N-30D 1 0001.txt PIMCO COMMERCIAL MORTGAGE SEMI ANNUAL REPORT [LOGO] PIMCO COMMERCIAL MORTGAGE SECURITIES TRUST, INC. A CLOSED-END FUND SPECIALIZING IN INVESTMENTS IN COMMERCIAL MORTGAGE-BACKED SECURITIES JUNE 30, 2000 SEMI-ANNUAL REPORT Pacific Investment Management Company is responsible for the management and administration of the PIMCO Commercial Mortgage Securities Trust, Inc. (the "Fund"). Founded in 1971, Pacific Investment currently manages $199 billion on behalf of mutual fund and institutional clients located around the world. Renowned for its fixed income management expertise, Pacific Investment manages assets for many of the largest corporations, foundations, endowments, and governmental bodies in the United States and the world. PIMCO Advisors L.P. is one of the largest investment management companies in the United States with assets under management of more than $264 billion as of June 30, 2000 and is a member of the Allianz Group of Companies. Allianz AG is a European based multi-national insurance and financial services holding company. PIMCO Advisors is recognized for providing consistent performance and high-quality service to mutual fund and institutional clients worldwide. Its investment firms are: Pacific Investment Management Company LLC/ Newport Beach, California Oppenheimer Capital/New York, New York Cadence Capital Management/Boston, Massachusetts NFJ Investment Group/Dallas, Texas Parametric Portfolio Associates/Seattle, Washington PIMCO Equity Advisors/New York, New York, a division of PIMCO Advisors L.P. PIMCO/Allianz International Advisors LLC/ New York, New York -------------------------------------------------------------------------------- Allianz AG On May 5, 2000, Allianz AG completed the acquisition of approximately 70% of the outstanding partnership interests in PIMCO Advisors L.P. ("PIMCO Advisors"), of which PIMCO is a subsidiary partnership. As a result of this transaction, PIMCO Advisors, and its subsidiaries, are now controlled by Allianz AG, a leading provider of financial services, particularly in Europe. PIMCO remains operationally independent, continues to operate under its existing name, and now leads the global fixed income investment efforts of Allianz AG. Key employees at each of PIMCO Advisors' investment units, including PIMCO's Bill Gross, have signed long-term employment contracts and have significant profit-sharing and retention arrangements to ensure continuity of the investment process and staff. With the addition of PIMCO Advisors, the Allianz Group manages assets of approximately $650 billion, including more than 300 mutual funds for retail and institutional clients around the world. -------------------------------------------------------------------------------- LETTER TO OUR SHAREHOLDERS For the six-month period ended June 30, 2000, the Fund returned 5.85% based on its NYSE share price, outperforming the broad bond market as measured by the Lehman Brothers Aggregate Bond Index, which rose 3.99%. Longer-term performance has been strong, with the Fund posting an 8.31% five-year, annualized return based on NYSE share price, versus a return of 6.25% for the Index. The short and long ends of the U.S Treasury market diverged during the first half of 2000. Short- and intermediate-term yields increased in anticipation of U.S. Federal Reserve tightening. In marked contrast, the 30-year Treasury yield fell, as investors grew concerned that the U.S. government's debt buy-back program would create a scarcity of long-term Treasuries. These changes resulted in an inverted yield curve. Confirming market expectations, the Federal Reserve raised the federal funds rate three times over