 | Nationwide Health Properties, Inc. | $ | 87,346,628 | |||||
| 1,994,070 | OMEGA Healthcare Investors, Inc. | 32,004,824 | ||||||
| 994,000 | Pennsylvania Real Estate Investment Trust | 29,501,920 | ||||||
| 325,000 | ProLogis | 20,598,500 | ||||||
| 200,000 | Ramco-Gershenson Properties Trust | 4,274,000 | ||||||
| 498,800 | Regency Centers Corp. | 32,167,612 | ||||||
| 630,735 | SL Green Realty Corp. | 58,948,493 | ||||||
| 171,100 | Sovran Self Storage, Inc. | 6,861,110 | ||||||
| 770,000 | Strategic Hotels & Resorts, Inc. | 12,882,100 | ||||||
| 751,900 | The Macerich Co. | 53,430,014 | ||||||
| 200,000 | U-Store-It Trust | 1,832,000 | ||||||
| 712,120 | Verde Realty (a)(d) | 23,499,960 | ||||||
| 864,328,894 | ||||||||
|
Total Common Stock (cost $1,646,220,749) |
2,191,477,324 | |||||||
| Preferred Stock – 16.7% | ||||||||
| Real Estate Investment Trusts (“REIT”) – 16.7% | ||||||||
| United States – 16.7% | ||||||||
| 450,000 | Alexandria Real Estate Equities, Inc., Series C | 11,812,500 | ||||||
| 126,800 | AP AIMCAP Corp., Series A | 1,711,800 | ||||||
| 80,500 | Apartment Investment & Management Co., Series U | 1,684,060 | ||||||
| 400,000 | Apartment Investment & Management Co., Series V | 8,212,000 | ||||||
| 400,000 | Apartment Investment & Management Co., Series Y | 8,012,000 | ||||||
| 174,000 | Associated Estates Realty Corp. | 4,089,000 | ||||||
| 400,000 | BioMed Realty Trust, Inc., Series A | 8,180,000 | ||||||
| 207,700 | Cedar Shopping Centers, Inc. | 4,880,950 | ||||||
| 125,000 | Digital Realty Trust, Inc., Series B | 2,768,750 | ||||||
| 200,800 | Duke Realty Corp., Series M | 4,046,120 | ||||||
| 400,000 | Entertainment Properties Trust, Series D | 7,480,000 | ||||||
| 337,500 | Equity Inns, Inc., Series C | 5,948,438 | ||||||
| 430,700 | Glimcher Realty Trust, Series G | 8,226,370 | ||||||
| 520,000 | Health Care REIT, Inc., Series F | 11,497,200 | ||||||
| 905,600 | Host Hotels & Resorts, Inc., Series E | 22,730,560 | ||||||
| 210,000 | Innkeepers USA Trust, Series C | 2,520,000 | ||||||
| 1,015,000 | iStar Financial, Inc., Series I | 18,676,000 | ||||||
| 200,000 | LaSalle Hotel Properties, Series D | 3,660,000 | ||||||
| 523,200 | LaSalle Hotel Properties, Series E | 9,993,120 | ||||||
| 520,000 | LaSalle Hotel Properties, Series G | 8,975,200 | ||||||
| 36,000 | LBA Realty Fund II – WBP I LLC, Series A | 1,494,000 | ||||||
| 170,000 | LBA Realty Fund II – WBP I LLC, Series B | 2,082,500 | ||||||
| 1,000,000 | LTC Properties, Inc., Series F | 22,110,000 | ||||||
| 200,000 | Mid-America Apartment Communities, Inc., Series H | 4,814,000 | ||||||
| 237,100 | National Retail Properties, Inc., Series C | 4,744,371 | ||||||
| 70,000 | NorthStar Realty Finance Corp., Series A | 1,158,500 | ||||||
| 240,000 | NorthStar Realty Finance Corp., Series B | 3,818,400 | ||||||
| 120,000 | OMEGA Healthcare Investors, Inc., Series D | 2,972,400 | ||||||
| 320,000 | PS Business Parks, Inc., Series O | 6,512,000 | ||||||
| 320,000 | Public Storage, Inc., Series K | 6,736,000 | ||||||
| 360,000 | Public Storage, Inc., Series M | 6,840,000 | ||||||
| 192,500 | SL Green Realty Corp., Series C | 4,377,450 | ||||||
| 200,000 | SL Green Realty Corp., Series D | 4,570,000 | ||||||
| 275,000 | Strategic Hotels & Resorts, Inc. (b) | 6,737,500 | ||||||
| 400,000 | Strategic Hotels & Resorts, Inc., Series B | 7,700,000 | ||||||
| 363,600 | Strategic Hotels & Resorts, Inc., Series C | 7,090,200 | ||||||
| 368,000 | Sunstone Hotel Investors, Inc., Series A | 7,187,040 | ||||||
| 342,600 | Taubman Centers, Inc., Series G | 8,102,490 | ||||||
| 573,500 | Taubman Centers, Inc., Series H | 13,649,300 | ||||||
|
Total Preferred Stock (cost $336,385,254) |
277,800,219 | |||||||
| Investment Companies – 2.8% | ||||||||
| United Kingdom – 2.8% | ||||||||
| 399,119 | Eurocastle Investment Ltd. | 9,774,162 | ||||||
| 15,495,600 | ING UK Real Estate Income Trust Ltd. + | 21,437,655 | ||||||
| 4,620,000 | Invista Foundation Property Trust Ltd. | 7,495,208 | ||||||
| 547,200 | ProLogis European Properties | 7,952,337 | ||||||
|
Total Investment Companies (cost $55,701,614) |
46,659,362 | |||||||
| Purchased Options (a) – 0.6% | ||||||||
| Brazil – 0.2% | ||||||||
| 438,400 | Brascan Residential Properties SA | |||||||
| expiring 10/22/08 @ $0 | 2,709,213 | |||||||
| India – 0.4% | ||||||||
| 518,800 | Unitech Ltd. | |||||||
| expiring 6/19/08 @ $0 | 6,439,754 | |||||||
|
Total Purchased Options (cost $6,482,721) |
9,148,967 | |||||||
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| U.S. $ | ||||||||
| Shares | Value | |||||||
| Warrants (a) – 0.0% | ||||||||
| Hong Kong – 0.0% | ||||||||
| 1,217,625 | China Overseas Land & Investment Ltd. | |||||||
|
expiring 8/27/08 @ $0 (cost $0) |
$ | 665,232 | ||||||
|
Total Investments – 152.2% (cost $2,044,790,338) |
2,525,751,104 | |||||||
| Other Assets less Liabilities – 2.6% | 43,488,841 | |||||||
| Preferred shares, at redemption value – (54.8%) | (910,000,000 | ) | ||||||
| Net Assets Applicable to Common Shares – 100% (c) | $ | 1,659,239,945 | ||||||
| (a) | Non-income producing security. |
| (b) | Securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. At December 31, 2007, the securities amounted to $36,709,287 or 2.2% of net assets. |
| (c) | Portfolio percentages are calculated based on net assets applicable to Common Shares. |
| (d) | Fair valued pursuant to guidelines approved by the board. |
| + | Investments in companies considered to be an affiliate of the Trust (such companies are defined as “Affiliated Companies” in Section 2(a)(3) of the Investment Company Act of 1940) were as follows: |
| Affiliate | Gross Additions | Gross Reductions | Dividend Income | |||||||||
|
ING UK Real Estate Income Trust Ltd.
