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 811-10491
-----------------------
Nuveen Real Estate Income Fund
--------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Kevin J. McCarthy
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
--------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (312) 917-7700
---------------------
Date of fiscal year end: December 31
-------------------
Date of reporting period: June 30, 2007
---------------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. SS. 3507.
ITEM 1. REPORTS TO SHAREHOLDERS
Semi-Annual Report
JUNE 30, 2007
Nuveen Investments
CLOSED-END FUNDS
NUVEEN
REAL ESTATE
INCOME FUND
JRS
High Current Income from a Portfolio of
Commercial Real Estate Investments
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financial advisor or brokerage Nuveen.
account.
NUVEEN INVESTMENTS LOGO
Chairman's
LETTER TO SHAREHOLDERS
(TIMOTHY
SCHWERTFEGER
PHOTO) Timothy R. Schwertfeger Chairman of the Board
Dear Shareholder:
Once again, I am pleased to report that over the six-month period covered by
this report your Fund continued to provide you with attractive income. For more
details about the management strategy and performance of your Fund, please read
the Portfolio Managers' Comments, the Dividend and Share Price Information, and
the Performance Overview sections of this report.
I also wanted to take this opportunity to report some important news about
Nuveen Investments. We have accepted a buyout offer from a private equity
investment firm. While this may affect the corporate structure of Nuveen
Investments, it will have no impact on the investment objectives of the Fund,
its portfolio management strategies or its dividend policies. We will provide
you with additional information about this transaction as more details become
available.
With the recent volatility in the stock market, many have begun to wonder which
way the market is headed, and whether they need to adjust their holdings of
investments. No one knows what the future will bring, which is why we think a
well-balanced portfolio that is structured and carefully monitored with the help
of an investment professional is an important component in achieving your
long-term financial goals. A well-diversified portfolio may actually help to
reduce your overall investment risk, and we believe that investments like your
Nuveen Investments Fund can be important building blocks in a portfolio crafted
to perform well through a variety of market conditions.
We are grateful that you have chosen us as a partner as you pursue your
financial goals and we look forward to continuing to earn your trust in the
months and years ahead. At Nuveen Investments, our mission continues to be to
assist you and your financial advisor by offering investment services and
products that can help you to secure your financial objectives.
Sincerely,
(TIMOTHY SCHWERTFEGER SIG)
Timothy R. Schwertfeger
Chairman of the Board
August 15, 2007
Portfolio Managers' COMMENTS
NUVEEN INVESTMENTS CLOSED-END FUNDS JRS
The Nuveen Real Estate Income Fund ("JRS") is managed by a team of real estate
investment professionals at Security Capital Research & Management Incorporated
("SC-R&M"), a wholly-owned subsidiary of J. P. Morgan Chase & Co. Anthony R.
Manno Jr. and Kenneth D. Statz, who each have more than 26 years of experience
in managing real estate investments, lead the team. Here they talk about the
economic environment and performance of the Fund over the six-month period.
WHAT WERE THE BASIC STRATEGIES AND TACTICS YOU USE TO MANAGE THE FUND DURING
THIS PERIOD?
In managing the JRS portfolio, SC-R&M sought to maintain significant property
type and geographic diversification while taking into account company credit
quality, sector, and security-type allocations. Investment decisions were based
on a multi-layered analysis of the company, the real estate it owns, its
management, and the relative price of the security, with a focus on securities
that we believe will be best positioned to generate sustainable income and
potential price appreciation over the long-run. Throughout 2007, the portfolio
continued to emphasize companies and property types associated with shorter
lease terms (e.g. multifamily, storage, etc.) and underweight more defensive,
bond-like companies and property types typically reflecting longer lease terms
(e.g. malls and shopping centers). Across all real estate sectors, SC-R&M
favored companies with properties located in the strongest markets. These "high
barrier to entry" markets are defined by constraints that limit new
construction, a quality that over the long-term has the potential to provide
superior value enhancement and a real inflation hedge.
The ability to shift allocations between preferred and common stock based on the
relative attractiveness of these two distinct security types is an important
tool in managing JRS for income and long-term capital appreciation. For the
first six months of 2007, SC-R&M continued to tilt the portfolio toward common
stocks, which at the end of the second quarter represented approximately 68% of
the portfolio. The remaining portfolio allocations were 30% preferred stocks and
2% cash equivalents.
With the recent volatility in the stock market, many have begun to wonder which
way the market is headed, and whether they need to adjust their holdings of
investments. No one knows what the future will bring, which is why we think a
well-balanced portfolio that is structured and carefully monitored with the help
of an investment professional is an important component in achieving your
long-term financial goals. A well-diversified portfolio may actually help to
reduce your overall investment risk, and we believe that investments like your
Nuveen Investments Fund can be important building blocks in a portfolio crafted
to perform well through a variety of market conditions.
Discussions of specific investments are for illustration only and are not
intended as recommendations of individual investments. The views expressed
herein represent those of the portfolio managers as of the date of this report
and are subject to change at any time, based on market conditions and other
factors. The Fund disclaims any obligation to advise shareholders of such
changes.
4
HOW DID THE FUND PERFORM OVER THIS SIX-MONTH PERIOD?
The performance of JRS, as well as the performance of comparative indices or
benchmarks, is presented in the accompanying table.
Cumulative Total Returns on Net Asset Value
For the six months ended 6-30-07
JRS -7.66%
Dow Jones Wilshire Real Estate Securities Index(1) -5.97%
--------------------------------------------------------------------------------
Past performance does not guarantee future results. Current performance may be
higher or lower than the data shown.
Returns do not reflect the deduction of taxes that a shareholder may have to pay
on Fund distributions or upon the sale of Fund shares. For additional
information, please see the individual Performance Overview page in this report.
--------------------------------------------------------------------------------
For the six months ended June 30, 2007, the Fund underperformed the Dow Jones
Wilshire Real Estate Securities Index. It is important to note that investing in
preferred stock is an important component of the income and appreciation
strategy of JRS. However, preferred securities are not included in broader real
estate securities indices, like the Dow Jones Wilshire Real Estate Securities
Index ("WARESI").
Real estate market statistics emerging in the period show a strongly positive
trend in rents and occupancy levels for most property segments in the face of
healthy job growth, escalating replacement costs and moderate levels of new
construction. Strong property operations are the backbone of cash flow and
long-term value for real estate companies, and while we are mindful of expense
pressures, a healthy and improving top-line provides a solid foundation for many
stocks in the group. Despite these strong fundamental conditions, real estate
stock prices swooned in the first half of 2007 amidst an otherwise strong U.S.
equity market as investors weighed turbulence in real estate lending markets and
questioned the potential for a broader impact on market liquidity and asset
pricing. A number of factors impacted real estate debt markets later in the
period, notably subprime-related volatility in the pricing of structured real
estate debt securities, pronouncements from rating agency Moody's regarding
tightening commercial underwriting standards, and a bounce in long-term U.S.
Treasury rates.
--------------------------------------------------------------------------------
1 The Dow Jones Wilshire Real Estate Securities Index is an unmanaged index
comprised of common shares of publicly-traded REITs and other real estate
operating companies.
--------------------------------------------------------------------------------
The Fund's strong representation in stock of companies that were subject to
merger and acquisition activities in the period was the major beneficial factor
for the period. Specifically, four companies (Archstone-Smith Trust, Equity
Office Properties Trust, New Plan Excel Realty Trust and Reckson Associates
Realty Corporation) were acquired during the period by third parties at
significant premiums to trading values prior to the announced deals. Our focus
on owning companies that own high quality commercial real estate with strong
forward prospects for cash flow growth proved highly attractive to privately
funded commercial real estate investors.
5
The Fund's investments in the storage and health care industries were
particularly poor performers in the period. Investor concern over a potential
decline in fundamentals in the storage industry due to turmoil in the single
family housing markets we believe are over blown. Surprisingly in a volatile
Real Estate Investment Trust (REIT) pricing period, the usually defensive health
care REITs also performed poorly in the period. Investor concern over rising
interest rates and the potential for lower investment spreads on new
acquisitions seemed to cause selling pressure in these securities. We believe
the long-term growth in the percentage of the U.S. population over the age of 80
years old bodes very well for the owners of high quality housing designed for
the aging baby boomers.
The Fund's tilt toward common versus preferred stock referenced above reduced
overall Fund performance due to the poor performance of REIT common shares
versus the modest but positive performance of the preferred stocks.
6
Distribution and Share Price
INFORMATION
We are providing you with information regarding your Fund's distributions. This
information is as of June 30, 2007, and likely will vary over time based on the
Fund's investment activities and portfolio investment value changes. On March 1,
2007, Nuveen Investments announced that the Fund would be moving from a monthly
to a quarterly distribution schedule. The last monthly distribution was paid on
April 2, 2007 and first quarterly distribution was paid on July 2, 2007.
In addition to owning preferred stocks, the Fund has issued its own preferred
shares, called Taxable Auctioned Preferred(TM). This provides a degree of
financial leverage that can increase share price volatility, but also can
enhance Fund returns and supplement the income available to pay common
shareholder distributions. This leveraging strategy provided incremental income
and helped enhance shareholder distributions over the six-month period.
The Fund has a managed distribution program. The goal of a managed distribution
program is to provide shareholders relatively consistent and predictable cash
flow by systematically converting its expected long-term return potential into
regular distributions. As a result, regular distributions throughout the year
will likely include a portion of expected long-term gains (both realized and
unrealized), along with net investment income.
Important points to understand about the managed distribution program are:
- The Fund seeks to establish a relatively stable distribution rate that roughly
corresponds to the projected total return from its investment strategy over an
extended period of time. However, you should not draw any conclusions about
the Fund's past or future investment performance from its current distribution
rate.
- Actual returns will differ from projected long-term returns (and therefore the
Fund's distribution rate), at least over shorter time periods. Over a specific
timeframe, the difference between actual returns and total distributions will
be reflected in an increasing (returns exceed distributions) or a decreasing
(distributions exceed returns) Fund net asset value.
- Each distribution is expected to be paid from some or all of the following
sources:
- net investment income (regular interest and dividends),
- realized capital gains, and
- unrealized gains, or, in certain cases, a return of principal (non-taxable
distributions)
- A non-taxable distribution is a payment of a portion of the Fund's capital.
When the Fund's returns exceed distributions, it may represent portfolio gains
generated, but not realized as a taxable capital gain. In periods when the
Fund's returns fall short of distributions, it will represent a portion of
your original principal unless the shortfall is offset during other time
7
periods over the life of your investment (previous or subsequent) when the
Fund's total return exceeds distributions.
- Because distribution source estimates are updated during the year, based on
the Fund's performance and forecast for its current fiscal year (which is the
calendar year for the Fund), these estimates may differ from both the tax
information reported to you in your Fund's IRS Form 1099 statement provided at
year end, as well as the ultimate economic sources of distributions over the
life of your investment.
The following table provides estimated information regarding the Fund's
distributions and total return performance for the six months ended June 30,
2007. The distribution information is presented on a tax basis rather than on a
generally accepted accounting principles (GAAP) basis. This information is
intended to help you better understand whether the Fund's returns for the
specified time period was sufficient to meet the Fund's distributions.
-----------------------------------------------------------------------------
AS OF 6/30/07 JRS
-----------------------------------------------------------------------------
Inception date 11/15/01
Six months ended 6/30/07:
Per share distribution:
From net investment income $0.35
From realized capital gains 0.79
From return of capital --
--------
Total per share distribution $1.14
========
Distribution rate on NAV 4.88%
Cumulative six-month total return on NAV -7.66%
Annualized one-year total return on NAV 7.76%
Annualized five-year total return on NAV 17.27%
Annualized since inception total return on NAV 18.19%
-----------------------------------------------------------------------------
As of June 30, 2007, the Fund was trading at a 3.04% premium to its net asset
value, compared with an average premium of 1.8% for the entire six-month period.
8
JRS Nuveen Real Estate
PERFORMANCE Income Fund
OVERVIEW
as of 6-30-07
PORTFOLIO ALLOCATION (AS A % OF TOTAL INVESTMENTS)
(PIE CHART)
Real Estate Investment Trust Common Stocks 67.9
Real Estate Investment Trust Preferred Stocks 30.5
Short-Term Investments 1.6
2006-2007 DISTRIBUTIONS PER SHARE(2)
(BAR CHART)
Jul 0.17
Aug 0.17
Sep 0.18
Oct 0.18
Nov 0.18
Dec 0.19
Jan 0.19
Feb 0.19
Mar 0.19
Apr
May
Jun 0.57
SHARE PRICE PERFORMANCE -- WEEKLY CLOSING PRICE
(LINE GRAPH)
7/03/06 23.40
23.50
23.10
23.50
24.30
24.50
24.50
24.90
24.90
25.30
25.10
25.80
25.70
26.40
27.60
28.50
26.80
27.40
24.80
25.40
26.30
27.50
28.40
28.80
28.70
28.40
28.50
27.30
28.20
28.60
29.00
30.00
29.00
28.40
28.10
26.50
27.40
26.70
27.80
26.90
26.90
26.70
27.30
27.00
26.30
25.80
24.00
25.00
25.90
25.70
24.50
23.40
24.10
6/30/07 24.10
FUND SNAPSHOT
-------------------------------------------------------------------------------------
Common Share Price $24.05
-------------------------------------------------------------------------------------
Common Share Net Asset Value $23.34
-------------------------------------------------------------------------------------
Premium/(Discount) to NAV 3.04%
-------------------------------------------------------------------------------------
Current Distribution Rate(1) 9.48%
-------------------------------------------------------------------------------------
Net Assets Applicable to
Common Shares ($000) $658,494
-------------------------------------------------------------------------------------
INDUSTRIES
(as a % of total investments)
-------------------------------------------------------------------------------------
Specialized 31.0%
-------------------------------------------------------------------------------------
Office 20.7%
-------------------------------------------------------------------------------------
Retail 17.6%
-------------------------------------------------------------------------------------
Residential 14.4%
-------------------------------------------------------------------------------------
Diversified 9.1%
-------------------------------------------------------------------------------------
Short-Term Investments 1.6%
-------------------------------------------------------------------------------------
Other 5.6%
-------------------------------------------------------------------------------------
TOP FIVE REAL ESTATE INVESTMENT TRUST COMMON STOCK ISSUERS
(as a % of total investments)
------------------------------------------------------------------------------------
Macerich Company 6.0%
------------------------------------------------------------------------------------
AvalonBay Communities, Inc. 5.8%
------------------------------------------------------------------------------------
Mack-Cali Realty Corporation 5.0%
------------------------------------------------------------------------------------
Ashford Hospitality Trust Inc. 4.2%
------------------------------------------------------------------------------------
Ventas Inc. 4.1%
------------------------------------------------------------------------------------
TOP FIVE REAL ESTATE INVESTMENT TRUST PREFERRED STOCK ISSUERS
(as a % of total investments)
------------------------------------------------------------------------------------
Crescent Real Estate Equities Company 4.1%
------------------------------------------------------------------------------------
Public Storage, Inc. 3.1%
------------------------------------------------------------------------------------
Lexington Realty Trust 2.6%
------------------------------------------------------------------------------------
Maguire Properties, Inc. 2.5%
------------------------------------------------------------------------------------
Hospitality Properties Trust 2.0%
------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 11/15/01)
-------------------------------------------------------------------------------------
ON SHARE PRICE ON NAV
-------------------------------------------------------------------------------------
6-Month (Cumulative) -11.73% -7.66%
-------------------------------------------------------------------------------------
1-Year 13.34% 7.76%
-------------------------------------------------------------------------------------
5-Year 17.99% 17.27%
-------------------------------------------------------------------------------------
Since Inception 18.12% 18.19%
-------------------------------------------------------------------------------------
1 Current Distribution Rate is based on the Fund's current annualized quarterly
distribution divided by the Fund's current market price. REIT distributions
received by the Fund are generally comprised of investment income, long-term
and short-term capital gains and a REIT return of capital. The Fund's
quarterly distributions to its shareholders may be comprised of ordinary
income, net realized capital gains and, if at the end of the calendar year the
Fund's cumulative net ordinary income and net realized gains are less than the
amount of the Fund's distributions, a return of capital for tax purposes.