the past six months to 6.50%, the highest level in nine years. It was the central bank's sixth rate increase since June 1999. The size of the latest increase confirmed that the Fed's recent policy of gradual, 0.25% rate hikes was insufficient to cool an economy that grew by more than 5% annually in each of the past three quarters. That pace is faster than the Fed believes is possible without triggering an increase in inflation. The Fed left rates unchanged in late June at their regularly scheduled meeting amid signs that higher rates were starting to have the desired effect. Economic reports in April and May showed the first back-to-back declines in retail sales in two years, falling employment, reduced new home construction and little change in consumer prices. Nevertheless, the Fed suggested that more tightening might be needed. Rising energy prices, especially for retail gasoline, were one reason for concern. Risks posed by economic imbalances such as the tight labor market, an expanding U.S. trade deficit and high levels of consumer and corporate debt also remained firmly in place. In this uncertain economic environment and amid continued Fed tightening, the Fund maintained an uninterrupted and constant dividend. The monthly dividend per share has remained steady at $0.09375 with total dividends declared of $0.5625 per share over the six-month period ended June 30, 2000. These dividend pay-outs equate to an annualized dividend yield of 9.28% based on the Fund's NYSE trading price as of June 30, 2000. On the following pages you will find specific details as to the Fund's portfolio and total return investment performance in light of economic and financial market activities. We are optimistic that the remainder of 2000 will be a successful period for Fund investors. As always, we appreciate the trust you have placed in us, and welcome your questions and comments regarding the Fund and this semi-annual report. Sincerely, /s/ Brent R. Harris Brent R. Harris Chairman of the Board July 31, 2000 1 SEMI-ANNUAL REPORT June 30, 2000 ABOUT THE FUND Launched in September 1993, PIMCO Commercial Mortgage Securities Trust, Inc. is unique in that it is the only closed-end fund that invests primarily in commercial mortgage-backed securities. Commercial mortgage-backed securities are fixed income instruments representing an interest in mortgage loans on commercial real estate properties, such as office buildings, shopping malls, hotels, apartment buildings, nursing homes, and industrial properties. The Fund's primary investment objective is to achieve high current income. Pacific Investment Management Company believes that yields on commercial mortgage-backed securities are, and will continue to be for the foreseeable future, higher than yields on corporate debt securities of comparable credit ratings and maturities. Capital gain from the disposition of investments is a secondary objective of the Fund. Unlike an open-end fund, whose shares are bought and sold at their net asset value ("NAV"), shares of most closed-end funds, including the Fund, are listed on a stock exchange where they trade at market value. Closing market prices for the Fund's shares are published in the New York Stock Exchange Composite Transaction section of newspapers each day. The Fund's NYSE trading symbol is "PCM." Comparative NAV and market price information about the Fund is published each Monday in The Wall Street Journal and each Saturday in The New York Times and Barron's in a table titled "Closed-End Funds." The Fund's Dividend Reinvestment Plan (the "Plan") provides automatic reinvestment of dividend and capital gains distributions in additional shares of the