|
$ | — | $ | — | $ | 1,936,974 | ||||||
Table of Contents
|
Assets
|
||||||
|
Investments, at value (cost $2,017,284,192)
|
$ | 2,504,313,449 | ||||
|
Investment in affiliate (cost $27,506,146)
|
21,437,655 | |||||
|
Cash (including foreign currency of $213,229 with
a cost of $213,964)
|
23,479,702 | |||||
|
Receivable for investment securities sold
|
28,429,055 | |||||
|
Dividends receivable
|
19,468,256 | |||||
|
Dividend withholding reclaims receivable
|
1,191,679 | |||||
|
Other assets
|
126,225 | |||||
|
Total Assets
|
2,598,446,021 | |||||
|
Liabilities
|
||||||
|
Payable for investment securities purchased
|
24,148,393 | |||||
|
Dividends payable — preferred shares
|
1,408,512 | |||||
|
Management fee payable
|
1,383,960 | |||||
|
Unrealized depreciation on swap contracts
|
1,683,437 | |||||
|
Accrued expenses and other liabilities
|
581,774 | |||||
|
Total Liabilities
|
29,206,076 | |||||
|
Preferred Shares, at redemption
value
|
||||||
|
$0.001 par value per share; 36,400 Auction
Preferred Shares authorized,
issued and outstanding at $25,000 per share liquidation preference |
910,000,000 | |||||
|
Net Assets Applicable to Common
Shares
|
$ | 1,659,239,945 | ||||
|
Composition of Net Assets Applicable to Common
Shares
|
||||||
|
Common Shares, $0.001 par value per share;
unlimited number of shares authorized, 102,676,778 shares issued and outstanding |
$ | 102,677 | ||||
|
Additional paid-in capital
|
1,472,539,737 | |||||
|
Distributions in excess of net investment income
|
(281,640,638 | ) | ||||
|
Accumulated net realized loss on investments,
swap contracts and foreign currency transactions
|
(11,146,961 | ) | ||||
|
Net unrealized appreciation on investments, swap
contracts and foreign currency denominated assets and liabilities
|
479,385,130 | |||||
|
Net Assets Applicable to Common
Shares
|
$ | 1,659,239,945 | ||||
|
Net Asset Value Applicable to Common
Shares
|
||||||
|
(based on 102,676,778 common shares outstanding)
|
$ | 16.16 | ||||
Table of Contents
|
Investment Income
|
||||||||||
|
Dividends (net of foreign withholding taxes of
$9,530,374)
|
$ | 148,292,842 | ||||||||
|
Dividends from affiliate
|
1,936,974 | |||||||||
|
Total Investment Income
|
$ | 150,229,816 | ||||||||
|
Expenses
|
||||||||||
|
Management fees
|
27,538,329 | |||||||||
|
Interest expense on line of credit
|
6,547,597 | |||||||||
|
Auction agent fees — preferred shares
|
2,312,451 | |||||||||
|
Administration fees
|
665,773 | |||||||||
|
Transfer agent fees
|
490,971 | |||||||||
|
Printing fees
|
472,252 | |||||||||
|
Insurance fees
|
170,621 | |||||||||
|
Custodian fees
|
132,889 | |||||||||
|
Trustees’ fees and expenses
|
124,314 | |||||||||
|
Legal fees
|
113,835 | |||||||||
|
Audit fees
|
77,305 | |||||||||
|
NYSE listing fee
|
34,473 | |||||||||
|
AMEX listing fee
|
15,000 | |||||||||
|
Rating agency fees
|
11,800 | |||||||||
|
Miscellaneous expenses
|
12,482 | |||||||||
|
Total Expenses
|
38,720,092 | |||||||||
|
Management fee waived
|
(8,099,508 | ) | ||||||||
|
Net Expenses
|
30,620,584 | |||||||||
|
Net Investment Income
|
119,609,232 | |||||||||
|
Net Realized and Unrealized Gain (Loss) on
Investments, Swap Contracts and Foreign Currency
Transactions
|
||||||||||
|
Net realized gain (loss) on:
|
||||||||||
|
Investments
|
191,910,875 | |||||||||
|
Swap contracts
|
3,913,231 | |||||||||
|
Foreign currency transactions
|
(617,070 | ) | ||||||||
|
Total Net Realized Gain
|
195,207,036 | |||||||||
|
Net change in unrealized
appreciation/depreciation on:
|
||||||||||
|
Investments
|
(605,396,970 | ) | ||||||||
|
Swap contracts
|
(6,902,545 | ) | ||||||||
|
Foreign currency denominated assets and
liabilities
|
63,927 | |||||||||
|
Total Net Change in Unrealized
Appreciation/Depreciation
|
(612,235,588 | ) | ||||||||
|
Net Loss on Investments, Swap Contracts and
Foreign Currency Transactions
|
(417,028,552 | ) | ||||||||
|
Dividends and Distributions on Preferred
Shares from
|
||||||||||
|
Net investment income
|
(49,028,024 | ) | ||||||||
| Net Decrease in Net Assets Applicable to Common Shares Resulting from Operations | $ | (346,447,344 | ) | |||||||
Table of Contents
| For the | For the | ||||||||
| Year Ended | Year Ended | ||||||||
| December 31, 2007 | December 31, 2006 | ||||||||
|
Change in Net Assets Applicable to Common
Shares Resulting from Operations
|
|||||||||
|
Net investment income
|
$ | 119,609,232 | $ | 99,109,452 | |||||
|
Net realized gain on investments, swap contracts
and foreign currency transactions
|
195,207,036 | 92,597,144 | |||||||
|
Net change in unrealized
appreciation/depreciation on investments, swap contracts and
foreign currency denominated assets and liabilities
|
(612,235,588 | ) | 734,013,335 | ||||||
|
Dividends and distributions on Preferred Shares
from net investment income
|
(49,028,024 | ) | (35,323,408 | ) | |||||
|
Net increase (decrease) in net assets applicable
to Common Shares resulting from operations
|
(346,447,344 | ) | 890,396,523 | ||||||
|
Dividends and Distributions on Common
Shares
|
|||||||||
|
Distribution of net investment income
|
(185,813,601 | ) | (230,141,928 | ) | |||||
|
Distribution of capital gains
|
(144,793,322 | ) | (100,149,675 | ) | |||||
|
Total dividends and distributions on Common Shares
|
(330,606,923 | ) | (330,291,603 | ) | |||||
|
Capital Share Transactions
|
|||||||||
|
Reinvestment of dividends
|
2,521,957 | 33,015,062 | |||||||
|
Offering expenses in connection with the issuance
of Preferred Shares
|
(2,282,400 | ) | — | ||||||
|
Net increase from capital share transactions
|
239,557 | 33,015,062 | |||||||
|
Net Increase (Decrease) in Net Assets
|
(676,814,710 | ) | 593,119,982 | ||||||
|
Net Assets Applicable to Common
Shares
|
|||||||||
|
Beginning of year
|
2,336,054,655 | 1,742,934,673 | |||||||
|
End of year (net of distributions in excess of
net investment income of $281,640,638 and $237,370,730,
respectively)
|
$ | 1,659,239,945 | $ | 2,336,054,655 | |||||
Table of Contents
|
Cash Flows from Operating
Activities:
|
||||||
|
Net decrease in net assets applicable to Common
Shares resulting from operations
|
$ | (346,447,344 | ) | |||
|
Adjustments to Reconcile Net Decrease in Net