2 Effective March 1, 2007, the Fund changed from a monthly distribution to a
quarterly distribution schedule. The Fund's last monthly distribution was
declared March 1, 2007, and paid on April 2, 2007. The Fund's first quarterly
distribution was declared June 1, 2007, and paid on July 2, 2007.
9
SHAREHOLDER MEETING REPORT
The shareholder meeting was held in the offices of Nuveen
Investments on April 4, 2007.
-------------------------------------------------------------------------------------------
APPROVAL OF THE BOARD MEMBERS WAS REACHED AS FOLLOWS:
Common and
Preferred Preferred
shares voting shares voting
together together
as a class as a class
-------------------------------------------------------------------------------------------
Robert P. Bremner
For 26,415,777 --
Withhold 158,877 --
-------------------------------------------------------------------------------------------
Total 26,574,654 --
-------------------------------------------------------------------------------------------
Lawrence H. Brown(1)
For 26,409,508 --
Withhold 165,146 --
-------------------------------------------------------------------------------------------
Total 26,574,654 --
-------------------------------------------------------------------------------------------
Jack B. Evans
For 26,424,284 --
Withhold 150,370 --
-------------------------------------------------------------------------------------------
Total 26,574,654 --
-------------------------------------------------------------------------------------------
William C. Hunter
For 26,427,002 --
Withhold 147,652 --
-------------------------------------------------------------------------------------------
Total 26,574,654 --
-------------------------------------------------------------------------------------------
William J. Schneider
For -- 8,243
Withhold -- 23
-------------------------------------------------------------------------------------------
Total -- 8,266
-------------------------------------------------------------------------------------------
Timothy R. Schwertfeger
For -- 8,247
Withhold -- 19
-------------------------------------------------------------------------------------------
Total -- 8,266
-------------------------------------------------------------------------------------------
Judith M. Stockdale
For 26,413,161 --
Withhold 161,493 --
-------------------------------------------------------------------------------------------
Total 26,574,654 --
-------------------------------------------------------------------------------------------
Carole E. Stone
For 26,418,513 --
Withhold 156,141 --
-------------------------------------------------------------------------------------------
Total 26,574,654 --
-------------------------------------------------------------------------------------------
Eugene S. Sunshine(2)
For 26,413,109 --
Withhold 161,545 --
-------------------------------------------------------------------------------------------
Total 26,574,654 --
-------------------------------------------------------------------------------------------
(1) Mr. Lawrence H. Brown retired from the Board of Trustees on July 1, 2007.
(2) Mr. Eugene S. Sunshine resigned from the Board of Trustees on July 31, 2007.
10
JRS
Nuveen Real Estate Income Fund
Portfolio of INVESTMENTS
as of 6-30-07 (Unaudited)
SHARES DESCRIPTION (1) VALUE
-------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST COMMON STOCKS - 98.5% (67.9% OF TOTAL INVESTMENTS)
INDUSTRIAL - 6.7%
1,823,900 DCT Industrial Trust Inc. $ 19,625,164
626,600 First Industrial Realty Trust, Inc. 24,287,016
-------------------------------------------------------------------------------------------------------------------------------
Total Industrial 43,912,180
------------------------------------------------------------------------------------------------------------------
OFFICE - 22.5%
1,195,300 Brandywine Realty Trust 34,161,674
2,280,800 HRPT Properties Trust 23,720,320
1,090,500 Mack-Cali Realty Corporation 47,425,845
264,600 Maguire Properties, Inc. 9,083,718
1,579,000 Republic Property Trust 19,342,750
116,396 SL Green Realty Corporation 14,420,300
-------------------------------------------------------------------------------------------------------------------------------
Total Office 148,154,607
------------------------------------------------------------------------------------------------------------------
RESIDENTIAL - 16.0%
315,300 Apartment Investment & Management Company, Class A 15,897,426
464,500 AvalonBay Communities, Inc. 55,219,760
278,100 Camden Property Trust 18,624,357
590,000 United Dominion Realty Trust 15,517,000
-------------------------------------------------------------------------------------------------------------------------------
Total Residential 105,258,543
------------------------------------------------------------------------------------------------------------------
RETAIL - 21.9%
413,800 Federal Realty Investment Trust 31,970,188
691,000 Macerich Company 56,952,220
396,900 Simon Property Group, Inc. 36,927,576
449,800 Weingarten Realty Investors Trust 18,486,780
-------------------------------------------------------------------------------------------------------------------------------
Total Retail 144,336,764
------------------------------------------------------------------------------------------------------------------
SPECIALIZED - 31.4%
3,430,000 Ashford Hospitality Trust Inc. 40,336,800
791,400 Cogdell Spencer Inc. 16,294,926
579,600 DiamondRock Hospitality Company 11,058,768
1,502,000 Extra Space Storage Inc. 24,783,000
933,800 Health Care Property Investors Inc. 27,014,834
1,716,100 Senior Housing Properties Trust 34,922,635
819,700 U-Store-It Trust 13,434,883
1,081,600 Ventas Inc. 39,208,000
-------------------------------------------------------------------------------------------------------------------------------
Total Specialized 207,053,846
------------------------------------------------------------------------------------------------------------------
TOTAL REAL ESTATE INVESTMENT TRUST COMMON STOCKS (COST 648,715,940
$512,529,292)
==================================================================================================================
SHARES DESCRIPTION (1) COUPON VALUE
-------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST PREFERRED STOCKS - 44.3% (30.5% OF TOTAL INVESTMENTS)
DIVERSIFIED - 13.2%
1,031,300 Crescent Real Estate Equities Company, Series A 6.750% $ 25,638,118
(Convertible)
530,000 Crescent Real Estate Equities Company, Series B 9.500% 13,435,500
529,942 Duke-Weeks Realty Corporation 6.950% 13,381,036
150,000 Lexington Corporate Properties Trust, Series B 8.050% 3,772,500
850,000 Lexington Realty Trust 7.550% 20,689,000
400,000 PS Business Parks, Inc., Series O 7.375% 10,187,520
-------------------------------------------------------------------------------------------------------------------------------
Total Diversified 87,103,674
------------------------------------------------------------------------------------------------------------------
SPECIALTY FINANCE - 1.5%
400,000 Gramercy Capital Corporation 8.125% 10,087,520
-------------------------------------------------------------------------------------------------------------------------------
11
JRS
Nuveen Real Estate Income Fund (continued)
Portfolio of INVESTMENTS as of 6-30-07 (Unaudited)
SHARES DESCRIPTION (1) COUPON VALUE
-------------------------------------------------------------------------------------------------------------------------------
OFFICE - 7.5%
160,000 Alexandria Real Estate Equities Inc., Series C 8.375% $ 4,091,200
200,000 Corporate Office Properties Trust, Series G 8.000% 5,036,000
12,141 Highwoods Properties, Inc., Series A 8.625% 12,645,610
57,612 Highwoods Properties, Inc., Series B 8.000% 1,462,769
81,000 HRPT Properties Trust, Series C 7.125% 2,039,580
993,800 Maguire Properties, Inc., Series A 7.625% 24,243,751
-------------------------------------------------------------------------------------------------------------------------------
Total Office 49,518,910
------------------------------------------------------------------------------------------------------------------
RESIDENTIAL - 4.9%
511,100 Apartment Investment & Management Company, Series U 7.750% 13,084,160
183,000 Apartment Investment & Management Company, Series Y 7.875% 4,640,880
101,900 BRE Properties, Series C 6.750% 2,460,885
505,900 BRE Properties, Series D 6.750% 12,252,898
-------------------------------------------------------------------------------------------------------------------------------
Total Residential 32,438,823
------------------------------------------------------------------------------------------------------------------
RETAIL - 3.7%
160,000 Cedar Shopping Centers Inc., Series A 8.875% 4,182,400
113,000 Glimcher Realty Trust, Series F 8.750% 2,870,200
154,300 Glimcher Realty Trust, Series G 8.125% 3,849,785
125,000 Saul Centers, Inc., Series A 8.000% 3,173,750
400,000 Taubman Centers, Inc., Series H 7.625% 10,052,000
-------------------------------------------------------------------------------------------------------------------------------
Total Retail 24,128,135
------------------------------------------------------------------------------------------------------------------
SPECIALIZED - 13.5%
130,000 Ashford Hospitality Trust, Series A 8.550% 3,341,650
546,900 FelCor Lodging Trust Inc., Series C 8.000% 13,716,252
120,000 Hersha Hospitality Trust, Series A 8.000% 2,995,200
800,000 Hospitality Properties Trust, Series C 7.000% 19,525,040
1,000,000 Public Storage, Inc., Series I 7.250% 25,550,000
151,700 Public Storage, Inc. 6.750% 3,718,546
175,000 Strategic Hotel Capital Inc., Series B 8.250% 4,366,250
320,000 Strategic Hotel Capital Inc., Series C 8.250% 8,121,600
300,000 Sunstone Hotel Investors Inc., Series A 8.000% 7,548,000
-------------------------------------------------------------------------------------------------------------------------------
Total Specialized 88,882,538
------------------------------------------------------------------------------------------------------------------
TOTAL REAL ESTATE INVESTMENT TRUST PREFERRED STOCKS (COST $284,483,479) 292,159,600
==================================================================================================================
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY VALUE
---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 2.3% (1.6% OF TOTAL INVESTMENTS)
$ 14,875 Repurchase Agreement with Fixed Income Clearing 4.000% 7/02/07 $ 14,875,467
Corporation, dated 6/29/07, repurchase price
$14,880,425, collateralized by $12,440,000 U.S.
Treasury Bond, 7.125%, due 2/15/23, value
$15,176,800
========== ------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $14,875,467) 14,875,467
==================================================================================================================
TOTAL INVESTMENTS (COST $811,888,238) - 145.1% 955,751,007
==================================================================================================================
BORROWINGS - (10.6)% (2) (70,000,000)
==================================================================================================================
OTHER ASSETS LESS LIABILITIES - (0.8)% (5,256,705)
==================================================================================================================
TAXABLE AUCTIONED PREFERRED SHARES, AT LIQUIDATION (222,000,000)
VALUE - (33.7)%
==================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES - 100% $ 658,494,302
==================================================================================================================
INTEREST RATE SWAPS OUTSTANDING AT JUNE 30, 2007:
FUND FIXED RATE UNREALIZED
NOTIONAL PAY/RECEIVE FLOATING RATE FIXED RATE PAYMENT TERMINATION APPRECIATION
COUNTERPARTY AMOUNT FLOATING RATE INDEX (ANNUALIZED) FREQUENCY DATE (DEPRECIATION)
------------------------------------------------------------------------------------------------------------------------------
Citigroup Inc. $43,000,000 Receive 1-Month USD-LIBOR 5.190% Monthly 2/6/09 $ 35,908
==============================================================================================================================
USD-LIBOR (United States Dollar-London Inter-Bank Offered Rate)
(1) All percentages shown in the Portfolio of Investments are based on net assets applicable
to Common shares unless otherwise noted.
(2) Borrowings Payable as a percentage of total investments is (7.3)%.
See accompanying notes to financial statements.