Fund. If your shares are registered in your own name, you are already enrolled in the Plan unless you have elected otherwise. Shareholders whose shares are held in the name of a broker or nominee should contact their broker or nominee to request participation in the Plan. All distributions to shareholders who elect not to participate in the Plan will be paid by check mailed directly to the record holder of shares. The Fund issues a quarterly press release summarizing investment performance and portfolio statistics. Should you wish to receive a copy, please call 800-213-3606 to be placed on the Fund's mailing list. 2 SEMI-ANNUAL REPORT June 30, 2000 SIX MONTHS IN REVIEW Economic and Market Review The short and long ends of the Treasury market diverged during the first quarter of 2000. Short-term Treasury yields rose in anticipation of more tightening by the Federal Reserve, with the 3-month Treasury yield increasing 0.57% to end the quarter at 5.89%. In marked contrast, the 30-year Treasury yield fell 0.64%, closing the first quarter at 5.84%, as investors grew concerned that the U.S. government's debt buyback would create a scarcity of long-term Treasuries. An inverted yield curve resulted, with 30-year Treasuries offering no yield advantage over their 3-month counterparts. The market correctly anticipated the Fed's intentions, as the central bank raised the federal funds rate twice in 0.25% increments during the first quarter in its continuing effort to temper the high-flying U.S. economy and combat the prospect of rising inflation. In a press release accompanying the second action, the Fed suggested that more rate hikes were in the offing because "increases in demand will continue to exceed the growth in potential supply, which could foster inflationary imbalances that would undermine the record economic expansion." -------------------------------------------------------------------------------- TREASURY YIELD CURVES -------------------------------------------------------------------------------- [GRAPH]
12/31/1999 6/30/2000 3 Mos. 5.312 5.860 6 Mos. 5.726 6.215 1 Yr. 5.962 6.062 2 Yrs. 6.235 6.358 3 Yrs. 6.289 6.269 5 Yrs. 6.342 6.179 10 Yrs. 6.435 6.023 30 Yrs. 6.479 5.896
Those "imbalances" included the record U.S. trade deficit, high corporate and individual debt levels and tight labor markets. Strong equity and housing markets also represented a potential threat because they created a wealth effect that fueled consumer demand. Still, actual inflation remained relatively subdued during the period. While effects of increased energy prices showed up in higher headline consumer price inflation, the core rate, outside of energy and food costs, was little changed. 3 SEMI-ANNUAL REPORT June 30, 2000 SIX MONTHS IN REVIEW (cont.) -------------------------------------------------------------------------------- Federal Open Market Committee Federal Funds Rate Changes -------------------------------------------------------------------------------- Fed Funds Target Rate (%) [GRAPH]
Fed Funds Date Target Rate (%) ===================================== Start 1994 3.00 4-Feb-94 3.25 22-Mar-94 3.50 18-Apr-94 3.75 17-May-94 4.25 6-Jul-94 4.25 16-Aug-94 4.75 27-Sep-94 4.75 15-Nov-94 5.50 20-Dec-94 5.50 1-Feb-95 6.00 28-Mar-95 6.00 23-May-95 6.00 6-Jul-95 5.75 22-Aug-95 5.75 26-Sep-95 5.75 15-Nov-95 5.75 19-Dec-95 5.50 31-Jan-96 5.25 26-Mar-96 5.25 21-May-96 5.25 3-Jul-96 5.25 20-Aug-96 5.25 24-Sep-96 5.25 13-Nov-96 5.25 17-Dec-96 5.25 5-Feb-97 5.25 25-Mar-97 5.50 20-May-97 5.50 2-Jul-97 5.50 19-Aug-97 5.50 30-Sep-97 5.50 12-Nov-97 5.50 16-Dec-97 5.50 4-Feb-98 5.50 31-Mar-98 5.50 19-May-98 5.50 30-Jun-98 5.50 18-Aug-98 5.50 29-Sep-98 5.25 15-Oct-98 5.00 17-Nov-98 4.75 22-Dec-98 4.75 3-Feb-99 4.75 30-Mar-99 4.75 18-May-99 4.75 30-Jun-99 5.00 24-Aug-99 5.25 5-Oct-99 5.25 16-Nov-99 5.50 21-Dec-99 5.50 2-Feb-00 5.75 21-Mar-00 6.00 16-May-00 6.50 28-Jun-00 6.50