Assets Applicable to Common Shares Resulting From Operations to
Net Cash Provided by Operating and Investing
Activities:
|
||||||
|
Net change in unrealized
appreciation/depreciation on swap contracts
|
6,902,545 | |||||
|
Net change in unrealized
appreciation/depreciation on investments
|
605,396,970 | |||||
|
Net realized gain on investments
|
(191,910,875 | ) | ||||
|
Cost of long-term securities purchased
|
(195,819,080 | ) | ||||
|
Proceeds from sale of long-term securities
|
667,245,316 | |||||
|
Increase in receivable for investment securities
sold
|
(23,147,025 | ) | ||||
|
Decrease in dividends receivable
|
1,208,121 | |||||
|
Decrease in receivable for capital shares sold
|
33,015,062 | |||||
|
Increase in dividend withholding reclaims
receivable
|
(752,155 | ) | ||||
|
Decrease in other assets
|
276,921 | |||||
|
Decrease in payable for investment securities
purchased
|
(52,208,451 | ) | ||||
|
Decrease in management fee payable
|
(276,823 | ) | ||||
|
Decrease in accrued expenses and other liabilities
|
(2,883,176 | ) | ||||
|
Net Cash Provided by Operating and Investing
Activities
|
500,600,006 | |||||
|
Cash Flows From Financing
Activities:
|
||||||
|
Reinvestment of dividends
|
2,521,957 | |||||
|
Offering expenses in connection with the issuance
of preferred shares
|
(2,282,400 | ) | ||||
|
Cash distributions paid on common shares
|
(330,606,923 | ) | ||||
|
Cash received from the issuance of preferred
shares
|
200,000,000 | |||||
|
Decrease in line of credit payable
|
(347,519,500 | ) | ||||
|
Increase in dividends payable —
preferred shares
|
327,725 | |||||
|
Net Cash Used in Financing Activities
|
(477,559,141 | ) | ||||
|
Net increase in cash
|
23,040,865 | |||||
|
Cash at Beginning of Year
|
438,837 | |||||
|
Cash at End of Year
|
$ | 23,479,702 | ||||
Table of Contents
| For the Period | ||||||||||||||||||
| For the | For the | For the | February 18, 2004(1) | |||||||||||||||
| Per share operating performance for a Common Share | Year Ended | Year Ended | Year Ended | through | ||||||||||||||
| outstanding throughout the period | December 31, 2007 | December 31, 2006 | December 31, 2005 | December 31, 2004 | ||||||||||||||
|
Net asset value, beginning of period
|
$ | 22.78 | $ | 17.23 | $ | 17.46 | $ | 14.33 | (2) | |||||||||
|
Income from investment operations
|
||||||||||||||||||
|
Net investment income(3)
|
1.17 | 0.98 | 1.09 | 0.84 | ||||||||||||||
|
Net realized and unrealized gain (loss) on
investments, swap contracts and foreign currency transactions
|
(4.07 | ) | 8.19 | 0.46 | 3.12 | |||||||||||||
|
Dividends and distributions on Preferred Shares
from net investment income (common stock equivalent basis)
|
(0.48 | ) | (0.35 | ) | (0.23 | ) | (0.08 | ) | ||||||||||
|
Total from investment operations
|
(3.38 | ) | 8.82 | 1.32 | 3.88 | |||||||||||||
|
Dividends and distributions on Common
Shares
|
||||||||||||||||||
|
Net investment income
|
(1.81 | ) | (2.28 | ) | (1.38 | ) | (0.75 | ) | ||||||||||
|
Capital gains
|
(1.41 | ) | (0.99 | ) | (0.17 | ) | — | |||||||||||
|
Total dividends and distributions to Common
Shareholders
|
(3.22 | ) | (3.27 | ) | (1.55 | ) | (0.75 | ) | ||||||||||
|
Offering expenses in connection with the
issuance of Preferred Shares
|
(0.02 | ) | — | — | — | |||||||||||||
|
Net asset value, end of period
|
$ | 16.16 | $ | 22.78 | $ | 17.23 | $ | 17.46 | ||||||||||
|
Market value, end of period
|
$ | 13.83 | $ | 24.68 | $ | 16.30 | $ | 15.21 | ||||||||||
|
Total investment
return(5)
|
||||||||||||||||||
|
Net asset value
|
(15.82 | )% | 53.42 | % | 8.13 | % | 28.20 | %(4) | ||||||||||
|
Market value
|
(32.34 | )% | 75.97 | % | 18.32 | % | 7.16 | %(4) | ||||||||||
|
Ratios and supplemental data
|
||||||||||||||||||
|
Net assets, applicable to Common Shares, end of
period (thousands)
|
$ | 1,659,240 | $ | 2,336,055 | $ | 1,742,935 | $ | 1,765,799 | ||||||||||
|
Ratios to average net assets applicable to Common
Shares of:
|
||||||||||||||||||
|
Net expenses, after fee waiver+
|
1.38 | % | 1.53 | % | 1.34 | % | 1.17 | %(6) | ||||||||||
|
Net expenses, before fee waiver+
|
1.74 | % | 1.89 | % | 1.71 | % | 1.53 | %(6) | ||||||||||
|
Net expenses, after the fee waiver excluding
interest on line of credit+
|
1.08 | % | 1.06 | % | 1.11 | % | 1.07 | %(6) | ||||||||||
|
Net expenses, before fee waiver excluding
interest on line of credit+
|
1.44 | % | 1.42 | % | 1.48 | % | 1.42 | %(6) | ||||||||||
|
Net investment income, after preferred share
dividends
|
3.17 | % | 3.11 | % | 5.11 | % | 6.20 | %(6) | ||||||||||
|
Preferred share dividends
|
2.20 | % | 1.73 | % | 1.39 | % | 0.66 | %(6) | ||||||||||
|
Net investment income, before preferred share
dividends+
|
5.37 | % | 4.84 | % | 6.50 | % | 6.86 | %(6) | ||||||||||
|
Ratios to average net assets applicable to
Common & Preferred Shares of:
|
||||||||||||||||||
|
Net expenses, after fee waiver+
|
0.95 | % | 1.07 | % | 0.91 | % | 0.82 | %(6) | ||||||||||
|
Net expenses, before fee waiver+
|
1.20 | % | 1.32 | % | 1.16 | % | 1.07 | %(6) | ||||||||||
|
Net expenses, after fee waiver excluding interest
on line of credit+
|
0.74 | % | 0.74 | % | 0.75 | % | 0.75 | %(6) | ||||||||||
|
Net expenses, before fee waiver excluding
interest on line of credit+
|
0.99 | % | 0.99 | % | 1.00 | % | 1.00 | %(6) | ||||||||||
|
Net investment income, after preferred share
dividends
|
2.18 | % | 2.18 | % | 3.45 | % | 4.35 | %(6) | ||||||||||
|
Preferred share dividends
|
1.51 | % | 1.21 | % | 0.94 | % | 0.46 | %(6) | ||||||||||
|
Net investment income, before preferred share
dividends+
|
3.69 | % | 3.39 | % | 4.39 | % | 4.81 | %(6) | ||||||||||
|
Portfolio turnover rate
|
6.10 | % | 13.23 | % | 21.79 | % | 21.54 | % | ||||||||||
|
Leverage analysis:
|
||||||||||||||||||
|
Preferred shares, at redemption value, ($25,000
per share liquidation preference) (thousands)
|
$ | 910,000 | $ | 710,000 | $ | 710,000 | $ | 710,000 | ||||||||||
|
Net asset coverage per share of preferred shares
|
$ | 70,584 | $ | 107,255 | $ | 86,368 | $ | 87,176 | ||||||||||
| (1) | Commencement of operations. |
| (2) | Net asset value at February 18, 2004. |
| (3) | Based on average shares outstanding. |