12
Statement of
ASSETS & LIABILITIES
June 30, 2007 (Unaudited)
--------------------------------------------------------------------------
ASSETS
Investments, at value (cost $811,888,238) $955,751,007
Unrealized appreciation on interest rate swaps 35,908
Receivables:
Dividends 4,526,558
Interest 3,306
Investments sold 15,037,796
Other assets 61,487
--------------------------------------------------------------------------
Total assets 975,416,062
--------------------------------------------------------------------------
LIABILITIES
Borrowings 70,000,000
Payable for investments purchased 23,742,834
Accrued expenses:
Management fees 501,271
Interest on borrowings 329,839
Taxable Auctioned Preferred share offering costs 54,764
Other 172,331
Taxable Auctioned Preferred shares dividends payable 120,721
--------------------------------------------------------------------------
Total liabilities 94,921,760
--------------------------------------------------------------------------
Taxable Auctioned Preferred shares, at liquidation value 222,000,000
--------------------------------------------------------------------------
Net assets applicable to Common shares $658,494,302
--------------------------------------------------------------------------
Common shares outstanding 28,218,393
--------------------------------------------------------------------------
Net asset value per Common share outstanding (net assets
applicable to Common shares, divided by Common shares
outstanding) $ 23.34
==========================================================================
NET ASSETS APPLICABLE TO COMMON SHARES CONSIST OF:
--------------------------------------------------------------------------
Common shares, $.01 par value per share $ 282,184
Paid-in surplus 421,210,587
Undistributed (Over-distribution of) net investment income (26,289,701)
Accumulated net realized gain (loss) from investments and
derivative transactions 119,392,555
Net unrealized appreciation (depreciation) of investments
and derivative transactions 143,898,677
--------------------------------------------------------------------------
Net assets applicable to Common shares $658,494,302
==========================================================================
Authorized shares:
Common Unlimited
Taxable Auctioned Preferred Unlimited
==========================================================================
See accompanying notes to financial statements.
13
Statement of
OPERATIONS
Six months ended June 30, 2007
(Unaudited)
------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 16,938,691
Interest 399,352
------------------------------------------------------------------------------
Total investment income 17,338,043
------------------------------------------------------------------------------
EXPENSES
Management fees 4,465,051
Taxable Auctioned Preferred shares - auction fees 275,220
Taxable Auctioned Preferred shares - dividend disbursing
agent fees 12,903
Shareholders' servicing agent fees and expenses 1,475
Interest expense 1,871,408
Liquidity and program fees 107,608
Custodian's fees and expenses 82,396
Trustees' fees and expenses 16,828
Professional fees 35,183
Shareholders' reports - printing and mailing expenses 60,703
Stock exchange listing fees 1,188
Investor relations expense 63,439
Other expenses 41,201
------------------------------------------------------------------------------
Total expenses before custodian fee credit and expense
reimbursement 7,034,603
Custodian fee credit (2,770)
Expense reimbursement (1,283,762)
------------------------------------------------------------------------------
Net expenses 5,748,071
------------------------------------------------------------------------------
Net investment income 11,589,972
------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) from investments 118,793,191
Net realized gain (loss) from interest rate swaps 69,134
Change in net unrealized appreciation (depreciation) of
investments (180,528,286)
Change in net unrealized appreciation (depreciation) of
interest rate swaps 136,936
------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (61,529,025)
------------------------------------------------------------------------------
DISTRIBUTIONS TO TAXABLE AUCTIONED PREFERRED SHAREHOLDERS
From and in excess of net investment income (5,547,369)
------------------------------------------------------------------------------
Decrease in net assets applicable to Common shares from
distributions to Taxable Auctioned Preferred shareholders (5,547,369)
------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to Common
shares from operations $ (55,486,422)
------------------------------------------------------------------------------
See accompanying notes to financial statements.
14
Statement of
CHANGES in NET ASSETS (Unaudited)
SIX MONTHS
ENDED YEAR ENDED
6/30/07 12/31/06
----------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 11,589,972 $ 28,427,511
Net realized gain (loss) from investments (net of federal
corporate income taxes of $0 and $15,719,306,
respectively, on long-term capital gains retained) 118,793,191 52,460,690
Net realized gain (loss) from interest rate swaps 69,134 (17,122)
Change in net unrealized appreciation (depreciation) of
investments (180,528,286) 98,615,287
Change in net unrealized appreciation (depreciation) of
interest rate swaps 136,936 551,230
Distributions to Taxable Auctioned Preferred shareholders:
From and in excess of net investment income (5,547,369) --
From net investment income -- (3,850,141)
From accumulated net realized gains -- (5,800,915)
----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to Common
shares from operations (55,486,422) 170,386,540
----------------------------------------------------------------------------------------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS
From and in excess of net investment income (32,158,133) --
From net investment income -- (37,860,356)
From accumulated net realized gains -- (17,451,897)
----------------------------------------------------------------------------------------------
Decrease in net assets applicable to Common shares from
distributions to Common shareholders (32,158,133) (55,312,253)
----------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from Common shares issued to shareholders due
to reinvestment of distributions 1,020,093 1,140,553
Taxable Auctioned Preferred shares offering costs and
adjustments -- (745,000)
----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to Common
shares from capital share transactions 1,020,093 395,553
----------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to Common
shares (86,624,462) 115,469,840
Net assets applicable to Common shares at the beginning of
period 745,118,764 629,648,924
----------------------------------------------------------------------------------------------
Net assets applicable to Common shares at the end of period $ 658,494,302 $745,118,764
----------------------------------------------------------------------------------------------
Undistributed (Over-distribution of) net investment income
at the end of period $ (26,289,701) $ (174,171)
----------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
15
Notes to
FINANCIAL STATEMENTS (Unaudited)
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
Nuveen Real Estate Income Fund (the "Fund") is a non-diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended. The Fund's Common shares are listed on the American Stock
Exchange and trade under the ticker symbol "JRS." The Fund was organized as a
Massachusetts business trust on August 27, 2001.
The Fund seeks to provide high current income by investing primarily in a
portfolio of income-producing common stocks, preferred stocks, convertible
preferred stocks and debt securities issued by real estate companies, such as
Real Estate Investment Trusts ("REITs").
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with U.S.
generally accepted accounting principles.
Investment Valuation
Exchange-listed securities are generally valued at the last sales price on the
securities exchange on which such securities are primarily traded. Securities
traded on a securities exchange for which there are no transactions on a given
day or securities not listed on a securities exchange are valued at the mean of
the closing bid and asked prices. Securities traded on Nasdaq are valued at the
Nasdaq Official Closing Price. The prices of fixed-income securities and
derivative instruments are generally provided by an independent pricing service
approved by the Fund's Board of Trustees. When price quotes are not readily
available, the pricing service or, in the absence of a pricing service for a
particular investment, the Board of Trustees of the Fund, or its designee, may
establish fair value using a wide variety of market data including yields or
prices of investments of comparable quality, type of issue, coupon, maturity and
rating, market quotes or indications of value from security dealers, evaluations
of anticipated cash flows or collateral, general market conditions and other
information and analysis, including the obligor's credit characteristics
considered relevant by the pricing service or the Board of Trustees' designee.
If the pricing service is unable to supply a price for a derivative investment
the Fund may use a market quote provided by a major broker/dealer in such
investments. If it is determined that the market price for an investment or
derivative instrument is unavailable or inappropriate, the Board of Trustees of
the Fund, or its designee, may establish fair value in accordance with
procedures established in good faith by the Board of Trustees. Short-term
investments are valued at amortized cost, which approximates market value.
Investment Transactions
Investment transactions are recorded on a trade date basis. Realized gains and
losses from investment transactions are determined on the specific
identification method. Investments purchased on a when-issued/delayed delivery
basis may have extended settlement periods. Any investments so purchased are
subject to market fluctuation during this period. The Fund has instructed the
custodian to segregate assets with a current value at least equal to the amount
of the when-issued/delayed delivery purchase commitments. At June 30, 2007, the
Fund had no such outstanding purchase commitments.
Investment Income
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on an accrual basis.
Federal Income Taxes
The Fund intends to comply with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies. The Fund intends to
distribute substantially all of its investment company taxable income to
shareholders. In any year when the Fund realizes net capital gains, the Fund may
choose to distribute all or a portion of its net capital gains to shareholders,
or alternatively, to retain all or a portion of its net capital gains and pay
federal corporate income taxes on such retained gains.
Dividends and Distributions to Common Shareholders
Distributions to Common shareholders are recorded on the ex-dividend date. The
amount and timing of distributions are determined in accordance with federal
corporate income tax regulations, which may differ from U.S. generally accepted
accounting principles.
The Fund makes quarterly cash distributions to Common shareholders of a stated
dollar amount per share. Subject to approval and oversight by the Fund's Board
of Trustees, the Fund seeks to maintain a stable distribution level designed to
deliver the long-term return potential of the Fund's investment strategy through
regular quarterly distributions (a "Managed Distribution Policy"). Total
distributions during a calendar year generally will be made from the Fund's net
investment income, net realized capital gains and net unrealized capital gains
in the Fund's portfolio, if any. The portion of distributions paid from net
unrealized gains, if any, would be distributed from the Fund's assets and would
be treated by shareholders as a non-taxable distribution for tax purposes. If
the Fund's total return on net asset value exceeds total distributions during a
calendar year, the excess will be reflected as an increase in net asset value
per share. In the event that total distributions during a calendar year exceed
the Fund's total return on net asset value, the difference will be treated as a
return of capital for tax purposes and will reduce net asset value per share.
The final
16
determination of the source and character of all distributions for the fiscal
year are made after the end of the fiscal year and are reflected in the
financial statements contained in the annual report as of December 31 each year.
REIT distributions received by the Fund are generally comprised of ordinary
income, long-term and short-term capital gains, and a return of REIT capital.
The actual character of amounts received during the period are not known until
after the fiscal year-end. For the fiscal year ended December 31, 2006, the
character of distributions to the Fund from the REITs was 64.23% ordinary
income, 26.69% long-term and short-term capital gains, and 9.08% return of REIT
capital.
For the fiscal year ended December 31, 2006, the Fund applied the actual
character of distributions reported by the REITs in which the Fund invests to
its receipts from the REITS. If a REIT held in the portfolio of investments did
not report the actual character of its distributions during the period, the Fund
treated the distributions as ordinary income.
For the six months ended June 30, 2007, the Fund applied the actual percentages
for the fiscal year ended December 31, 2006, described above, to its receipts
from the REITs and treated as income in the Statement of Operations only the
amount of ordinary income so calculated. The Fund adjusts that estimated
breakdown of income type (and consequently its net investment income) as
necessary early in the following calendar year when the REITs inform their
shareholders of the actual breakdown of income type.
The actual character of distributions made by the Fund during the fiscal year
ended December 31, 2006, is reflected in the accompanying financial statements.
The distributions made by the Fund to its shareholders during the six months
ended June 30, 2007, are provisionally classified as being "From and in excess
of net investment income", and those distributions will be classified as being
from net investment income, net realized capital gains and/or a return of
capital for tax purposes after the fiscal year end, based upon the income type
breakdown information conveyed at the time by the REITs whose securities are
held in the Fund's portfolio. For purposes of calculating "Undistributed
(Over-distribution of) net investment income" as of June 30, 2007, the
distribution amounts provisionally classified as "From and in excess of net
investment income" were treated as being entirely from net investment income.
Consequently, the financial statements at June 30, 2007, reflect an
over-distribution of net investment income.
Taxable Auctioned Preferred Shares
The Fund has issued and outstanding 1,720 Series M, 1,720 Series T, 1,720 Series
W, 2,000 Series Th and 1,720 Series F, Taxable Auctioned Preferred shares,
$25,000 stated value per share, as a means of effecting financial leverage. The
dividend rate paid by the Fund on each Series is determined every seven days,
pursuant to a dutch auction process overseen by the auction agent, and is
payable at the end of each rate period.
Interest Rate Swap Transactions
The Fund is authorized to invest in interest rate swap transactions. The Fund's
use of interest rate swap transactions is intended to mitigate the negative
impact that an increase in short-term interest rates could have on Common share
net earnings as a result of leverage. Interest rate swap transactions involve
the Fund's agreement with the counterparty to pay or receive a fixed rate
payment in exchange for the counterparty paying or receiving a variable rate
payment that is intended to approximate the Fund's variable rate payment
obligation on Taxable Auctioned Preferred shares or any variable rate borrowing.
The payment obligation is based on the notional amount of the interest rate swap
contract. Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
the swap counterparty on such transactions is limited to the net amount of
interest payments that the Fund is to receive. Interest rate swap positions are
valued daily. Although there are economic advantages of entering into interest
rate swap transactions, there are also additional risks. The Fund helps manage
the credit risks associated with interest rate swap transactions by entering
into agreements only with counterparties Nuveen Asset Management (the
"Adviser"), a wholly owned subsidiary of Nuveen Investments, Inc. ("Nuveen"),
believes have the financial resources to honor their obligations and by having
the Adviser continually monitor the financial stability of the swap
counterparties.
Repurchase Agreements
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian take possession of the underlying collateral
securities, the fair value of which exceeds the principal amount of the
repurchase transaction, including accrued interest, at all times. If the seller
defaults, and the fair value of the collateral declines, realization of the
collateral may be delayed or limited.
Custodian Fee Credit
The Fund has an arrangement with the custodian bank whereby certain custodian
fees and expenses are reduced by net credits earned on the Fund's cash on
deposit with the bank. Such deposit arrangements are an alternative to overnight
investments. Credits for cash balances may be offset by charges for any days on
which the Fund overdraws its account at the custodian bank.
17
Notes to
FINANCIAL STATEMENTS (Unaudited) (continued)
Indemnifications
Under the Fund's organizational documents, its Officers and Trustees are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, in the normal course of business, the Fund
enters into contracts that provide general indemnifications to other parties.
The Fund's maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the Fund that have not yet
occurred. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
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 the financial statements and the reported amounts of increases and
decreases in net assets applicable to Common shares from operations during the
reporting period. Actual results may differ from those estimates.
2. FUND SHARES
During the six months ended June 30, 2007 and the fiscal year ended December 31,
2006, 37,486 and 44,494 shares were issued to shareholders due to reinvestment
of distributions, respectively.
On May 25, 2006, the Fund issued 2,000 Series Th Taxable Auctioned Preferred
shares, $25,000 stated value per share, with a total liquidation value of
$50,000,000.
3. INVESTMENT TRANSACTIONS
Purchases and sales (excluding short-term investments and derivative
transactions) during the six months ended June 30, 2007, aggregated $254,550,469
and $246,683,352, respectively.
4. INCOME TAX INFORMATION
The following information is presented on an income tax basis. Differences
between amounts for financial statement and federal income tax purposes are
primarily due to timing differences in recording income and timing differences
in recognizing certain gains and losses on investment transactions. To the
extent that differences arise that are permanent in nature, such amounts are
reclassified within the capital accounts on the Statement of Assets and
Liabilities presented in the annual report, based on their federal tax basis
treatment; temporary differences do not require reclassification. Temporary and
permanent differences do not impact the net asset value of the Fund.