During the second quarter, short and intermediate interest rates fell modestly amid cautious optimism that Federal Reserve tightening was beginning to cool the economy and contain inflation. Yields declined an average of 0.15% on 1-year, 2-year and 5-year Treasuries over the second quarter. In contrast, the 30-year Treasury yield increased 0.06%, closing the second quarter at 5.90%. The yield curve continued to be inverted, with 5-year Treasuries yielding 6.18% and 30-year Treasuries offering only a slight 0.04% yield advantage over 3-month Treasuries. The Federal Reserve raised the federal funds rate by 0.50% to 6.50% on May 16, 2000, the highest level in nine years. The size of the increase confirmed that the central bank's previous policy of gradual, 0.25% rate hikes was insufficient to cool an economy that grew by more than 5% annually in each of the past three quarters. That pace is faster than the Fed believes is possible without triggering an increase in inflation. The Fed left rates unchanged in late June at their regularly scheduled meeting amid signs that higher rates were starting to have the desired effect. Economic reports in April and May showed the first back-to-back declines in retail sales in two years, falling employment, reduced new home construction and little change in consumer prices. 4 SEMI-ANNUAL REPORT June 30, 2000 Nevertheless, the Fed said, "signs that growth in demand is moving to a sustainable pace are still tentative and preliminary." The central bank also warned of "heightened inflation pressures in the foreseeable future," suggesting that more tightening may be needed. Rising energy prices, especially for retail gasoline, were one reason for concern. Risks posed by economic imbalances such as the tight labor market, an expanding U.S. trade deficit and high levels of consumer and corporate debt also remained firmly in place. -------------------------------------------------------------------------------- Movements of Core CPI and Core PPI during the Past Two Years -------------------------------------------------------------------------------- CPI & PPI Y/Y Percent Change (%) [GRAPH] Core CPI Core PPI Jun-98 1.6 -0.7 Jul-98 1.7 -0.2 Aug-98 1.7 -0.8 Sep-98 1.4 -0.9 Oct-98 1.4 -0.7 Nov-98 1.5 -0.6 Dec-98 1.6 0.0 Jan-99 1.7 0.8 Feb-99 1.7 0.5 Mar-99 1.8 0.8 Apr-99 2.3 1.2 May-99 2.1 1.4 Jun-99 2.0 1.5 Jul-99 2.1 1.5 Aug-99 2.3 2.3 Sep-99 2.6 3.1 Oct-99 2.6 2.8 Nov-99 2.6 3.1 Dec-99 2.7 2.9 Jan-00 2.7 2.5 Feb-00 3.2 4.0 Mar-00 3.7 4.5 Apr-00 3.0 3.9 May-00 3.1 3.9 Jun-00 3.7 4.3 -------------------------------------------------------------------------------- Movements of GDP during the Past Two Years -------------------------------------------------------------------------------- Annualized Quarterly Percent Change (%) [GRAPH] Jun-1998 2.2% Sep-1998 3.8% Dec-1998 5.9% Mar-1999 3.7% Jun-1999 1.9% Sep-1999 5.7% Dec-1999 7.3% Mar-2000 5.5% Jun-2000 1.3% 5 SEMI-ANNUAL REPORT June 30, 2000 SIX MONTHS IN REVIEW (cont.) Performance For the six-month period ended June 30, 2000, the Fund delivered a total return investment performance of 3.61% based on net asset value and a 5.85% return based on its NYSE share price. The Fund's total return based on NYSE share price outperformed the 3.99% return of the Lehman Brothers Aggregate Bond Index over the fiscal period. Fund performance was helped when the Moody's and Fitch IBCA, two national rating agencies, upgraded several of the Fund's holdings. -------------------------------------------------------------------------------- Growth of $10,000 Net Investment in the Fund -------------------------------------------------------------------------------- [GRAPH]