| (4) | Total investment return on net asset value (“NAV”) is calculated assuming a purchase at the offering price of $15.00 (less $0.675 sales load) per share paid by the initial shareholder on the first day and a sale at NAV on the last day of the period reported. Total investment return based upon market value is calculated assuming a purchase of Common Shares at the then-current market price of $15.00 on February 25, 2004 (initial public offering). |
| (5) | Total investment return does not reflect brokerage commissions. A return calculated for a period of less than one year is not annualized. Dividends and distributions are assumed to be reinvested at the prices obtained under the Trust’s Dividend Reinvestment Plan. NAV total return is calculated assuming reinvestment of distributions at NAV on the date of the distribution. |
| (6) | Annualized. |
| + | Does not reflect the effects of dividends to Preferred Shareholders. |
Table of Contents
1. Fund Organization
2. Significant Accounting Policies
Securities Valuation – The net asset value of the common shares of the Trust will be computed based upon the value of the Trust’s portfolio securities and other assets. The Trust calculates net asset value per common share by subtracting the Trust’s liabilities (including accrued expenses, dividends payable and any borrowings of the Trust) and the liquidation value of any outstanding preferred shares from the Trust’s total assets (the value of the securities the Trust holds, plus cash or other assets, including interest accrued but not yet received) and dividing the result by the total number of common shares of the Trust outstanding. Net asset value per common share will be determined as of the close of the regular trading session (usually 4:00 p.m., EST) on the New York Stock Exchange (“NYSE”) on each business day on which the NYSE is open for trading.
For purposes of determining the net asset value of the Trust, readily marketable portfolio assets traded principally on an exchange, or on a similar regulated market reporting contemporaneous transaction prices, are valued, except as indicated below, at the last sale price for such assets on such principal markets on the business day on which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the closing bid and asked prices on such day. If no bid or asked prices are quoted on such day, then the security is valued by such method as the Trust’s board of trustees (the “Board”) shall determine in good faith to reflect its fair market value. Readily marketable assets not traded on such a market are valued at the current bid prices provided by dealers or other sources approved by the Board, including pricing services when such prices are believed by the Board to reflect the fair market value of such assets. The prices provided by a pricing service take into account institutional size trading in similar groups of assets and any developments related to specific assets. Foreign securities are valued based upon quotations from the primary market in which they are traded and are translated from the local currency into U.S. dollars using current exchange rates. In addition, if quotations are not readily available, or if the values have been materially affected by events occurring after the closing of a foreign market, assets may be valued by another method that the Board of Trustees believes accurately reflects fair value. Other assets are valued at fair value by or pursuant to guidelines approved by the Board.
Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities, which mature in 60 days or less are valued at, amortized cost, which approximates market value.
Foreign Currency Translation – The books and records of the Trust are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis:
| (i) | market value of investment securities, other assets and liabilities – at the current rates of exchange; |
| (ii) | purchases and sales of investment securities, income and expenses – at the rate of exchange prevailing on the respective dates of such transactions. |
Although the net assets of the Trust are presented at the foreign exchange rates and market values at the close of each fiscal period, the Trust does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of long-term securities held at the end of the fiscal period. Similarly, the Trust does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of portfolio securities sold during the fiscal period. Accordingly, realized foreign currency gains or losses will be included in the reported net realized gains or losses on investment transactions.
Net realized gains or losses on foreign currency transactions represent net foreign exchange gains or losses from the holding of foreign currencies, currency gains or losses realized between the trade date and settlement date on securities transactions, and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Trust’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains or losses from valuing foreign currency denominated assets or liabilities (other than investments) at period end exchange rates are reflected as a component of net unrealized appreciation or depreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of domestic origin as a result of, among other factors, the possibility of political or economic instability, or the level of governmental supervision and regulation of foreign securities markets.
Forward Exchange Currency Contracts – The Trust may enter into forward exchange currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on it foreign portfolio holdings, to hedge certain firm purchase and sales commitments denominated in foreign currencies and for investment purposes. A forward exchange currency contract is a commitment to purchase or sell a foreign currency on a future date at a negotiated forward rate. The gain or loss arising from the difference between the original contracts and the closing of such contracts would be included in net realized gain or loss on foreign currency transactions.
Fluctuations in the value of open forward exchange currency contracts are recorded for financial reporting purposes as unrealized appreciation and depreciation by the Trust.