At June 30, 2007, the cost of investments was $811,888,238.
Gross unrealized appreciation and gross unrealized depreciation of investments
at June 30, 2007, were as follows:
-----------------------------------------------------------------------------------
Gross unrealized:
Appreciation $164,664,837
Depreciation (20,802,068)
-----------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments $143,862,769
-----------------------------------------------------------------------------------
The tax components of undistributed net ordinary income and net long-term
capital gains at December 31, 2006, the Fund's last tax year end, were as
follows:
----------------------------------------------------------------------------
Undistributed net ordinary income * $ --
Undistributed net long-term capital gains --
----------------------------------------------------------------------------
* Net ordinary income consists of net taxable income derived from dividends,
interest, and net short-term capital gains, if any.
The tax character of distributions paid during the Fund's last tax year ended
December 31, 2006, was designated for purposes of the dividends paid deduction
as follows:
----------------------------------------------------------------------------
Distributions from net ordinary income * $41,681,126
Distributions from net long-term capital gains 23,218,809
----------------------------------------------------------------------------
* Net ordinary income consists of net taxable income derived from dividends,
interest, and net short-term capital gains, if any.
5. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund's management fee is separated into two components - a complex-level
component, based on the aggregate amount of all fund assets managed by the
Adviser, and a specific fund-level component, based only on the amount of assets
within the Fund. This pricing structure enables Nuveen fund shareholders to
benefit from growth in the assets within each individual fund as well as from
growth in the amount of complex-wide assets managed by the Adviser.
18
The annual fund-level fee, payable monthly, is based upon the average daily
Managed Assets of the Fund as follows:
AVERAGE DAILY MANAGED ASSETS FUND-LEVEL FEE RATE
------------------------------------------------------------------------
For the first $500 million .7000%
For the next $500 million .6750
For the next $500 million .6500
For the next $500 million .6250
For Managed Assets over $2 billion .6000
------------------------------------------------------------------------
The annual complex-level fee, payable monthly, which is additive to the
fund-level fee, for all Nuveen sponsored funds in the U.S., is based on the
aggregate amount of total fund assets managed as stated in the tables below. As
of June 30, 2007, the complex-level fee rate was .1828%.
Effective August 20, 2007, the complex-level fee schedule is as follows:
COMPLEX-LEVEL ASSET BREAKPOINT LEVEL(1) EFFECTIVE RATE AT BREAKPOINT LEVEL
------------------------------------------------------------------------------------------------
$55 billion .2000%
$56 billion .1996
$57 billion .1989
$60 billion .1961
$63 billion .1931
$66 billion .1900
$71 billion .1851
$76 billion .1806
$80 billion .1773
$91 billion .1691
$125 billion .1599
$200 billion .1505
$250 billion .1469
$300 billion .1445
------------------------------------------------------------------------------------------------
Prior to August 20, 2007, the complex-level fee schedule was as follows:
COMPLEX-LEVEL ASSET BREAKPOINT LEVEL(1) EFFECTIVE RATE AT BREAKPOINT LEVEL
------------------------------------------------------------------------------------------------
$55 billion .2000%
$56 billion .1996
$57 billion .1989
$60 billion .1961
$63 billion .1931
$66 billion .1900
$71 billion .1851
$76 billion .1806
$80 billion .1773
$91 billion .1698
$125 billion .1617
$200 billion .1536
$250 billion .1509
$300 billion .1490
------------------------------------------------------------------------------------------------
(1) The complex-level fee component of the management fee for the funds is
calculated based upon the aggregate Managed Assets ("Managed Assets" means
the average daily net assets of each fund including assets attributable to
preferred stock issued by or borrowings by the Nuveen funds) of
Nuveen-sponsored funds in the U.S.
The management fee compensates the Adviser for overall investment advisory and
administrative services and general office facilities. The Adviser has entered
into a Sub-Advisory Agreement with Security Capital Research & Management
Incorporated ("Security Capital"), under which Security Capital manages the
investment portfolio of the Fund. Security Capital is compensated for its
services to the Fund from the management fee paid to the Adviser.
19
Notes to
FINANCIAL STATEMENTS (Unaudited) (continued)
The Fund pays no compensation directly to those of its Trustees who are
affiliated with the Adviser or to its Officers, all of whom receive remuneration
for their services to the Fund from the Adviser or its affiliates. The Board of
Trustees has adopted a deferred compensation plan for independent Trustees that
enables Trustees to elect to defer receipt of all or a portion of the annual
compensation they are entitled to receive from certain Nuveen advised funds.
Under the plan, deferred amounts are treated as though equal dollar amounts had
been invested in shares of select Nuveen advised funds.
For the first ten years of the Fund's operations, the Adviser has agreed to
reimburse the Fund, as a percentage of average daily Managed Assets, for fees
and expenses in the amounts and for the time periods set forth below:
YEAR ENDING YEAR ENDING
NOVEMBER 30, NOVEMBER 30,
-----------------------------------------------------------------------------------
2001 * .30% 2007 .25%
2002 .30 2008 .20
2003 .30 2009 .15
2004 .30 2010 .10
2005 .30 2011 .05
2006 .30
-----------------------------------------------------------------------------------
* From the commencement of operations.
The Adviser has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond November 30, 2011.
Agreement and Plan of Merger
On June 20, 2007, Nuveen Investments announced that it had entered into a
definitive Agreement and Plan of Merger ("Merger Agreement") with an investor
group majority-led by Madison Dearborn Partners, LLC. Madison Dearborn Partners,
LLC is a private equity investment firm based in Chicago, Illinois. The investor
group includes affiliates of Merrill Lynch, Wachovia, Citigroup, Deutsche Bank
and Morgan Stanley. It is anticipated that Merrill Lynch and its affiliates will
be indirect "affiliated persons" (as that term is defined in the Investment
Company Act of 1940) of the Fund. One important implication of this is that the
Fund will not be able to buy or sell securities to or from Merrill Lynch, but
the portfolio management team and Fund Management do not expect that this will
significantly impact the ability of the Fund to pursue its investment objectives
and polices. Under the terms of the merger, each outstanding share of Nuveen
Investments' common stock (other than dissenting shares) will be converted into
the right to receive a specified amount of cash, without interest. The merger is
expected to be completed by the end of the year, subject to customary
conditions, including obtaining the approval of Nuveen Investments shareholders,
obtaining necessary fund and client consents sufficient to satisfy the terms of
the Merger Agreement, and expiration of certain regulatory waiting periods. The
obligations of Madison Dearborn Partners, LLC to consummate the merger are not
conditioned on its obtaining financing.
The consummation of the merger will be deemed to be an "assignment" (as defined
in the 1940 Act) of the investment management agreement between the Fund and the
Adviser, and will result in the automatic termination of the Fund's agreement.
Prior to the consummation of the merger, it is anticipated that the Board of
Trustees of the Fund will consider a new investment management agreement with
the Adviser. If approved by the Board, the new agreement would be presented to
the Fund's shareholders for approval, and, if so approved by shareholders, would
take effect upon consummation of the merger. There can be no assurance that the
merger described above will be consummated as contemplated or that necessary
shareholder approvals will be obtained.
6. BORROWINGS
On August 15, 2006, the Fund entered into a commercial paper program ($70
million maximum) with CITIBANK, N.A.'s conduit financing agency, CHARTA, LLC
("CHARTA"). CHARTA issues high grade commercial paper and uses the proceeds make
advances to the Fund. For the six months ended June 30, 2007, the average daily
balance of borrowings under the commercial paper program agreement was the full
$70 million maximum allowed. The average annualized interest rate on such
borrowings was 5.39%. In addition to the interest expense, the Fund also pays a
..21% per annum program fee and a .10% per annum liquidity fee.
7. NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Interpretation No. 48
Effective June 29, 2007, the Fund adopted Financial Accounting Standards Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48).
FIN 48 provides guidance regarding 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 Fund'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
would be recorded as a tax benefit or expense in the current year. Management of
the Fund has concluded that there are no significant
20
uncertain tax positions that require recognition in the Fund's financial
statements. Consequently, the adoption of FIN 48 had no impact on the net assets
or results of operations of the Fund.
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 157
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements." This standard establishes a single authoritative definition of
fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to
fair value measurements already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this standard relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about fair value
measurements. As of June 30, 2007, the Fund does not believe the adoption of
SFAS No. 157 will impact the financial statement amounts; however, additional
disclosures may be required about the inputs used to develop the measurements
and the effect of certain of the measurements included within the Statement of
Operations for the period.
21
Financial
HIGHLIGHTS (Unaudited)
Selected data for a Common share outstanding throughout each period:
Investment Operations
-------------------------------------------------------------------------
Distributions
from Net Distributions
Investment from Capital
Income to Gains to
Beginning Net Taxable Taxable
Common Realized/ Auctioned Auctioned
Share Net Unrealized Preferred Preferred
Net Asset Investment Gain Share- Share-
Value Income(a) (Loss)(b) holders+ holders+ Total
---------------------------------------------------------------------------------------------------------------------------
Year Ended 12/31:
2007(f) $26.44 $.41 $(2.17) $(.20)**** $ -- $(1.96)
2006 22.38 1.01 5.40 (.14) (.21) 6.06
2005 22.46 .84 .93 (.03) (.16) 1.58
2004(c) 18.57 .88 4.56 (.05) (.04) 5.35
2003(d) 17.30 .12 1.38 (.01) -- 1.49
Year Ended 10/31:
2003 13.56 .85 4.38 (.05) (.02) 5.16
2002(e) 14.33 1.02 (.46) (.07) (.02) .47
---------------------------------------------------------------------------------------------------------------------------
Less Distributions
------------------------------------------
Offering Costs
Net and Taxable
Investment Capital Auctioned Ending
Income to Gains to Tax Preferred Common
Common Common Return Share Share Ending
Share- Share- of Underwriting Net Asset Market
holders holders Capital Total Discounts Value Value
---------------------------------------------------------------------------------------------------------------------------
Year Ended 12/31:
2007(f) $(1.14)**** $ -- $ -- $(1.14) $ -- $23.34 $24.05
2006 (1.35) (.62) -- (1.97) (.03) 26.44 28.48
2005 (.29) (1.37) -- (1.66) -- 22.38 19.99
2004(c) (.69) (.63) (.14) (1.46) -- 22.46 20.75
2003(d) (.01) (.08) (.13) (.22) -- 18.57 18.73
Year Ended 10/31:
2003 (.97) (.41) (.04) (1.42) -- 17.30 17.81
2002(e) (.89) (.25) -- (1.14) (.10) 13.56 14.40
---------------------------------------------------------------------------------------------------------------------------
Cumulative Taxable Auctioned Preferred
at End of Period Borrowings at End of Period
--------------------------------------------- ----------------------------
Aggregate Liquidation Aggregate
Amount and Market Asset Amount Asset
Outstanding Value Per Coverage Outstanding Coverage
(000) Share Per Share (000) Per $1,000
----------------------------------------------------------------------------------------------------------
Year Ended 12/31:
2007(f) $222,000 $25,000 $ 99,155 $70,000 $13,578
2006 222,000 25,000 108,910 70,000 14,816
2005 172,000 25,000 116,519 -- --
2004(c) 172,000 25,000 116,857 -- --
2003(d) 172,000 25,000 100,956 -- --
Year Ended 10/31:
2003 172,000 25,000 95,758 -- --
2002(e) 172,000 25,000 80,420 -- --
----------------------------------------------------------------------------------------------------------
* Annualized.
** - Total Return on Market Value is the combination of changes in the market
price per share and the effect of reinvested dividend income and
reinvested capital gains distributions, if any, at the average price
paid per share at the time of reinvestment. The last dividend declared
in the period, which is typically paid on the first business day of the
following month, is assumed to be reinvested at the ending market price.
The actual reinvestment for the last dividend declared in the period
takes place over several days, and in some instances may not be based on
the market price, so the actual reinvestment price may be different from
the price used in the calculation. Total returns are not annualized.
Total Return on Common Share Net Asset Value is the combination of
changes in Common share net asset value, reinvested divided income at
net asset value and reinvested capital gains distributions at net asset
value, if any. The last dividend declared in the period, which is
typically paid on the first business day of the following month, is
assumed to be reinvested at the ending net asset value. The actual
reinvest price for the last dividend declared in the period may often be
based on the fund's market price (and not its net asset value), and
therefore may be different from the price used in the calculation. Total
returns are not annualized.
- The Fund elected to retain a portion of its realized long-term capital
gains for the tax year ended December 31, 2006, and pay required federal
corporate income taxes on these gains. As reported on Form 2439, Common
shareholders of record on December 29, 2006, must include their pro-rata
share of these gains on their 2006 federal tax returns, and will receive
a corresponding credit toward their taxes, or a tax refund, for their
pro-rata share of the taxes paid by the Fund. The standardized total
returns shown above do not include the economic benefit to Common
shareholders of record of this tax credit/refund. The Fund's
corresponding 2006 total return on market value and net asset value when
this benefit is included are 57.50% and 30.56%, respectively.
*** After custodian fee credit and expense reimbursement, where applicable.
**** Represents distributions paid "From and in excess of net investment
income" for the six months ended June 30, 2007.
+ The amounts shown are based on Common share equivalents.
++ - Ratios do not reflect the effect of dividend payments to Taxable
Auctioned Preferred shareholders.
- Income ratios reflect income earned on assets attributable to Taxable
Auctioned Preferred shares and borrowings, where applicable.
- For periods ended prior to December 31, 2004, each ratio included the
effect of the net interest expense incurred on interest rate swap
transactions as follows:
Year Ended 12/31:
2003(d) .91*
Year Ended 10/31:
2003 1.03
2002(e) .68*
- Each ratio includes the effect of the interest expense paid on borrowings
as follows:
Ratio of Borrowing Interest Expense to Average Net
Assets Applicable to Common Shares
--------------------------------------------------
Year Ended 12/31:
2007(f) .51%*
2006 .21%
2005 --
2004(c) --
2003(d) --
Year Ended 10/31:
2003 --
2002(e) --
(a) Per share Net Investment Income is calculated using the average daily
shares method.