Month Net Asset NYSE Lehman Brothers Value Market Value Aggregate Bond Index 08/31/1993 10,000 10,000 10,000 09/30/1993 9,993 10,000 10,027 10/31/1993 10,014 10,484 10,065 11/30/1993 10,022 9,767 9,979 12/31/1993 10,043 9,946 10,033 01/31/1994 10,131 9,672 10,169 02/28/1994 9,970 9,399 9,992 03/31/1994 9,898 9,422 9,746 04/30/1994 9,786 8,955 9,668 05/31/1994 9,853 9,328 9,667 06/30/1994 9,802 9,165 9,645 07/31/1994 9,893 9,260 9,837 08/31/1994 10,023 9,547 9,849 09/30/1994 9,916 9,666 9,704 10/31/1994 9,803 8,983 9,695 11/30/1994 9,780 8,690 9,674 12/31/1994 9,882 8,910 9,741 01/31/1995 10,068 9,285 9,934 02/28/1995 10,408 9,663 10,170 03/31/1995 10,516 9,740 10,232 04/30/1995 10,739 10,124 10,375 05/31/1995 11,143 10,408 10,777 06/30/1995 11,246 10,799 10,856 07/31/1995 11,166 10,668 10,831 08/31/1995 11,286 10,852 10,962 09/30/1995 11,407 10,400 11,069 10/31/1995 11,631 10,802 11,213 11/30/1995 11,771 10,775 11,381 12/31/1995 11,989 10,857 11,540 01/31/1996 12,122 11,378 11,617 02/29/1996 11,943 11,682 11,415 03/31/1996 11,797 11,376 11,336 04/30/1996 11,844 11,179 11,272 05/31/1996 11,856 11,038 11,249 06/30/1996 11,931 11,124 11,400 07/31/1996 12,134 11,714 11,431 08/31/1996 12,219 11,917 11,412 09/30/1996 12,379 11,771 11,611 10/31/1996 12,697 12,154 11,868 11/30/1996 12,990 12,421 12,072 12/31/1996 13,003 12,438 11,959 01/31/1997 12,968 12,771 11,996 02/28/1997 13,144 12,618 12,026 03/31/1997 13,099 12,894 11,892 04/30/1997 13,287 13,048 12,070 05/31/1997 13,554 13,142 12,185 06/30/1997 13,695 13,799 12,329 07/31/1997 14,024 13,956 12,662 08/31/1997 13,939 14,051 12,554 09/30/1997 14,193 14,083 12,739 10/31/1997 14,297 14,051 12,924 11/30/1997 14,342 14,472 12,983 12/31/1997 14,468 14,479 13,114 01/31/1998 14,607 14,644 13,282 02/28/1998 14,694 15,010 13,272 03/31/1998 14,740 14,909 13,318 04/30/1998 14,723 14,943 13,387 05/31/1998 14,971 14,705 13,514 06/30/1998 15,265 14,876 13,629 07/31/1998 15,387 15,324 13,658 08/31/1998 15,380 15,359 13,880 09/30/1998 15,559 15,114 14,205 10/31/1998 15,475 14,939 14,130 11/30/1998 15,480 15,186 14,210 12/31/1998 15,528 15,907 14,253 01/31/1999 15,668 15,943 14,355 02/28/1999 15,559 15,688 14,104 03/31/1999 15,712 15,505 14,182 04/30/1999 15,832 15,542 14,227 05/31/1999 15,790 15,727 14,103 06/30/1999 15,654 16,439 14,058 07/31/1999 15,776 16,100 13,998 08/31/1999 15,840 15,910 13,991 09/30/1999 15,808 15,566 14,153 10/31/1999 15,753 15,681 14,205 11/30/1999 15,878 14,788 14,204 12/31/1999 15,907 15,203 14,136 01/31/2000 15,862 15,084 14,090 02/29/2000 15,954 15,204 14,260 03/31/2000 16,159 16,049 14,448 04/30/2000 16,214 16,170 14,407 05/31/2000 15,990 15,558 14,400 06/30/2000 16,482 16,093 14,699
The line graph depicts the value of a net $10,000 investment made at the Fund's inception on September 2, 1993 and held through June 30, 2000, compared to the Lehman Brothers Aggregate Bond Index, an unmanaged market index. Investment performance assumes the reinvestment of dividends and capital gains distributions, if any. The Fund's NYSE Market Value performance does not reflect the effect of sales loads or broker commissions. The performance data quoted represents past performance. Investment return and share value will fluctuate so that Fund shares, when sold, may be worth more or less than their original cost. -------------------------------------------------------------------------------- Investment Performance for the Periods Ended 6/30/2000 --------------------------------------------------------------------------------