The Trust’s custodian will place and maintain cash not available for investment or other liquid assets in a separate account of the Trust having a value at least equal
Table of Contents
Risks may arise from the potential inability of a counterparty to meet the terms of a contract and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. The face or contract amount, in U.S. dollars, reflects the total exposure the Trust has in that particular currency contract. As of December 31, 2007, the Trust did not hold any forward exchange currency contracts.
Securities Transactions and Investment Income – Securities transactions are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the basis of identified cost. Dividend income is recorded on the ex-dividend date. Distributions received from investments in REITs are recorded as dividend income on ex-dividend date, subject to reclassification upon notice of the character of such distributions by the issuer. The portion of dividend attributable to the return of capital is recorded against the cost basis of the security. Withholding taxes on foreign dividends are recorded net of reclaimable amounts, at the time the related income is earned. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, including accretion of original issue discount, where applicable, and accretion of discount on short-term investments, is recorded on the accrual basis. Realized gains and losses from securities transactions are recorded on the basis of identified cost.
Swaps – The Trust may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Trust enters into interest rate swap agreements to manage its exposure to interest rate and credit risk. Interest rate swap agreements involve the exchange by the Trust with another party of their respective commitments to pay or receive interest. Dividends and interest on the securities in the swap are included in the value of the exchange. The swaps are valued daily at current market value and any unrealized gain or loss is included in the Statement of Assets and Liabilities. Gain or loss is realized on the periodic reset date or termination date of the swap and is equal to the difference between the Trust’s basis in the swap and the proceeds of the closing transaction, including any fees. During the period that the swap agreement is open, the Trust may be subject to risk from the potential inability of the counterparty to meet the terms of the agreement. The swaps involve elements of both market and credit risk in excess of the amounts reflected on the Statement of Assets and Liabilities.
The Trust entered into interest rate swap agreements for the year ended December 31, 2007. Details of the swap agreement outstanding as of December 31, 2007 were as follows:
| Notional | Fixed | Floating | ||||||||||||||||||
| Termination | Amount | Rate | Rate | Unrealized | ||||||||||||||||
| Counterparty | Date | (000) | Paid | Received | Depreciation | |||||||||||||||
|
Royal Bank of Canada
|
7/01/2009 | $200,000 | 4.32% | 1 Month LIBOR | $ | (1,683,437) | ||||||||||||||
Dividends and Distributions to Shareholders – Dividends from net investment income, if any, are declared and paid on a monthly basis. Distributions from net realized capital gains, if any, are normally distributed in September and December. Income dividends and capital gain distributions to common shareholders are recorded on the ex-dividend date. To the extent the Trust’s net realized capital gains, if any, can be offset by capital loss carryforwards, it is the policy of the Trust not to distribute such gains.
The current monthly rate is $0.115 per share. The Trust continues to evaluate its monthly distribution policy in light of ongoing economic and market conditions and may change the amount of the monthly distributions in the future.
Use of Estimates – The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
3. Concentration of Risk
4. Investment Management Agreement and Other Agreements
The Trust has multiple service agreements with The Bank of New York (“BNY”). Under the servicing agreements, BNY will perform custodial, fund accounting, certain administrative services, and transfer agency services for the Trust. As custodian, BNY is responsible for the custody of the Trust’s assets. As administrator, BNY is responsible for maintaining the books and records of the Trust’s securities and cash. As transfer agent, BNY is responsible for performing transfer agency services for the Trust. The Bank of New York is a subsidiary of The Bank of New York Mellon Corporation, a financial holding company.
Table of Contents
5. Portfolio Securities
For the year ended December 31, 2007, there were purchases and sales transactions (excluding short-term securities) of $195,819,080 and $667,245,316, respectively.
6. Federal Income Taxes
Effective June 29, 2007, the Fund adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Trust’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. The adoption of FIN 48 did not result in the recording of any tax benefit or expense in the current period. As of and during the period ended December 31, 2007, the fund did not have a liability for any unrecognized tax benefits. The fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of operations. During the period, the fund did not incur any interest or penalties. Each of the tax years in the three-year period ended December 31, 2007, remains subject to examination by the Internal Revenue Service. Management’s determination regarding FIN 48 may be subject to review and adjustment at a later date based on factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.
The Trust distinguishes between dividends on a tax basis and on a financial reporting basis and only distributions in excess of tax basis earnings and profits are reported in the financial statements as a tax return of capital. Differences in the recognition or classification of income between the financial statements and tax earnings and profits which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized losses in the components of net assets on the Statement of Assets and Liabilities.
In order to present paid-in capital in excess of par and accumulated net realized gains or losses on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made to additional paid-in capital, undistributed net investment income and accumulated net realized gains or losses on investments. For the year ended December 31, 2007, the adjustments were to decrease accumulated net realized gain on investments and increase undistributed net investment income by $70,962,485 due to the difference in the treatment for book and tax purposes of certain investments. Results of operations and net assets were not affected by these reclassifications.
Capital losses incurred after October 31 (“post-October” capital losses) within the taxable year are deemed to arise on the first business day of the Fund’s next taxable year. The Fund incurred and will defer post-October capital loss of $11,204,277 during 2007.
Passive Foreign Investment Company losses incurred after October 31 (“post-October” PFIC losses) within the taxable year are deemed to arise on the first business day of the Fund’s next taxable year. The Fund incurred and will defer post-October PFIC losses of $90,404,181 during 2007.
Information on the tax components of net assets as of December 31, 2007 is as follows:
| Net Tax | ||||||||||||
| Unrealized | ||||||||||||
| Net Tax | Depreciation | Undistributed | ||||||||||
| Cost of | Unrealized | on Swap | Long-Term | |||||||||
| Investments | Gross Tax | Gross Tax | Appreciation | Contracts and | Other | Capital Gains/ | ||||||
| for Tax | Unrealized | Unrealized | on | Foreign | Temporary | (Accumulated | ||||||
| Purposes | Appreciation | Depreciation | Investments | Currency | Differences | Capital Loss) | ||||||
|
$2,234,558,989
|
$484,554,107 | $(193,361,992) | $291,192,115 | $(1,569,549) | $(91,820,758) | $(11,204,277) | ||||||
For the year ended December 31, 2007 and December 31, 2006, the tax character of distributions paid, as reflected in the Statements of Changes in Net Assets, were $238,750,661 and $265,465,336 of ordinary income and $140,884,286 and $100,149,675 of long-term capital gain, respectively.
7. Borrowings
The Trust has access to a secured line of credit up to $300,000,000 from BNY for borrowing purposes. Borrowings under this arrangement bear interest at the Federal funds rate plus 50 basis points. At December 31, 2007, there was no outstanding borrowing in connection with the Trust’s line of credit.