(b) Net of federal corporate income taxes on long-term capital gains retained
by the Fund of $0.56 per share for the fiscal year ended December 31,
2006.
(c) For the fiscal year ended December 31, 2004, the Fund changed its method
of presentation for net interest expense on interest rate swap
transactions. The effect of this reclassification was to increase Net
Investment Income by $0.15 per share with a corresponding decrease in Net
Realized/Unrealized Gain (Loss), a decrease in each of the Ratios of
Expenses to Average Net Assets Applicable to Common Shares by 0.77% with a
corresponding increase in each of the Ratios of Net Investment Income to
Average Net Assets Applicable to Common Shares.
(d) For the period November 1, 2003 through December 31, 2003.
(e) For the period November 15, 2001 (commencement of operations) through
October 31, 2002.
(f) For the six months ended June 30, 2007.
22
Total Returns Ratios/Supplemental Data
------------------ -------------------------------------------------------
Ratios to Average Net Assets Applicable
Based to Common Shares Before
on Credit/Reimbursement
Common Ending Net ----------------------------------------
Based Share Assets
on Net Applicable to Net
Market Asset Common Investment
Value** Value** Shares (000) Expenses++ Income++
---------------------------------------------------------------------------------
(11.73)% (7.66)% $658,494 1.91%* 2.80%*
54.49 27.87 745,119 1.54 3.74
4.75 7.42 629,649 1.28 3.46
19.80 30.12 631,979 1.34 4.13
6.49 8.69 522,576 2.31* 4.07*
35.40 39.80 486,814 2.51 5.17
3.30 2.09 381,290 2.12* 6.71*
---------------------------------------------------------------------------------
Ratios/Supplemental Data
----------------------------------------------------
Ratios to Average Net Assets Applicable
to Common Shares After
Credit/Reimbursement***
----------------------------------------
Net Portfolio
Investment Turnover
Expenses++ Income++ Rate
-------------------------------------------------------------------
1.56%* 3.15%* 24%
1.15 4.13 25
.90 3.85 13
.94 4.52 14
1.91* 4.47* 2
2.09 5.59 26
1.72* 7.11* 37
------------------------------------------------------------------------------
See accompanying notes to financial statements.
23
Annual Investment
Management Agreement
APPROVAL PROCESS
The Board Members are responsible for overseeing the performance of the
investment adviser to the Fund and determining whether to continue the advisory
arrangements. At the annual review meeting held on May 21, 2007 (the "May
Meeting"), the Board Members of the Fund, including the Independent Board
Members, unanimously approved the continuance of the Investment Management
Agreement between the Fund and Nuveen Asset Management ("NAM" or the "Adviser"),
and the Sub-Advisory Agreement between NAM and Security Capital Research &
Management Incorporated (the "Sub-Adviser"). NAM and the Sub-Adviser are each a
"Fund Adviser." The foregoing Investment Management Agreement with NAM and
Sub-Advisory Agreement with the Sub-Adviser are hereafter referred to as the
"Original Investment Management Agreement" and the "Original Sub-Advisory
Agreement," respectively.
Subsequent to the May Meeting, Nuveen Investments, Inc. ("Nuveen"), the parent
company of NAM, entered into a merger agreement providing for the acquisition of
Nuveen by Windy City Investments, Inc., a corporation formed by investors led by
Madison Dearborn Partners, LLC ("MDP"), a private equity investment firm (the
"Transaction"). The Original Investment Management Agreement and Original
Sub-Advisory Agreement, as required by Section 15 of the Investment Company Act
of 1940 (the "1940 Act"), each provides for its automatic termination in the
event of its "assignment" (as defined in the 1940 Act). Any change in control of
the adviser is deemed to be an assignment. The consummation of the Transaction
will result in a change of control of NAM as well as its affiliated sub-advisers
and therefore cause the automatic termination of the Original Investment
Management Agreement and Original Sub-Advisory Agreement, as required by the
1940 Act. Accordingly, in anticipation of the Transaction, at a meeting held on
July 31, 2007 (the "July Meeting"), the Board Members, including the Independent
Board Members, unanimously approved a new Investment Management Agreement (the
"New Investment Management Agreement") with NAM on behalf of the Fund and a new
Sub-Advisory Agreement (the "New Sub-Advisory Agreement") between NAM and the
Sub-Adviser on behalf of the Fund to take effect immediately after the
Transaction or shareholder approval of the new advisory contracts, whichever is
later. The 1940 Act also requires that the New Investment Management Agreement
and New Sub-Advisory Agreement be approved by the Fund's shareholders in order
for it to become effective. Accordingly, to ensure continuity of advisory
services, the Board Members, including the Independent Board Members,
unanimously approved an Interim Investment Management Agreement and an Interim
Sub-Advisory Agreement to take effect upon the closing of the Transaction if
shareholders have not yet approved the New Investment Management Agreement and
New Sub-Advisory Agreement.
Because the information provided and considerations made at the annual review
continue to be relevant with respect to the evaluation of the New Investment
Management Agreement and New Sub-Advisory Agreement, the Board considered the
foregoing as part of its deliberations of the New Investment Management
Agreement and New Sub-Advisory Agreement. Accordingly, as indicated, the
discussions immediately below outline the materials and information presented to
the Board in connection with the Board's prior annual review and the analysis
undertaken and the conclusions reached by Board Members when determining to
continue the Original Investment Management Agreement and Original Sub-Advisory
Agreement.
I. APPROVAL OF THE ORIGINAL INVESTMENT MANAGEMENT AGREEMENT & ORIGINAL
SUB-ADVISORY AGREEMENT
During the course of the year, the Board received a wide variety of materials
relating to the services provided by the Fund Advisers and the performance of
the Fund (as applicable). At each of its quarterly meetings, the Board reviewed
investment performance (as applicable) and various matters relating to the
operations of the Fund and other Nuveen funds, including the compliance program,
shareholder services, valuation, custody, distribution and other information
relating to the nature, extent and quality of services provided by the Fund
Adviser. Between the regularly scheduled quarterly meetings, the Board Members
received information on particular matters as the need arose.
24
In preparation for their considerations at the May Meeting, the Independent
Board Members received extensive materials, well in advance of the meeting,
which outlined or are related to, among other things:
- the nature, extent and quality of services provided by the Fund Adviser;
- the organization and business operations of the Fund Adviser, including the
responsibilities of various departments and key personnel;
- the Fund's past performance as well as its performance compared to funds with
similar investment objectives based on data and information provided by an
independent third party and to recognized and/or customized benchmarks (as
appropriate);
- the profitability of the Fund Adviser and certain industry profitability
analyses for unaffiliated advisers;
- the expenses of the Fund Adviser in providing the various services;
- the advisory fees and total expense ratios of the Fund, including comparisons
of such fees and expenses with those of comparable, unaffiliated funds based
on information and data provided by an independent third party (the "Peer
Universe") as well as compared to a subset of funds within the Peer Universe
(the "Peer Group") of the Fund (as applicable);
- the advisory fees the Fund Adviser assesses to other types of investment
products or clients;
- the soft dollar practices of the Fund Adviser, if any; and
- from independent legal counsel, a legal memorandum describing among other
things, applicable laws, regulations and duties in reviewing and approving
advisory contracts.
At the May Meeting, NAM made a presentation to, and responded to questions from,
the Board. At the May Meeting, the Independent Board Members met privately with
their legal counsel to review the Board's duties in reviewing advisory contracts
and considering the renewal of the advisory contracts (which include the
sub-advisory contracts). The Independent Board Members, in consultation with
independent counsel, reviewed the factors set out in judicial decisions and
Securities and Exchange Commission ("SEC") directives relating to the renewal of
advisory contracts. As outlined in more detail below, the Board Members
considered all factors they believed relevant with respect to the Fund,
including, but not limited to, the following: (a) the nature, extent and quality
of the services to be provided by the Fund Adviser; (b) the investment
performance of the Fund and the Fund Adviser (as applicable); (c) the costs of
the services to be provided and profits to be realized by the Fund Adviser and
its affiliates; (d) the extent to which economies of scale would be realized;
and (e) whether fee levels reflect those economies of scale for the benefit of
the Fund's investors. In addition, as noted, the Board Members met regularly
throughout the year to oversee the Fund. In evaluating the advisory contracts,
the Board Members also relied upon their knowledge of the respective Fund
Adviser, its services and the Fund resulting from their meetings and other
interactions throughout the year. It is with this background that the Board
Members considered each advisory contract.
A. NATURE, EXTENT & QUALITY OF SERVICES
In considering the renewal of the Original Investment Management Agreement and
Original Sub-Advisory Agreement, the Board Members considered the nature, extent
and quality of the respective Fund Adviser's services. The Board Members
reviewed materials outlining, among other things, the Fund Adviser's
organization and business; the types of services that the Fund Adviser or its
affiliates provide or are expected to provide to the Fund; the performance
record of the Fund (as described in further detail below); and at the annual
review, any initiatives Nuveen had taken for the applicable fund product line.
As noted, at the annual review, the Board Members were already familiar with the
organization, operations and personnel of each respective Fund Adviser due to
the Board Members' experience in governing the Fund and working with such Fund
Advisers on matters relating to the Fund. At the May Meeting, the Board Members
also recognized NAM's investment in additional qualified personnel throughout
the various groups in the organization and recommended to NAM that it continue
to review staffing needs as necessary. The Board Members recognized NAM's
investment of resources and efforts to continue to enhance and refine its
investment processes.
25
Annual Investment
Management Agreement
APPROVAL PROCESS (continued)
With respect to the Sub-Adviser, the Board Members also received and reviewed an
evaluation of the Sub-Adviser from NAM at the annual review. Such evaluation
outlined, among other things, the Sub-Adviser's organizational history, client
base, product mix, investment team and any changes thereto, investment process
and any changes to its investment strategy, and the Fund's investment objectives
and performance (as applicable). At the May Meeting, the Board Members noted
that NAM recommended the renewal of the applicable Original Sub-Advisory
Agreement and considered the basis for such recommendations and any
qualifications in connection therewith. In its review of the Sub-Adviser, the
Board Members also considered, among other things, the experience of the
investment personnel, the quality of the Sub-Adviser's investment processes in
making portfolio management decisions and any additional refinements and
improvements adopted to the portfolio management processes and Fund performance.
The Board Members noted the depth of experience of the Sub-Adviser's personnel
and disciplined investment process at the annual review.
In addition to advisory services, the Independent Board Members considered the
quality of administrative and non-advisory services provided by NAM and noted
that NAM and its affiliates provide the Fund with a wide variety of services and
officers and other personnel as are necessary for the operations of the Fund,
including:
- product management;
- fund administration;
- oversight by shareholder services and other fund service providers;
- administration of Board relations;
- regulatory and portfolio compliance; and
- legal support.
As the Fund operates in a highly regulated industry and given the importance of
compliance, the Board Members considered, in particular, NAM's compliance
activities for the Fund and enhancements thereto. In this regard, the Board
Members recognized the quality of NAM's compliance team. The Board Members also
considered NAM's ability and procedures to monitor the Sub-Adviser's
performance, business practices and compliance policies and procedures. The
Board Members further noted NAM's negotiations with other service providers and
the corresponding reduction in certain service providers' fees at the May
Meeting.
In addition to the foregoing services, the Board Members also noted the
additional services that NAM or its affiliates provide to Nuveen's closed-end
funds including, in particular, its secondary market support activities. The
Board Members recognized Nuveen's continued commitment to supporting the
secondary market for the common shares of its closed-end funds through a variety
of programs designed to raise investor and analyst awareness and understanding
of closed-end funds. These efforts include:
- maintaining shareholder communications;
- providing advertising for the Nuveen closed-end funds;
- maintaining its closed-end fund website;
- maintaining continual contact with financial advisers;
- providing educational symposia;
- conducting research with investors and financial analysis regarding closed-end
funds; and
- evaluating secondary market performance.
With respect to the Nuveen closed-end funds that utilize leverage through the
issuance of preferred shares ("Preferred Shares"), the Board Members noted
Nuveen's continued support for the holders of Preferred Shares by, among other
things:
- maintaining an in-house trading desk;
- maintaining a product manager for the Preferred Shares;
26
- developing distribution for Preferred Shares with new market participants;
- maintaining an orderly auction process;
- managing leverage and risk management of leverage; and
- maintaining systems necessary to test compliance with rating agency criteria.
With respect to the Sub-Adviser, the Board Members noted that the sub-advisory
agreement was essentially an agreement for portfolio management services only
and the Sub-Adviser was not expected to supply other significant administrative
services to the Fund.
Based on their review, the Board Members found that, overall, the nature, extent
and quality of services provided (and expected to be provided) to the Fund under
the respective Original Investment Management Agreement or Original Sub-Advisory
Agreement, as applicable, were satisfactory.
B. THE INVESTMENT PERFORMANCE OF THE FUND & FUND ADVISERS
At the May Meeting, the Board considered the investment performance for the
Fund, including the Fund's historic performance as well as its performance
compared to funds with similar investment objectives (the "Performance Peer
Group") based on data provided by an independent third party (as described
below). The Board Members also reviewed the Fund's historic performance compared
to recognized and/or customized benchmarks (as applicable).
In evaluating the performance information during the annual review at the May
Meeting, in certain instances, the Board Members noted that the closest
Performance Peer Group for a fund may not adequately reflect such fund's
investment objectives and strategies, thereby limiting the usefulness of the
comparisons of such fund's performance with that of the Performance Peer Group.
These Performance Peer Groups include those for the Fund as well as for: the
Nuveen Diversified Dividend and Income Fund; the Nuveen Multi-Strategy Income
and Growth Fund; the Nuveen Multi-Strategy Income and Growth Fund 2; the Nuveen
Tax-Advantaged Floating Rate Fund; the Nuveen Equity Premium Advantage Fund; the
Nuveen Equity Premium Income Fund; the Nuveen Equity Premium Opportunity Fund;
and the Nuveen Equity Premium and Growth Fund.