Since 6 Month Inception Period 1 Year 3 Years* 5 Years* 9/2/93* ----------------------------------------------------------------------------------------- Fund Net Asset Value 3.61% 5.29% 6.37% 7.95% 7.59% Fund NYSE Market Value 5.85% -2.11% 5.26% 8.31% 7.21% Lehman Brothers Aggregate Bond Index 3.99% 4.56% 6.04% 6.25% N/A
* Average annual total return 6 SEMI-ANNUAL REPORT June 30, 2000 Share price performance was significantly boosted over the first quarter as the Fund's trading discount to its net asset value narrowed from (6.90)% to (3.40)%. However, during the second quarter the trend reversed [(3.40)% to (5.13)%] and a widening discount caused the Fund's NYSE share price performance to lag. Towards the end of the six-month period, the discount to net asset value temporarily spiked to more than 10% in early June as concerns about potential inflation permeated the marketplace. -------------------------------------------------------------------------------- Premium/(Discount) to Net Asset Value -------------------------------------------------------------------------------- [GRAPH] 06/25/1998 -4.25% 07/02/1998 -3.44% 07/09/1998 -3.95% 07/16/1998 -3.07% 07/23/1998 -2.84% 07/30/1998 -2.08% 08/06/1998 -3.24% 08/13/1998 -3.74% 08/20/1998 -4.32% 08/27/1998 -1.39% 09/03/1998 -2.18% 09/10/1998 -3.47% 09/17/1998 -3.54% 09/24/1998 -5.57% 10/01/1998 -3.85% 10/08/1998 -12.43% 10/15/1998 -8.68% 10/22/1998 -6.00% 10/29/1998 -5.60% 11/05/1998 -3.81% 11/12/1998 -4.33% 11/19/1998 -4.36% 11/27/1998 -3.88% 12/03/1998 -3.92% 12/10/1998 -3.09% 12/17/1998 -3.74% 12/24/1998 -2.54% 12/31/1998 0.15% 01/07/1999 -2.27% 01/14/1999 -0.82% 01/21/1999 -1.41% 01/28/1999 -0.98% 02/04/1999 -0.22% 02/11/1999 -0.91% 02/18/1999 -2.06% 02/25/1999 -1.44% 03/04/1999 -2.21% 03/11/1999 -0.81% 03/18/1999 -0.86% 03/25/1999 -0.55% 04/01/1999 -2.65% 04/08/1999 -2.09% 04/15/1999 -3.60% 04/22/1999 -3.60% 04/29/1999 -3.95% 05/06/1999 -3.88% 05/13/1999 -3.88% 05/20/1999 -4.06% 05/27/1999 -2.24% 06/03/1999 -1.73% 06/10/1999 -0.02% 06/17/1999 -0.19% 06/24/1999 1.05% 07/01/1999 1.35% 07/08/1999 3.55% 07/15/1999 -0.65% 07/22/1999 -1.88% 07/29/1999 -0.77% 08/05/1999 0.15% 08/12/1999 -1.84% 08/19/1999 -1.56% 08/26/1999 -1.61% 09/02/1999 -1.54% 09/09/1999 -0.97% 09/16/1999 -2.21% 09/23/1999 -3.85% 09/30/1999 -3.92% 10/07/1999 -5.61% 10/16/1999 -6.56% 10/21/1999 -7.65% 10/28/1999 -3.70% 11/04/1999 -5.94% 11/11/1999 -5.13% 11/18/1999 -6.01% 11/24/1999 -8.80% 12/02/1999 -9.27% 12/09/1999 -11.54% 12/16/1999 -11.19% 12/23/1999 -12.02% 12/30/1999 -7.76% 01/06/2000 -6.13% 01/13/2000 -4.86% 01/20/2000 -6.81% 01/27/2000 -7.02% 02/03/2000 -7.64% 02/10/2000 -4.98% 02/17/2000 -1.78% 02/24/2000 -6.40% 03/02/2000 -8.69% 03/09/2000 -8.48% 03/16/2000 -8.49% 03/23/2000 -7.46% 03/30/2000 -5.67% 04/06/2000 -7.34% 04/13/2000 -5.79% 04/20/2000 -4.82% 04/27/2000 -5.88% 05/04/2000 -6.47% 05/11/2000 -9.15% 05/18/2000 -6.15% 05/22/2000 -6.03% 06/01/2000 -5.90% 06/08/2000 -13.10% 06/15/2000 -5.20% 06/22/2000 -3.88% 06/29/2000 -4.07% 06/30/2000 -5.13% 7 SEMI-ANNUAL REPORT June 30, 2000 SIX MONTHS IN REVIEW (cont.) Credit Spreads Treasuries generally outperformed other fixed income sectors during the first quarter. During this period, yields on mortgages and corporate bonds did not fall in line with long-term Treasuries, which caused yield premiums on non-Treasury bonds to widen. Falling 10- and 30-year Treasury yields and concern about credit deterioration in the midst of Fed tightening lured investors away from other bond market sectors. Yield spreads between CMBS and 10-year Treasuries increased over the first quarter with spreads on AAA-rated CMBS