The average daily amount of borrowings during the year ended December 31, 2007 was $112,509,279, with a related weighted average interest rate of 5.82%. The maximum amount outstanding for the year ended December 31, 2007, was $396,446,000.
Table of Contents
8. Capital
On February 26, 2004, the Trust’s Board authorized the issuance of preferred shares, in addition to the existing common shares, as part of its leverage strategy. Preferred shares issued by the Trust have seniority over the common shares.
The Trust issued 4,000 shares of Preferred Shares Series T28A, 4,000 shares of Preferred Shares Series W28B, 4,000 shares of Preferred Shares Series T28C, 4,000 shares of Preferred Shares Series W28D, 6,200 shares of Preferred Shares Series T7 and 6,200 shares of Preferred Shares Series W7, each with a liquidation value of $25,000 per share plus accumulated and unpaid dividends. Dividends will be accumulated daily at an annual rate set through auction procedures. Distributions of net realized capital gains, if any, will be paid annually. On January 17, 2007, the Trust issued 4,000 shares each of Preferred Shares Series TH and F, respectively, for approximately $197,700,000 (sales proceeds less sales load and offering costs). Consistent with the other preferred shares each share has a liquidation value of $25,000 per share plus accumulated and unpaid dividends and have seniority over common shares.
For the year ended December 31, 2007, the annualized dividend rates ranged from:
| High | Low | At December 31, 2007 | ||||||||||||
|
Series T28A
|
6.45 | % | 5.15 | % | 5.76 | % | ||||||||
|
Series W28B
|
6.35 | 5.18 | 6.10 | |||||||||||
|
Series T28C
|
6.35 | 5.19 | 6.00 | |||||||||||
|
Series W28D
|
6.50 | 5.20 | 5.71 | |||||||||||
|
Series T7
|
6.40 | 4.91 | 5.55 | |||||||||||
|
Series W7
|
6.50 | 4.95 | 6.21 | |||||||||||
|
Series TH7
|
6.35 | 5.00 | 5.96 | |||||||||||
|
Series F7
|
6.50 | 4.95 | 5.55 | |||||||||||
The Trust is subject to certain limitations and restrictions while preferred shares are outstanding. Failure to comply with these limitations and restrictions could preclude the Trust from declaring any dividends or distributions to common shareholders or repurchasing common shares and/or could trigger the mandatory redemption of preferred shares at their liquidation value.
The holders of preferred shares have voting rights equal to the holders of common shares (one vote per share) and will vote together with holders of common shares as a single class. However, holders of preferred shares, voting as a separate class, are also entitled to elect two Trustees. In addition, the Investment Company Act of 1940, as amended, requires that, along with approval by shareholders that might otherwise be required, the approval of the holders of a majority of any outstanding preferred shares, voting separately as a class, would be required to (a) adopt any plan of reorganization that would adversely affect the preferred shares, (b) change a Trust’s sub-classification as a closed-end investment company or change its fundamental investment restrictions and (c) change the nature of its business so as to cease to be an investment company.
9. Indemnifications
10. Accounting Pronouncements
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To the Shareholders and Board of Trustees of
| We have audited the accompanying statement of assets and liabilities of the ING Clarion Global Real Estate Income Fund (the “Trust”), including the portfolio of investments, as of December 31, 2007, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Trust’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Trust’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2007, by correspondence with the Trust’s custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. 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 Trust at December 31, 2007, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended and financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles. | |
 |
PHILADELPHIA, PENNSYLVANIA
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Federal Income Tax Information
For corporate shareholders, 0.75% of ordinary income distributions for the year ended December 31, 2007 qualified for the corporate dividends-received deduction.
In January 2008, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV as to the federal tax status of the distributions received by you in the calendar year 2007.
Trustees
| Number of | ||||||||||||
| Portfolios in | ||||||||||||
| the Fund | ||||||||||||
| Term of Office | Complex | Other Directorships | ||||||||||
| Name, Address | and Length of | Principal Occupations | Overseen | Held by | ||||||||
| and Age | Time Served(1) | Title | During The Past | by Trustee | Trustee | |||||||
| Five Years | ||||||||||||
| Interested Trustees: | ||||||||||||
|
T. Ritson Ferguson* 201 King of Prussia Road Radnor, PA 19087 Age: 48 |
3 years/since inception | Trustee, President and Chief Executive Officer | Managing Director and Chief Investment Officer of ING Clarion Real Estate Securities, L.P. (since 1995). | 2 | Board member of the Community Coalition of Chester County (since 2005) and board member of ING Business Select Ltd. (UK)(2007-present). | |||||||
|
Jarrett B. Kling* 201 King of Prussia Road Radnor, PA 19087 Age: 64 |
3 years/since inception | Trustee | Managing Director of ING Clarion Real Estate Securities, L.P. | 2 | Trustee of The Hirtle and Callaghan Trust (1995-present); National Trustee of the Boys and Girls Clubs of America (1997-present); Board of Old Mutual Advisor Funds (since 2005). | |||||||
| Independent Trustees: | ||||||||||||
|
Asuka Nakahara 201 King of Prussia Road Radnor, PA 19087 Age: 52 |
3 years/since inception | Trustee | Associate Director of the Zell-Lurie Real Estate Center at the Wharton School, University of Pennsylvania (since July 1999); Lecturer of Real Estate at the Wharton School, University of Pennsylvania (since July 1999); Chief Financial Officer of Trammell Crow Co. (January 1, 1996-September 1, 1998); Chief Knowledge Officer of Trammell Crow Co. (September 1, 1998-December 31, 1999). | 2 | Serves on the Advisory board of the HBS Club of Philadelphia (2000-present); the boards of The Philadelphia Foundation (2004-present), the Children’s Hospital of Philadelphia (2006- present) and Merion Golf Club (2007-present). Former Trustee of Ardmore Presbyterian Church (2002-2004). | |||||||
|
Frederick S. Hammer 201 King of Prussia Road Radnor, PA 19087 Age: 71 |
3 years/since inception | Trustee | Co-Chairman of Inter-Atlantic Group (since 1994) and a member of its investment committee; Co-Chairman of Guggenheim Securities Holdings, LLC (2002-2003); non-executive. | 2 | Serves on the Boards of E- Duction, Inc. (2005-present), Avalon Insurance Holdings, Inc. (2006-present), Homeowners Insurance Corp. (2006-present) and Director of US Fiduciary Corp. (2006-present); Trustee of the Madison Square Boys and Girls Club (1978-2006). Chairman of the Board of Annuity and Life Re (Holdings), Ltd. (1998-2005); Director on the Boards of Tri-Arc Financial Services, Inc. (1989-2004) and Magellan Insurance Co., Ltd. (1989-2004); Director of Medallion Financial Corp. (1999- 2002), IKON Office Solutions, Inc. (1986-1999) and VISA International (1978-1989). | |||||||
|
Richard L. Sutton 201 King of Prussia Road Radnor, PA 19087 Age: 72 |
3 years/since inception | Trustee | Of Counsel, Morris, Nichols, Arsht & Tunnell (2000-present); Partner, Morris, Nichols, Arsht & Tunnel (1966-2000). | 2 | Trustee of the Unidel Foundation, Inc. (since 2000); Board of Directors of ING Global Real Estate Securities Ltd. (2006-present), Wilmington Country Club (1999-2004), Grand Opera House, Inc., (1976-1992), University of Delaware Library Associates, Inc. (1981-1999), Wilmington Club (1987- 2003), American Judicature Society (1995-1999). | |||||||