The Board Members reviewed performance information including, among other
things, total return information compared with the Fund's Performance Peer Group
as well as recognized and/or customized benchmarks (as appropriate) for the
one-, three- and five-year periods (as applicable) ending December 31, 2006.
This information supplemented the performance information provided to the Board
at each of its quarterly meetings. Based on their review at the May Meeting, the
Board Members determined that the Fund's investment performance over time had
been satisfactory.
C. FEES, EXPENSES & PROFITABILITY
1. Fees & Expenses
During the annual review, the Board evaluated the management fees and
expenses of the Fund reviewing, among other things, the Fund's advisory fees
(net and gross management fees) and total expense ratios (before and after
expense reimbursements and/or waivers) in absolute terms as well as
comparisons to the gross management fees (before waivers), net management
fees (after waivers) and total expense ratios (before and after waivers) of
comparable funds in the Peer Universe and the Peer Group. In reviewing the
fee schedule for the Fund, the Board Members considered the fund-level and
complex-wide breakpoint schedules (described in further detail below) and any
fee waivers and reimbursements provided by Nuveen. The Board Members further
reviewed data regarding the construction of Peer Groups as well as the
methods of measurement for the fee and expense analysis and the performance
analysis. In certain cases, due to the small number of peers in the Peer
Universe, the Peer Universe and Peer Group had significant overlap or even
consisted entirely of the same unaffiliated funds. In reviewing the
comparisons of fee and expense information, the Board Members recognized that
in certain cases, the size of a fund relative to peers, the small size and
odd composition of the Peer Group (including differences in objectives and
strategies), expense anomalies, timing of information used or other factors
impacting the comparisons thereby limited some of the usefulness of the
comparative data. The Board
27
Annual Investment
Management Agreement
APPROVAL PROCESS (continued)
Members also considered the differences in the use of leverage. The Board
Members also noted the limited Peer Groups available for the Nuveen funds
with multi-sleeves of investments (e.g., the Nuveen Diversified Dividend and
Income Fund, the Nuveen Multi-Strategy Income and Growth Fund, the Nuveen
Multi-Strategy Income and Growth Fund 2 and the Nuveen Tax Advantaged Total
Return Strategy Fund). Based on their review of the fee and expense
information provided, the Board Members determined that the Fund's net total
expense ratio was within an acceptable range compared to peers.
2. Comparisons with the Fees of Other Clients
At the annual review, the Board Members further reviewed data comparing the
advisory fees of NAM with fees NAM charges to other clients. Such clients
include NAM's separately managed accounts and funds that are not offered by
Nuveen but are sub-advised by one of Nuveen's investment management teams. In
general, the advisory fees charged for separate accounts are somewhat lower
than the advisory fees assessed to the Fund. The Board Members considered the
differences in the product types, including, but not limited to, the services
provided, the structure and operations, product distribution and costs
thereof, portfolio investment policies, investor profiles, account sizes and
regulatory requirements. The Board Members noted, in particular, that the
range of services provided to the Fund (as discussed above) is much more
extensive than that provided to separately managed accounts. As described in
further detail above, such additional services include, but are not limited
to: product management, fund administration, oversight of third party service
providers, administration of Board relations, and legal support. The Board
Members noted that the Fund operates in a highly regulated industry requiring
extensive compliance functions compared to other investment products. Given
the inherent differences in the products, particularly the extensive services
provided to the Fund, the Board Members believe such facts justify the
different levels of fees.
With respect to the Sub-Adviser, in considering the fees of the Sub-Adviser,
the Board Members also considered the pricing schedule or fees that the
Sub-Adviser charges for similar investment management services for other fund
sponsors or clients, as applicable. With respect to sub-advisers unaffiliated
with Nuveen, such as the Sub-Adviser, the Board Members noted that such fees
were the result of arm's-length negotiations.
3. Profitability of Fund Advisers
In conjunction with its review of fees, the Board Members also considered the
profitability of Nuveen for its advisory activities (which incorporated
Nuveen's wholly-owned affiliated sub-advisers) and its financial condition. At
the annual review, the Board Members reviewed the revenues and expenses of
Nuveen's advisory activities for the last three years, the allocation
methodology used in preparing the profitability data as well as the 2006
Annual Report for Nuveen. The Board Members noted this information
supplemented the profitability information requested and received during the
year to help keep them apprised of developments affecting profitability (such
as changes in fee waivers and expense reimbursement commitments). In this
regard, the Board Members noted the enhanced dialogue and information
regarding profitability with NAM during the year, including more frequent
meetings and updates from Nuveen's corporate finance group. The Board Members
considered Nuveen's profitability compared with other fund sponsors prepared
by three independent third party service providers as well as comparisons of
the revenues, expenses and profit margins of various unaffiliated management
firms with similar amounts of assets under management prepared by Nuveen.
In reviewing profitability, the Board Members recognized the subjective nature
of determining profitability which may be affected by numerous factors
including the allocation of expenses. Further, the Board Members recognized
the difficulties in making comparisons as the profitability of other advisers
generally is not publicly available and the profitability information that is
available for certain advisers or management firms may not be representative
of the industry and may be affected by, among other things, the adviser's
particular business mix, capital costs, types of funds managed and expense
allocations.
Notwithstanding the foregoing, the Board Members reviewed Nuveen's methodology
at the annual review and assumptions for allocating expenses across product
lines to determine profitability. Last year, the Board Members
28
also designated an Independent Board Member as a point person for the Board to
review the methodology determinations during the year and any refinements
thereto, which relevant information produced from such process was reported to
the full Board. In reviewing profitability, the Board Members recognized
Nuveen's increased investment in its fund business. Based on its review, the
Board Members concluded that Nuveen's level of profitability for its advisory
activities was reasonable in light of the services provided. With respect to
sub-advisers unaffiliated with Nuveen, such as the Sub-Adviser, the Board
Members also considered the Sub-Adviser's revenues from serving as Sub-Adviser
to the Fund, expenses (including the basis for allocating expenses) and
profitability margins (pre- and post-tax). Based on their review, the Board
Members were satisfied that the respective Fund Adviser's level of profitability
was reasonable in light of the services provided.
In evaluating the reasonableness of the compensation, the Board Members also
considered other amounts paid to a Fund Adviser by the Fund as well as any
indirect benefits (such as soft dollar arrangements, if any) the Fund Adviser
and its affiliates receive, or are expected to receive, that are directly
attributable to the management of the Fund, if any. See Section E below for
additional information on indirect benefits a Fund Adviser may receive as a
result of its relationship with the Fund. Based on their review of the overall
fee arrangement of the Fund, the Board Members determined that the advisory fees
and expenses of the Fund were reasonable.
D. ECONOMIES OF SCALE & WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE
With respect to economies of scale, the Board Members recognized the potential
benefits resulting from the costs of the Fund being spread over a larger asset
base. To help ensure the shareholders share in these benefits, the Board Members
reviewed and considered the breakpoints in the advisory fee schedules that
reduce advisory fees. In addition to advisory fee breakpoints, the Board also
approved a complex-wide fee arrangement in 2004. Pursuant to the complex-wide
fee arrangement, the fees of the funds in the Nuveen complex, including the
Fund, are reduced as the assets in the fund complex reach certain levels. In
evaluating the complex-wide fee arrangement, the Board Members noted that the
last complex-wide asset level breakpoint for the complex-wide fee schedule was
at $91 billion and that the Board Members anticipated further review and/or
negotiations prior to the assets of the Nuveen complex reaching such threshold.
Based on their review, the Board Members concluded that the breakpoint schedule
and complex-wide fee arrangement were acceptable and desirable in providing
benefits from economies of scale to shareholders, subject to further evaluation
of the complex-wide fee schedule as assets in the complex increase. See Section
II, Paragraph D -- "Approval of the New Investment Management Agreement and New
Sub-Advisory Agreement -- Economies of Scale and Whether Fee Levels Reflect
These Economies of Scale" for information regarding subsequent modifications to
the complex-wide fee.
E. INDIRECT BENEFITS
In evaluating fees, the Board Members also considered any indirect benefits or
profits the respective Fund Adviser or its affiliates may receive as a result of
its relationship with the Fund. In this regard, the Board Members considered the
revenues received by affiliates of NAM for serving as agent at Nuveen's
preferred trading desk and for serving as a co-manager in the initial public
offering of new closed-end exchange traded funds.
In addition to the above, the Board Members considered whether the Fund Adviser
received any benefits from soft dollar arrangements whereby a portion of the
commissions paid by the Fund for brokerage may be used to acquire research that
may be useful to the Fund Adviser in managing the assets of the Fund and other
clients. With respect to NAM, the Board Members noted that NAM does not
currently have any soft dollar arrangements; however, to the extent certain bona
fide agency transactions that occur on markets that traditionally trade on a
principal basis and riskless principal transactions are considered as generating
"commissions," NAM intends to comply with the applicable safe harbor provisions.
With respect to the Sub-Adviser, the Board Members considered that the
Sub-Adviser may benefit from its soft dollar arrangements pursuant to which such
Sub-Adviser receives research from brokers that execute the Fund's portfolio
transactions. The Board Members noted that the Sub-Adviser's profitability may
be lower if it were required to pay for this research with hard dollars.
29
Annual Investment
Management Agreement
APPROVAL PROCESS (continued)
Based on their review, the Board Members concluded that any indirect benefits
received by a Fund Adviser as a result of its relationship with the Fund were
reasonable and within acceptable parameters.
F. OTHER CONSIDERATIONS
The Board Members did not identify any single factor discussed previously as
all-important or controlling in their considerations to continue an advisory
contract. The Board Members, including the Independent Board Members,
unanimously concluded that the terms of the Original Investment Management
Agreement and Original Sub-Advisory Agreement are fair and reasonable, that the
respective Fund Adviser's fees are reasonable in light of the services provided
to the Fund and that the Original Investment Management Agreement and the
Original Sub-Advisory Agreement be renewed.
II. APPROVAL OF THE NEW INVESTMENT MANAGEMENT AGREEMENT & NEW SUB-ADVISORY
AGREEMENT
Following the May Meeting, the Board Members were advised of the potential
Transaction. As noted above, the completion of the Transaction would terminate
the Original Investment Management Agreement and the Original Sub-Advisory
Agreement. Accordingly, at the July Meeting, the Board of the Fund, including
the Independent Board Members, unanimously approved the New Investment
Management Agreement and New Sub-Advisory Agreement on behalf of the Fund.
Leading up to the July Meeting, the Board Members had several meetings and
deliberations with and without Nuveen management present, and with the advice of
legal counsel, regarding the proposed Transaction as outlined below.
On June 8, 2007, the Board Members held a special telephonic meeting to discuss
the proposed Transaction. At that meeting, the Board Members established a
special ad hoc committee comprised solely of Independent Board Members to focus
on the Transaction and to keep the Independent Board Members updated with
developments regarding the Transaction. On June 15, 2007, the ad hoc committee
discussed with representatives of NAM the Transaction and modifications to the
complex-wide fee schedule that would generate additional fee savings at
specified levels of complex-wide asset growth. Following the foregoing meetings
and several subsequent telephonic conferences among Independent Board Members
and independent counsel, and between Independent Board Members and
representatives of Nuveen, the Board met on June 18, 2007 to further discuss the
proposed Transaction. Immediately prior to and then again during the June 18,
2007 meeting, the Independent Board Members met privately with their independent
legal counsel. At that meeting, the Board met with representatives of MDP, of
Goldman Sachs, Nuveen's financial adviser in the Transaction, and of the Nuveen
Board to discuss, among other things, the history and structure of MDP, the
terms of the proposed Transaction (including the financing terms), and MDP's
general plans and intentions with respect to Nuveen (including with respect to
management, employees, and future growth prospects). On July 9, 2007, the Board
also met to be updated on the Transaction as part of a special telephonic Board
meeting. The Board Members were further updated at a special in-person Board
meeting held on July 19, 2007 (one Independent Board Member participated
telephonically). Subsequently, on July 27, 2007, the ad hoc committee held a
telephonic conference with representatives of Nuveen and MDP to further discuss,
among other things, the Transaction, the financing of the Transaction, retention
and incentive plans for key employees, the effect of regulatory restrictions on
transactions with affiliates after the Transaction, and current volatile market
conditions and their impact on the Transaction.
In connection with their review of the New Investment Management Agreement and
New Sub-Advisory Agreement, the Independent Board Members, through their
independent legal counsel, also requested in writing and received additional
information regarding the proposed Transaction and its impact on the provision
of services by NAM and its affiliates.
30
The Independent Board Members received, well in advance of the July Meeting,
materials which outlined, among other things:
- the structure and terms of the Transaction, including MDP's co-investor
entities and their expected ownership interests, and the financing
arrangements that will exist for Nuveen following the closing of the
Transaction;
- the strategic plan for Nuveen following the Transaction;
- the governance structure for Nuveen following the Transaction;
- any anticipated changes in the operations of the Nuveen funds following the
Transaction, including changes to NAM's and Nuveen's day-to-day management,
infrastructure and ability to provide advisory, distribution or other
applicable services to the Fund;
- any changes to senior management or key personnel who work on Fund related
matters (including portfolio management, investment oversight, and
legal/compliance) and any retention or incentive arrangements for such
persons;
- any anticipated effect on the Fund's expense ratio (including advisory fees)
following the Transaction;
- any benefits or undue burdens imposed on the Fund as a result of the
Transaction;
- any legal issues for the Fund as a result of the Transaction;
- the nature, quality and extent of services expected to be provided to the Fund
following the Transaction, changes to any existing services and policies
affecting the Fund, and cost-cutting efforts, if any, that may impact such
services or policies;
- any conflicts of interest that may arise for Nuveen or MDP with respect to the
Fund;
- the costs associated with obtaining necessary shareholder approvals and who
would bear those costs; and
- from legal counsel, a memorandum describing the applicable laws, regulations
and duties in approving advisory contracts, including, in particular, with
respect to a change of control.