widening 0.44% and spreads on A-rated CMBS increasing 0.35%. During the second quarter, Treasuries and agency mortgages outperformed as investors continued to favor securities with superior credit quality. Yield spreads between CMBS and 10-year Treasuries leveled-off over the second quarter with spreads on both AAA-rated and A-rated CMBS remaining around 1.63% and 1.96%, respectively. -------------------------------------------------------------------------------- Comparative Changes in Yield Spreads Over 10-Year Treasuries* -------------------------------------------------------------------------------- [GRAPH]
AAA - A - AAA - A - Rated CMBS Rated CMBS Rated Rated Corporates Corporates 12/31/1996 70 95 35 55 3/31/1997 65 85 39 57 6/30/1997 63 75 35 48 9/30/1997 63 78 35 58 12/31/1997 78 105 47 57 3/31/1998 80 105 55 80 6/30/1998 85 110 56 84 9/30/1998 145 190 65 119 12/31/1998 136 186 62 107 3/31/1999 122 150 68 99 6/30/1999 123 158 85 123 9/30/1999 142 190 78 119 12/31/1999 120 160 67 115 3/31/2000 164 195 115 153 6/30/2000 163 196 109 149 *7 to 10 year U.S. Treasury Bonds as of June 30, 2000
8 SEMI-ANNUAL REPORT June 30, 2000 Quality Ratings Throughout the six-month period, the portfolio's average quality has remained firmly anchored around a BBB rating. We regularly scrutinize and evaluate every portfolio holding in an effort to assure that each security retains healthy characteristics and that each remains a viable holding in relation to the portfolio. We also focus our security selection process on the potential that a particular bond may be upgraded in the future. As highlighted below, this strategy was rewarded over the course of the six-month period. -------------------------------------------------------------------------------- Upgraded Securities during the Past Six Months --------------------------------------------------------------------------------
New Prior Rating % of Net Security Description Rating Rating Service Assets ---------------------------------------------------------------------------------------- Structured Asset Securities Corp. 7.750% due 02/25/2028 A+ BBB+ Fitch 2.7% Structured Asset Securities Corp. 7.201% due 04/25/2003 Baa2 Ba1 Moody's 1.7% First Boston Mortgage Securities Corp. 7.182% due 01/25/2028 BBB B+ Fitch 0.9% Hotel First 8.520% due 08/05/2008 AA+ AA Fitch 1.8% ------- 7.1%
-------------------------------------------------------------------------------- Portfolio Composition By Quality Rating* -------------------------------------------------------------------------------- [GRAPH] AAA 14.4% AA 9.6% A 9.9% BBB 35.0% BB 23.3% B 7.8% * As rated by Standard & Poor's or the equivalent by Moody's, Duff & Phelps or Fitch IBCA Geographic Distribution The geographic distribution of the Fund's investment portfolio did not change significantly over the six-month period ended June 30, 2000. While loans on properties in nearly every state are held in the portfolio, the three largest contributors, California, Texas and Florida remained unchanged. This is consistent with the Fund's low turnover rate that limits significant shifts in portfolio composition. It also reflects the overall diversity of CMBS issuance, which is closely linked to commercial development. 