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| Number of | ||||||||||||
| Portfolios in | ||||||||||||
| the Fund | ||||||||||||
| Term of Office | Principal Occupations | Complex | Other Directorships | |||||||||
| Name, Address | and Length of | During The Past | Overseen | Held by | ||||||||
| and Age | Time Served(1) | Title | Five Years | by Trustee | Trustee | |||||||
|
John Bartholdson 201 King of Prussia Road Radnor, PA 19087 Age: 63 |
3 years/3 years | Trustee/Audit Committee Financial Expert | Senior Vice President, CFO and Treasurer, and a Director of Triumph Group, Inc. (1993-2007). | 2 | Serves on the Board of Old Mutual Advisor Funds, Old Mutual Advisor Funds II and Old Mutual Insurance Series Fund (since 2004). | |||||||
| (1) | After a Trustee’s initial term, each Trustee is expected to serve a three-year term concurrent with the class of Trustees for which he serves. Messrs. Sutton and Bartholdson, as Class III Trustees, are expected to stand for re-election at the Trust’s 2010 annual meeting of shareholders; Messrs. Ferguson and Hammer, as Class I Trustees, are expected to stand for re-election at the Trust’s 2008 annual meeting of shareholders; Messrs. Kling and Nakahara, as Class II Trustees, are expected to stand for re-election at the Trust’s 2009 annual meeting of shareholders. |
| * | Messrs. Ferguson and Kling are deemed to be interested persons of the Trust as defined in the Investment Company Act of 1940, as amended, due to their positions with the Advisor. |
Officers
| Name, Address, Age | Principal Occupations | |||
| and Position(s) Held | Length of | During the Past | ||
| with Registrant | Time Served | Five Years and Other Affiliations | ||
| Officers: | ||||
|
Jonathan A. Blome 201 King of Prussia Road Radnor, PA 19087 Age: 30 Chief Financial Officer |
since 2006 | Senior Vice President of ING Clarion Real Estate Securities, L.P. since 2005 | ||
|
William E. Zitelli 201 King of Prussia Road Radnor, PA 19087 Age: 39 Chief Compliance Officer and Secretary |
since 2007 | Senior Vice President and Chief Compliance Officer of ING Clarion Real Estate Securities, L.P. since 2007 | ||
Additional Information
The Trust has delegated the voting of the Trust’s voting securities to the Trust’s advisor pursuant to the proxy voting policies and procedures of the advisor. You may obtain a copy of these policies and procedures by calling 1-888-711-4272. The policies may also be found on the website of the Securities and Exchange Commission (http://www.sec.gov).
Information regarding how the Trust voted proxies for portfolio securities, if applicable, during the most recent 12-month period ended June 30, is also available, without charge and upon request by calling the Trust at 1-888-711-4272 or by accessing the Trust’s Form N-PX on the Commission’s website at http://www.sec.gov.
The Trust files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Trust’s Form N-Q are available on the SEC website at http://www.sec.gov. The Trust’s Form N-Q may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330.
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Board Considerations in Approving the Advisory Agreement
In particular, the Board of Trustees considered the nature, extent and quality of advisory services provided by the Advisor. The Board of Trustees considered both the performance of the Trust, as well as other services provided to the Trust by the Advisor. In concluding that the services provided by the Advisor were satisfactory and supported continuation of the investment management agreement, the Board of Trustees evaluated the Advisor’s personnel, experience, investment process (including brokerage practices), track record, and compliance program, as well as the administrative oversight of the Trust’s operations provided by the Advisor and the resources the Advisor devoted to the Trust, including the additional personnel added to support the Trust’s operations. In making its conclusion, the Board of Trustees found that the nature, extent and quality of these services provided by the Advisor to the Trust supported renewal of the investment management agreement. Based on the Board of Trustees’ evaluation of the Trust’s recent and long-term performance relative to its peer groups and appropriate indices/benchmarks, in light of total return, yield and economic and market trends and market risk expectations, and compared to other accounts managed by the Advisor, the Board of Trustees concluded that the Trust’s performance (both actual performance and comparable performance), particularly in light of the Trust’s income objective supported renewal of the investment management agreement.
The Board of Trustees also considered the level of compensation and other benefits received by the Advisor as a result of its relationship with the Trust. The Board of Trustees took into account the quality of the Advisor’s services as well as advisory fees charged to other comparable closed-end global real estate funds, which fell within a relatively tight band, and other assets comparably managed by the Advisor. Based on this review, the Board of Trustees concluded that the advisory fee structure under the investment management agreement was reasonable and supports renewal of the investment management agreement. During the course of its review, the Board of Trustees also considered information relating to the costs incurred by the Advisor in connection with the provision of services to the Trust and the potential that the Advisor may realize “fall out benefits” as a result of its relationship with the Trust. The Board of Trustees concluded that, based on the profit levels reported by the Advisor and in light of the specific circumstances of the Trust, the advisory fees paid to the Advisor has not resulted in a profit (including allowance for return on entrepreneurial risk) to the Advisor that is excessive or beyond the range that would have been negotiated at arm’s length. In this regard, the Board of Trustees did not specifically consider the potential for realization of economies of scale because the Trust is a closed-end vehicle with limited potential for asset growth. The Board of Trustees further concluded that the sufficient profitability of the Advisor to remain a sustainable business and to attract and retain talented employees supported renewal of the investment management agreement.
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Pursuant to the Trust’s Dividend Reinvestment Plan (the “Plan”), shareholders of the Trust are automatically enrolled, to have all distributions of dividends and capital gains reinvested by The Bank of New York (the “Plan Agent”) in the Trust’s shares pursuant to the Plan. You may elect not to participate in the Plan and to receive all dividends in cash by sending written instructions or by contacting The Bank of New York, as dividend disbursing agent, at the address set forth below. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by contacting the Plan Agent before the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution. Shareholders who do not participate in the Plan will receive all distributions in cash paid by check and mailed directly to the shareholders of record (or if the shares are held in street or other nominee name, then to the nominee) by the Plan Agent, which serves as agent for the shareholders in administering the Plan.