Immediately preceding the July Meeting, representatives of MDP met with the
Board to further respond to questions regarding the Transaction. After the
meeting with MDP, the Independent Board Members met with independent legal
counsel in executive session. At the July Meeting, Nuveen also made a
presentation and responded to questions. Following the presentations and
discussions of the materials presented to the Board, the Independent Board
Members met again in executive session with their counsel. As outlined in more
detail below, the Independent Board Members considered all factors they believed
relevant with respect to the Fund, including the impact that the Transaction
could be expected to have on the following: (a) the nature, extent and quality
of services to be provided; (b) the investment performance of the Fund; (c) the
costs of the services and profits to be realized by Nuveen and its affiliates;
(d) the extent to which economies of scale would be realized; and (e) whether
fee levels reflect those economies of scale for the benefit of investors. As
noted above, during the past year, the Board Members had completed their annual
review of the Original Investment Management Agreement and Original Sub-Advisory
Agreement and many of the factors considered at such reviews were applicable to
their evaluation of the New Investment Management Agreement and New Sub-Advisory
Agreement. Accordingly, in evaluating such agreements, the Board Members relied
upon their knowledge and experience with the Fund Advisers and considered the
information received and their evaluations and conclusions drawn at the reviews.
While the Board reviewed many Nuveen funds at the July Meeting, the Independent
Board Members evaluated all information available to them on a fund-by-fund
basis, and their determinations were made separately in respect of the Fund.
A. NATURE, EXTENT & QUALITY OF SERVICES
In evaluating the nature, quality and extent of the services expected to be
provided by the Fund Adviser under the applicable New Investment Management
Agreement or New Sub-Advisory Agreement, the Independent Board Members
considered, among other things, the expected impact, if any, of the Transaction
on the operations, facilities, organization and personnel of NAM and the
Sub-Adviser (if applicable); the potential implications of regulatory
restrictions on the Fund following the Transaction; the ability of NAM and its
affiliates to perform their duties after the Transaction; and any anticipated
changes to the current investment and other practices of the Fund.
31
Annual Investment
Management Agreement
APPROVAL PROCESS (continued)
The Board noted that the terms of the New Investment Management Agreement,
including the fees payable thereunder, are substantially identical to those of
the Original Investment Management Agreement relating to the Fund (with both
reflecting reductions to fee levels in the complex-wide fee schedule for
complex-wide assets in excess of $80 billion that have an effective date of
August 20, 2007). Similarly, the terms of the New Sub-Advisory Agreement,
including fees payable thereunder, are substantially identical to those of the
Original Sub-Advisory Agreement relating to the Fund. The Board considered that
the services to be provided and the standard of care under the New Investment
Advisory Agreement and the New Sub-Advisory Agreement are the same as the
corresponding original agreements. The Board Members noted the Transaction does
not alter the allocation of responsibilities between the Adviser and the
Sub-Adviser. The Sub-Adviser will continue to furnish an investment program in
respect of, make investment decisions for and place all orders for the purchase
and sale of securities for the portion of the Fund's investment portfolio
allocated by the Adviser to the Sub-Adviser, all on behalf of the Fund and
subject to oversight of the Board and the Adviser. The Board Members further
noted that key personnel of the Adviser or Sub-Adviser who have responsibility
for the Fund in each area, including portfolio management, investment oversight,
fund management, fund operations, product management, legal/compliance and board
support functions, are expected to be the same following the Transaction. The
Board Members considered and are familiar with the qualifications, skills and
experience of such personnel. The Board also considered certain information
regarding any anticipated retention or incentive plans designed to retain key
personnel. Further, the Board Members noted that no changes to Nuveen's
infrastructure (including at the affiliated sub-adviser level) or operations as
a result of the Transaction were anticipated other than potential enhancements
as a result of an expected increase in the level of investment in such
infrastructure and personnel. The Board noted MDP's representations that it does
not plan to have a direct role in the management of Nuveen, appointing new
management personnel, or directly impacting individual staffing decisions. The
Board Members also noted that there were not any planned "cost cutting" measures
that could be expected to reduce the nature, extent or quality of services.
After consideration of the foregoing, the Board Members concluded that no
diminution in the nature, quality and extent of services provided to the Fund
and its shareholders by the Fund Advisers is expected.
In addition to the above, the Board Members considered potential changes in the
operations of the Fund. In this regard, the Board Members considered the
potential effect of regulatory restrictions on the Fund's transactions with
future affiliated persons. During their deliberations, it was noted that, after
the Transaction, a subsidiary of Merrill Lynch is expected to have an ownership
interest in Nuveen at a level that will make Merrill Lynch an affiliated person
of Nuveen. The Board Members recognized that applicable law would generally
prohibit the Fund from engaging in securities transactions with Merrill Lynch as
principal, and would also impose restrictions on using Merrill Lynch for agency
transactions. They recognized that having MDP and Merrill Lynch as affiliates
may restrict the Nuveen funds' ability to invest in securities of issuers
controlled by MDP or issued by Merrill Lynch and its affiliates even if not
bought directly from MDP or Merrill Lynch as principal. They also recognized
that various regulations may require the Nuveen funds to apply investment
limitations on a combined basis with affiliates of Merrill Lynch. The Board
Members considered information provided by NAM regarding the potential impact on
the Nuveen funds' operations as a result of these regulatory restrictions. The
Board Members considered, in particular, the Nuveen funds that may be impacted
most by the restricted access to Merrill Lynch, including: municipal funds
(particularly certain state-specific funds), senior loan funds, taxable fixed
income funds, preferred security funds and funds that heavily use derivatives.
The Board Members considered such funds' historic use of Merrill Lynch as
principal in their transactions and information provided by NAM regarding the
expected impact resulting from Merrill Lynch's affiliation with Nuveen and
available measures that could be taken to minimize such impact. NAM informed the
Board Members that, although difficult to determine with certainty, its
management did not believe that MDP's or Merrill Lynch's status as an affiliate
of Nuveen would have a material adverse effect on any Nuveen fund's ability to
pursue its investment objectives and policies.
In addition to the regulatory restrictions considered by the Board, the Board
Members also considered potential conflicts of interest that could arise between
the Nuveen funds and various parties to the Transaction and discussed possible
ways of addressing such conflicts.
32
Based on its review along with its considerations regarding services at the
annual review, the Board concluded that the Transaction was not expected to
adversely affect the nature, quality or extent of services provided by the
respective Fund Adviser and that the expected nature, quality and extent of such
services supported approval of the New Investment Management Agreement and New
Sub-Advisory Agreement.
B. PERFORMANCE OF THE FUND
With respect to the performance of the Fund, the Board considered that the
portfolio management personnel responsible for the management of the Fund's
portfolio were expected to continue to manage the portfolio following the
completion of the Transaction.
In addition, the Board Members recently reviewed Fund performance at the May
Meeting, as described above, and determined the Fund's performance was
satisfactory or better. The Board Members further noted that the investment
policies and strategies were not expected to change as a result of the
Transaction.
In light of the foregoing factors, along with the prior findings regarding
performance at the annual review, the Board concluded that its findings with
respect to performance supported approval of the New Investment Management
Agreement and New Sub-Advisory Agreement.
C. FEES, EXPENSES & PROFITABILITY
As described in more detail above, during the annual review, the Board Members
considered, among other things, the management fees and expenses of the Fund,
the breakpoint schedules, and comparisons of such fees and expenses with peers.
At the annual review, the Board Members determined that the Fund's advisory fees
and expenses were reasonable. In evaluating the profitability of the Fund
Adviser under the New Investment Management Agreement and New Sub-Advisory
Agreement, the Board Members considered their conclusions at their prior reviews
and whether the management fees or other expenses would change as a result of
the Transaction. As described above, the investment management fee for NAM is
composed of two components -- a fund-level component and complex-wide level
component. The fee schedule under the New Investment Management Agreement to be
paid to NAM is identical to that under the Original Investment Management
Agreement, including the modified complex-wide fee schedule. As noted above, the
Board recently approved a modified complex-wide fee schedule that would generate
additional fee savings on complex-wide assets above $80 billion. The
modifications have an effective date of August 20, 2007 and are part of the
Original Investment Management Agreement. Accordingly, the terms of the
complex-wide component under the New Investment Management Agreement are the
same as under the Original Investment Management Agreement. The Board Members
also noted that Nuveen has committed for a period of two years from the date of
closing of the Transaction that it will not increase gross management fees for
any Nuveen fund and will not reduce voluntary expense reimbursement levels for
any Nuveen fund from their currently scheduled prospective levels. Based on the
information provided, the Board Members did not expect that overall Fund
expenses would increase as a result of the Transaction.
In addition, the Board Members considered that additional fund launches were
anticipated after the Transaction which would result in an increase in total
assets under management in the complex and a corresponding decrease in overall
management fees under the complex-wide fee schedule. Taking into consideration
the Board's prior evaluation of fees and expenses at the annual renewal, and the
modification to the complex-wide fee schedule, the Board determined that the
management fees and expenses were reasonable.
While it is difficult to predict with any degree of certainty the impact of the
Transaction on Nuveen's profitability for its advisory activities (which
includes its affiliated sub-advisers), at the recent annual review, the Board
Members were satisfied that Nuveen's level of profitability for its advisory
activities was reasonable. During the year, the Board Members had noted the
enhanced dialogue regarding profitability and the appointment of an Independent
Board Member as a point person to review methodology determinations and
refinements in calculating profitability. Given their considerations at the
annual review and the modifications to the complex-wide fee schedule, the Board
Members were satisfied that Nuveen's level of profitability for its advisory
activities continues to be reasonable.
33
Annual Investment
Management Agreement
APPROVAL PROCESS (continued)
With respect to the Sub-Adviser, the fees paid under the New Sub-Advisory
Agreement are the same as the Original Sub-Advisory Agreement. With respect to
sub-advisers unaffiliated with Nuveen, such as the Sub-Adviser, the Board
Members considered the Sub-Adviser's revenues from serving as Sub-Adviser to the
Fund, expenses (including the basis for allocating expenses) and profitability
margins (pre- and post-tax) at the annual review. The Transaction is not
anticipated to affect the profitability of the Sub-Adviser. At the annual
review, the Board Members were satisfied that the respective Fund Adviser's
level of profitability was reasonable in light of the services provided. Taking
into account the Board's prior evaluation and the fact that sub-advisory fees
will not change, the Board Members were satisfied that the respective Fund
Advisers' levels of profitability were reasonable in light of the services
provided.
D. ECONOMIES OF SCALE & WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE
The Board Members have been cognizant of economies of scale and the potential
benefits resulting from the costs of the Fund being spread over a larger asset
base. To help ensure that shareholders share in the benefits derived from
economies of scale, the Board adopted the complex-wide fee arrangement in 2004.
At the May Meeting, the Board Members reviewed the complex-wide fee arrangements
and noted that additional negotiations may be necessary or appropriate as the
assets in the complex approached the $91 billion threshold. In light of this
assessment coupled with the upcoming Transaction, at the June 15, 2007 meeting,
the ad hoc committee met with representatives of Nuveen to further discuss
modifications to the complex-wide fee schedule that would generate additional
savings for shareholders as the assets of the complex grow. The proposed terms
for the complex-wide fee schedule are expressed in terms of targeted cumulative
savings at specified levels of complex-wide assets, rather than in terms of
targeted marginal complex-wide fee rates. Under the modified schedule, the
schedule would generate additional fee savings beginning at complex-wide assets
of $80 billion in order to achieve targeted cumulative annual savings at $91
billion of $28 million on a complex-wide level (approximately $0.6 million
higher than those generated under the then current schedule) and generate
additional fee savings for asset growth above complex-wide assets of $91 billion
in order to achieve targeted annual savings at $125 billion of assets of
approximately $50 million on a complex-wide level (approximately $2.2 million
higher annually than that generated under the then current schedule). At the
July Meeting, the Board approved the modified complex-wide fee schedule for the
Original Investment Management Agreement and these same terms will apply to the
New Investment Management Agreement. Accordingly, the Board Members believe that
the breakpoint schedules and revised complex-wide fee schedule are appropriate
and desirable in ensuring that shareholders participate in the benefits derived
from economies of scale.
E. INDIRECT BENEFITS
During their recent annual review, the Board Members considered any indirect
benefits that the Fund Adviser may receive as a result of its relationship with
the Fund, as described above. As the policies and operations of the Fund
Advisers are not anticipated to change significantly after the Transaction, such
indirect benefits should remain after the Transaction. The Board Members further
considered any additional indirect benefits to be received by the Fund Adviser
or its affiliates after the Transaction. The Board Members noted that other than
benefits from its ownership interest in Nuveen and indirect benefits from fee
revenues paid by the Fund under the management agreements and other
Board-approved relationships, it was currently not expected that MDP or its
affiliates would derive any benefit from the Fund as a result of the Transaction
or transact any business with or on behalf of the Fund (other than perhaps
potential Fund acquisitions, in secondary market transactions, of securities
issued by MDP portfolio companies); or that Merrill Lynch or its affiliates
would derive any benefits from the Fund as a result of the Transaction (noting
that, indeed, Merrill Lynch would stand to experience the discontinuation of
principal transaction activity with the Nuveen funds and likely would experience
a noticeable reduction in the volume of agency transactions with the Nuveen
funds).
F. OTHER CONSIDERATIONS
In addition to the factors above, the Board Members also considered the
following with respect to the Fund:
34
- Nuveen would rely on the provisions of Section 15(f) of the 1940 Act. Section
15(f) provides, in substance, that when a sale of a controlling interest in an
investment adviser occurs, the investment adviser or any of its affiliated
persons may receive any amount or benefit in connection with the sale so long
as (i) during the three-year period following the consummation of a
transaction, at least 75% of the investment company's board of directors must
not be "interested persons" (as defined in the 1940 Act) of the investment
adviser or predecessor adviser and (ii) an "unfair burden" (as defined in the
1940 Act, including any interpretations or no-action letters of the SEC) must
not be imposed on the investment company as a result of the transaction
relating to the sale of such interest, or any express or implied terms,
conditions or understanding applicable thereto. In this regard, to help ensure
that an unfair burden is not imposed on the Nuveen funds, Nuveen has committed
for a period of two years from the date of the closing of the Transaction (i)
not to increase gross management fees for any Nuveen fund; (ii) not to reduce
voluntary expense reimbursement levels for any Nuveen fund from their
currently scheduled prospective levels during that period; (iii) that no
Nuveen fund whose portfolio is managed by a Nuveen affiliate shall use Merrill
Lynch as a broker with respect to portfolio transactions done on an agency
basis, except as may be approved in the future by the Compliance Committee of
the Board; and (iv) that each adviser/portfolio team affiliated with Nuveen
shall not cause the Fund (or sleeves thereof) and other Nuveen funds that the
team manages, as a whole, to enter into portfolio transactions with or through
the other minority owners of Nuveen, on either a principal or an agency basis,
to a significantly greater extent than both what one would expect an
investment team to use such firm in the normal course of business, and what
such team has historically done, without prior Board or Compliance Committee
approval (excluding the impact of proportionally increasing the use of such
other "minority owners" to fill the void necessitated by not being able to use
Merrill Lynch).
- The Fund would not incur any costs in seeking the necessary shareholder
approvals for the New Investment Management Agreement or New Sub-Advisory
Agreement (except for any costs attributed to seeking shareholder approvals of
Fund specific matters unrelated to the Transaction, such as approval of Board
Members or changes to investment policies, in which case a portion of such
costs will be borne by the Fund).
- The reputation, financial strength and resources of MDP.
- The long-term investment philosophy of MDP and anticipated plans to grow
Nuveen's business to the benefit of the Nuveen funds.
- The benefits to the Nuveen funds as a result of the Transaction including: (i)
as a private company, Nuveen may have more flexibility in making additional
investments in its business; (ii) as a private company, Nuveen may be better
able to structure compensation packages to attract and retain talented
personnel; (iii) as certain of Nuveen's distribution partners are expected to
be equity or debt investors in Nuveen, Nuveen may be able to take advantage of
new or enhanced distribution arrangements with such partners; and (iv) MDP's
experience, capabilities and resources that may help Nuveen identify and
acquire investment teams or firms and finance such acquisitions.
- The historic premium and discount levels at which the shares of the Nuveen
funds have traded at specified dates with particular focus on the premiums and
discounts after the announcement of the Transaction, taking into consideration
recent volatile market conditions and steps or initiatives considered or
undertaken by NAM to address discount levels.
G. CONCLUSION
The Board Members did not identify any single factor discussed previously as
all-important or controlling. The Board Members, including the Independent Board
Members, unanimously concluded that the terms of the New Investment Management
Agreement and New Sub-Advisory Agreement are fair and reasonable, that the fees
therein are reasonable in light of the services to be provided to the Fund and
that the New Investment Management Agreement and New Sub-Advisory Agreement
should be approved and recommended to shareholders.
35
Annual Investment
Management Agreement
APPROVAL PROCESS (continued)
III. APPROVAL OF INTERIM CONTRACTS
As noted above, at the July Meeting, the Board Members, including the
Independent Board Members, unanimously approved the Interim Investment
Management Agreement and Interim Sub-Advisory Agreement. If necessary to assure
continuity of advisory services, the Interim Investment Management Agreement and
Interim Sub-Advisory Agreement will take effect upon the closing of the
Transaction if shareholders have not yet approved the New Investment Management
Agreement and New Sub-Advisory Agreement. The terms of the Interim Investment
Management Agreement and Interim Sub-Advisory Agreement are substantially
identical to those of the corresponding Original Investment Management Agreement
and New Investment Management Agreement and the Original Sub-Advisory Agreement
and New Sub-Advisory Agreement, respectively, except for certain term and escrow
provisions. In light of the foregoing, the Board Members, including the
Independent Board Members, unanimously determined that the scope and quality of
services to be provided to the Fund under the Interim Investment Management
Agreement and Interim Sub-Advisory Agreement are at least equivalent to the
scope and quality of services provided under the Original Investment Management
Agreement and Original Sub-Advisory Agreement, respectively.
36
Reinvest Automatically
EASILY and CONVENIENTLY
NUVEEN MAKES REINVESTING EASY. A PHONE CALL IS ALL IT TAKES TO SET UP YOUR
REINVESTMENT ACCOUNT.
NUVEEN CLOSED-END FUNDS DIVIDEND REINVESTMENT PLAN
Your Nuveen Closed-End Fund allows you to conveniently reinvest dividends and/or
capital gains distributions in additional Fund shares.
By choosing to reinvest, you'll be able to invest money regularly and
automatically, and watch your investment grow through the power of tax-free
compounding. Just like dividends or distributions in cash, there may be times
when income or capital gains taxes may be payable on dividends or distributions
that are reinvested.
It is important to note that an automatic reinvestment plan does not ensure a
profit, nor does it protect you against loss in a declining market.
EASY AND CONVENIENT
To make recordkeeping easy and convenient, each month you'll receive a statement
showing your total dividends and distributions, the date of investment, the
shares acquired and the price per share, and the total number of shares you own.
HOW SHARES ARE PURCHASED
The shares you acquire by reinvesting will either be purchased on the open
market or newly issued by the Fund. If the shares are trading at or above net
asset value at the time of valuation, the Fund will issue new shares at the
greater of the net asset value or 95% of the then-current market price. If the
shares are trading at less than net asset value, shares for your account will be
purchased on the open market. If the Plan Agent begins purchasing Fund shares on
the open market while shares are trading below net asset value, but the Fund's
shares subsequently trade at or above their net asset value before the Plan
Agent is able to complete its purchases, the Plan Agent may cease open-market
purchases and may invest the uninvested portion of the distribution in
newly-issued Fund shares at a price equal to the greater of the shares' net
asset value or 95% of the shares' market value on the last business day
immediately prior to the purchase date. Dividends and distributions received to
purchase shares in the open market will normally be invested shortly after the
dividend payment date. No interest will be paid on dividends and distributions
awaiting reinvestment. Because the market price of the shares may increase
before purchases are completed, the average purchase price per share may exceed
the market price at the time of valuation, resulting in the acquisition of fewer
shares than if the dividend or distribution had been paid in shares issued by
the Fund. A pro rata portion of any applicable brokerage commissions on open
market purchases will be paid by Plan participants. These commissions usually
will be lower than those charged on individual transactions.
37
FLEXIBLE
You may change your distribution option or withdraw from the Plan at any time,
should your needs or situation change. Should you withdraw, you can receive a
certificate for all whole shares credited to your reinvestment account and cash
payment for fractional shares, or cash payment for all reinvestment account
shares, less brokerage commissions and a $2.50 service fee.
You can reinvest whether your shares are registered in your name, or in the name
of a brokerage firm, bank, or other nominee. Ask your investment advisor if his
or her firm will participate on your behalf. Participants whose shares are
registered in the name of one firm may not be able to transfer the shares to
another firm and continue to participate in the Plan.
The Fund reserves the right to amend or terminate the Plan at any time. Although
the Fund reserves the right to amend the Plan to include a service charge
payable by the participants, there is no direct service charge to participants
in the Plan at this time.
CALL TODAY TO START REINVESTING DIVIDENDS AND/OR DISTRIBUTIONS
For more information on the Nuveen Automatic Reinvestment Plan or to enroll in
or withdraw from the Plan, speak with your financial advisor or call us at (800)
257-8787.
38
Glossary of
TERMS USED in this REPORT
Average Annual Total Return: This is a commonly used method to express an
investment's performance over a particular, usually multi-year time period. It
expresses the return that would have been necessary each year to equal the
investment's actual cumulative performance (including change in NAV or market
price and reinvested dividends and capital gains distributions, if any) over the
time period being considered.
Market Yield (also known as Dividend Yield or Current Yield): Market yield is
based on the Fund's current annualized monthly distribution divided by the
Fund's current market price. The Fund's monthly distributions to its
shareholders may be comprised of ordinary income, net realized capital gains
and, if at the end of the calendar year the Fund's cumulative net ordinary
income and net realized gains are less than the amount of the Fund's
distributions, a tax return of capital.
Net Asset Value (NAV): A Fund's common share NAV per share is calculated by
subtracting the liabilities of the Fund (including any Preferred shares issued
in order to leverage the Fund) from its total assets and then dividing the
remainder by the number of shares outstanding. Fund NAVs are calculated at the
end of each business day.
39
NOTES
40
NOTES
41
NOTES
42
OTHER USEFUL INFORMATION
QUARTERLY PORTFOLIO OF INVESTMENTS AND PROXY VOTING INFORMATION
The Fund's (i) quarterly portfolio of investments, (ii) information regarding
how the Fund voted proxies relating to portfolio securities held during the most
recent 12-month period ended June 30, 2006, and (iii) a description of the
policies and procedures that the Fund used to determine how to vote proxies
relating to portfolio securities are available without charge, upon request, by
calling Nuveen Investments toll-free at (800) 257-8787 or on Nuveen's website at
www.nuveen.com.
You may also obtain this and other Fund information directly from the Securities
and Exchange Commission ("SEC"). The SEC may charge a copying fee for this
information. Visit the SEC on-line at http://www.sec.gov or in person at the
SEC's Public Reference Room in Washington, D.C. Call the SEC at 1-202-942-8090
for room hours and operation. You may also request Fund information by sending
an e-mail request to publicinfo@sec.gov or by writing to the SEC's Public
Reference Section at 450 Fifth Street NW, Washington, D.C. 20549.
CEO Certification Disclosure
The Fund has filed with the Securities and Exchange Commission the certification
of its Chief Executive Officer and Chief Financial Officer required by Section
302 of the Sarbanes-Oxley Act.
Board of Trustees
Robert P. Bremner
Jack B. Evans
William C. Hunter
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
Carol E. Stone
Fund Manager
Nuveen Asset Management
333 West Wacker Drive
Chicago, IL 60606
Custodian
State Street Bank & Trust Company
Boston, MA
Transfer Agent and
Shareholder Services
State Street Bank & Trust Company
Nuveen Funds
P.O. Box 43071
Providence, RI 02940-3071
(800) 257-8787
Legal Counsel
Chapman and Cutler LLP
Chicago, IL
Independent Registered
Public Accounting Firm
Ernst & Young LLP
Chicago, IL
The Fund intends to repurchase shares of its own common or preferred
stock in the future at such times and in such amounts as is deemed
advisable. No shares were repurchased during the period covered by
this report. Any future repurchases will be reported to shareholders
in the next annual or semi-annual report.
43
Nuveen Investments:
-----------------------------------------------------------------------
SERVING INVESTORS FOR GENERATIONS
Since 1898, financial advisors and their clients have relied on Nuveen
Investments to provide dependable investment solutions. For the past century,
Nuveen Investments has adhered to the belief that the best approach to investing
is to apply conservative risk-management principles to help minimize volatility.
Building on this tradition, we today offer a range of high quality equity and
fixed-income solutions that are integral to a well-diversified core portfolio.
Our clients have come to appreciate this diversity, as well as our continued
adherence to proven, long-term investing principles.
We offer many different investing solutions for our clients' different needs.
Managing $172 billion in assets, as of June 30, 2007, Nuveen Investments offers
access to a number of different asset classes and investing solutions through a
variety of products. Nuveen Investments markets its capabilities under six
distinct brands: Nuveen, a leader in fixed-income investments; NWQ, a leader in
value-style equities; Rittenhouse, a leader in growth-style equities; Symphony,
a leading institutional manager of market-neutral alternative investment
portfolios; Santa Barbara, a leader in growth equities; and Tradewinds, a leader
in global equities.
Find out how we can help you reach your financial goals.
To learn more about the products and services Nuveen Investments offers, talk to
your financial advisor, or call us at (800) 257-8787. Please read the
information provided carefully before you invest.
Be sure to obtain a prospectus, where applicable. Investors should consider the
investment objective and policies, risk considerations, charges and expenses of
the Fund carefully before investing. The prospectus contains this and other
information relevant to an investment in the Fund. For a prospectus, please
contact your securities representative or Nuveen Investments, 333 W. Wacker Dr.,
Chicago, IL 60606. Please read the prospectus carefully before you invest or
send money.
ESA-A-0607D
Learn more about Nuveen Funds at: WWW.NUVEEN.COM/CEF
Share prices
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Interactive planning tools
ITEM 2. CODE OF ETHICS.
Not applicable to this filing.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable to this filing.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable to this filing.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to this filing.
ITEM 6. SCHEDULE OF INVESTMENTS.
See Portfolio of Investments in Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to this filing.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to this filing.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's Board implemented after the registrant
last provided disclosure in response to this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, 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") (17 CFR 270.30a-3(c))) 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 controls and procedures required by Rule 30a-3(b)
under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or
15d-15(b) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")(17 CFR 240.13a-15(b) or 240.15d-15(b)).
(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
(17 CFR 270.30a-3(d)) that occurred during the second fiscal quarter
of the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
File the exhibits listed below as part of this Form.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit: Not applicable to
this filing.
(a)(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2(a) under
the 1940 Act (17 CFR 270.30a-2(a)) in the exact form set forth below: Ex-99.CERT
attached hereto.
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under
the 1940 Act (17 CFR 270.23c-1) sent or given during the period covered by the
report by or on behalf of the registrant to 10 or more persons: Not applicable.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the 1940 Act (17 CFR
270.30a-2(b)); Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR
240.13a-14(b) or 240.15d-14(b)), and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished
pursuant to this paragraph will not be deemed "filed" for purposes of Section 18
of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of
that section. Such certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the Exchange Act,
except to the extent that the registrant specifically incorporates it by
reference. Ex-99.906 CERT attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Nuveen Real Estate Income Fund
By (Signature and Title)* /s/ Kevin J. McCarthy
---------------------------------------
Kevin J. McCarthy
Vice President and Secretary
Date: September 6, 2007
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 (Signature and Title)* /s/ Gifford R. Zimmerman
---------------------------------------
Gifford R. Zimmerman
Chief Administrative Officer
(principal executive officer)
Date: September 6, 2007
By (Signature and Title)* /s/ Stephen D. Foy
---------------------------------------
Stephen D. Foy
Vice President and Controller
(principal financial officer)
Date: September 6, 2007
* Print the name and title of each signing officer under his or her signature.