After the Trust declares a dividend or determines to make a capital gain distribution, the Plan Agent will acquire shares for the participants’ account, depending upon the circumstances described below, either (i) through receipt of unissued but authorized shares from the Trust (“newly issued shares”) or (ii) by open market purchases. If, on the dividend payment date, the NAV is equal to or less than the market price per share plus estimated brokerage commissions (such condition being referred to herein as “market premium”), the Plan Agent will invest the dividend amount in newly issued shares on behalf of the participants. The number of newly issued shares to be credited to each participant’s account will be determined by dividing the dollar amount of the dividend by the NAV on the date the shares are issued. However, if the NAV is less than 95% of the market price on the payment date, the dollar amount of the dividend will be divided by 95% of the market price on the payment date. If, on the dividend payment date, the NAV is greater than the market value per share plus estimated brokerage commissions (such condition being referred to herein as “market discount”), the Plan Agent will invest the dividend amount in shares acquired on behalf of the participants in open-market purchases.
The Plan Agent’s fees for the handling of the reinvestment of dividends and distributions will be paid by the Trust. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent’s open market purchases in connection with the reinvestment of dividends and distributions. The automatic reinvestment of dividends and distributions will not relieve participants of any Federal income tax that may be payable on such dividends or distributions.
The Trust reserves the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Trust reserves the right to amend the Plan to include a service charge payable by the participants. Participants that request a sale of shares through the Plan Agent are subject to a $2.50 sales fee and a $0.15 per share sold brokerage commission. All correspondence concerning the Plan should be directed to the Plan Agent at The Bank of New York, Attention: Stock Transfer Department, P.O. Box 11258, New York, NY 10286-1258, Phone Number: (800) 432-8224.
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| ING Clarion Global Real Estate Income Fund |
| Fund Information | |
| Board of Trustees | |
| T. Ritson Ferguson | |
| Jarrett B. Kling | |
| Asuka Nakahara | |
| Frederick S. Hammer | |
| Richard L. Sutton | |
| John Bartholdson | |
| Officers | |
| T. Ritson Ferguson | |
| President and | |
| Chief Executive Officer | |
| Jonathan A. Blome | |
| Chief Financial Officer | |
| William E. Zitelli | |
| Chief Compliance Officer and | |
| Secretary | |
| Investment Advisor | |
| ING Clarion Real Estate Securities, L.P. | |
| 201 King of Prussia Road | |
| Radnor, PA 19087 | |
| 888-711-4272 | |
| Administrator, Custodian and | |
| Transfer Agent | |
| The Bank of New York | |
| New York, New York | |
| Preferred Shares – Dividend Paying Agent | |
| The Bank of New York | |
| New York, New York | |
| Legal Counsel | |
| Morgan, Lewis & Bockius, LLP | |
| Washington, DC | |
| Independent Registered Public Accounting Firm | |
| Ernst & Young LLP | |
| Philadelphia, Pennsylvania |
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2006: $77,800
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2006: $0
2006: $11,000
2006: $0
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2006: $117,315
Table of Contents
(a)
|
T. Ritson Ferguson | |
| Managing Director and Chief Investment Officer | ||
| 15 years | ||
| Experience during past 5 years has been with ING Clarion Real Estate Securities, L.P. | ||
| Steven D. Burton | ||
| Managing Director and Lead Global Portfolio Manager | ||
| 12 years | ||
| Experience during past 5 years has been with ING Clarion Real Estate Securities, L.P. | ||
| Joseph P. Smith | ||
| Managing Director and Portfolio Manager | ||
| 17 years | ||
| Experience during past 5 years has been with ING Clarion Real Estate Securities, L.P. |
| Number of Accounts | ||||||||||||||||||
| Managed with | Total Assets in Accounts | |||||||||||||||||
| Number of | Total Assets | Advisory Fee Based | Managed with Advisory Fee | |||||||||||||||
| Name of Portfolio Managers | Type of Accounts | Accounts Managed | in the Accounts | on Performance | Based on Performance | |||||||||||||
T. Ritson Ferguson |
Registered | 20 | $ | 13,743,500,000 | 1 | $ | 212,200,000 | |||||||||||
| Investment | ||||||||||||||||||
| Companies | ||||||||||||||||||
| Other Pooled | 8 | $ | 607,600,000 | 8 | $ | 607,600,000 | ||||||||||||
| Investment Vehicles | ||||||||||||||||||
| Other Accounts | 64 | $ | 3,324,100,000 | 5 | $ | 397,400,000 | ||||||||||||
Steven D. Burton |
Registered | 17 | $ | 13,030,700,000 | 1 | $ | 212,200,000 | |||||||||||
| Investment | ||||||||||||||||||
| Companies | ||||||||||||||||||
| Other Pooled | 0 | $ | 0 | 0 | $ | 0 | ||||||||||||
| Investment Vehicles | ||||||||||||||||||
| Other Accounts | 40 | $ | 2,386,300,000 | 1 | $ | 289,300,000 | ||||||||||||
Joseph P. Smith |
Registered | 3 | $ | 712,800,000 | 0 | $ | 0 | |||||||||||
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| Number of Accounts | ||||||||||||||||||
| Managed with | Total Assets in Accounts | |||||||||||||||||
| Number of | Total Assets | Advisory Fee Based | Managed with Advisory Fee | |||||||||||||||
| Name of Portfolio Managers | Type of Accounts | Accounts Managed | in the Accounts | on Performance | Based on Performance | |||||||||||||
| Investment | ||||||||||||||||||
| Companies | ||||||||||||||||||
| Other Pooled | 8 | $ | 607,600,000 | 8 | $ | 607,600,000 | ||||||||||||
| Investment Vehicles | ||||||||||||||||||
| Other Accounts | 24 | $ | 937,800,000 | 4 | $ | 108,100,000 | ||||||||||||
| Name of Portfolio Managers | Dollar Value of Trust Shares Beneficially Owned | |||
T. Ritson Ferguson |
$500,000-$1,000,000 | |||
Steven D. Burton |
$100,000-$500,000 | |||
Joseph P. Smith |
$10,001-$50,000 | |||
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Table of Contents
| By: | /s/ T. Ritson Ferguson | |||
| Name: | T. Ritson Ferguson | |||
| Title: | President and Chief Executive Officer | |||
| Date: | March 5, 2008 | |||
| By: | /s/ T. Ritson Ferguson | |||
| Name: | T. Ritson Ferguson | |||
| Title: | President and Chief Executive Officer | |||
| Date: | March 5, 2008 | |||
| By: | /s/ Jonathan A. Blome | |||
| Name: | Jonathan A. Blome | |||
| Title: | Treasurer and Chief Financial Officer | |||
| Date: | March 5, 2008 | |||