9 SEMI-ANNUAL REPORT June 30, 2000 SIX MONTHS IN REVIEW (cont.) Sector Allocations The Fund features its greatest sector concentrations in multi-class and multi-family CMBS. Multi-class CMBS provides diversification benefits and multi-family CMBS is selected due to the traditional and stable nature of the property type. Over the past several years, real estate fundamentals have remained solid with all sectors performing relatively well. We do not see any major change in the near term, however, we will continue to monitor the portfolio with regards to changes in the real estate market and make adjustments when appropriate. -------------------------------------------------------------------------------- Portfolio Composition By Commercial Mortgage Type -------------------------------------------------------------------------------- [GRAPH] Multi-Class* 36.3% Multi-Family 25.3% Healthcare 15.8% Hospitality 8.9% Real Estate Asset-Backed Securities 7.5% Corporate Bonds 5.0% Other 1.2% * A mix of all types of commercial properties Secular Outlook PIMCO's secular outlook is bullish based on expectations of a slowing U.S. economy, leading to U.S. and global growth of 3% over the next couple of years. This deceleration will gradually lower interest rates on high quality bonds by capping inflation near 3% in the U.S. and 2% in Europe. The U.S. expansion will slow amid a correction of unsustainable imbalances such as the shrinking pool of available labor and a swelling trade deficit financed with a large share of the world's savings. Restrictive policies by central bankers worldwide, in contrast to liquidity infusions of the past few years, will also inhibit growth. There is a greater than 50% chance that the global economy will dip into a recession over the secular horizon. Five forces could produce this outcome: Central Bank Overreach: The Fed and other central banks could tighten too much for too long. Monetary authorities may be forced to sustain restrictive policies to deflate bubbles in housing and stock markets that stimulate consumption and, ultimately, inflation. Emerging Market Contagion: Emerging economies are stronger than two years ago, with higher currency reserves, less short-term debt and financial reforms under way. Even so, countries with fixed currency regimes remain vulnerable to rising interest rates brought on by central bank tightening. 10 SEMI-ANNUAL REPORT June 30, 2000 Japanese Economic Drag: Large fiscal deficits and tentative economic and political reforms could undermine confidence in Japan, pushing interest rates higher and depressing the already sluggish Japanese economy. Further weakness in Japan, the economic center of Asia, would reverberate elsewhere. The U.S. Equity Bubble: Rising stock markets have recently generated wealth gains that fueled consumer and investment spending. With equity markets now off their peaks, consumption and investment could follow. Flight From The Dollar: A falling dollar due to the rising U.S. trade deficit or lower stock prices would unsettle bond markets worldwide. Investors would flee to safe havens in local markets, driving up yields on riskier assets and curbing growth. In contrast with recent financial crises, investors will not be able to count on rescue by the Fed or the International Monetary Fund in the event of a slowdown and/or recession. Fed Chairman Greenspan has said he "would anticipate appropriate discounts or `haircuts' for other than federally guaranteed liabilities" if borrowers get into trouble. In other words, investors will be "bailed in" instead of "bailed out." This absence of support will increase risk and raise the cost of capital for all but AAA-rated sovereign borrowers. -------------------------------------------------------------------------------- 30 Year and 3 Month Treasury Yields -------------------------------------------------------------------------------- [GRAPH]
Month 3 -Month 30 - Year Treasury Bill Treasury Bill Jun-1980 6.995 9.810 Jul-1980 8.126 10.240 Aug-1980 9.259 11.000 Sep-1980 10.321 11.340 Oct-1980 11.580 11.590 Nov-1980 13.888 12.370 Dec-1980 15.661 11.980 Jan-1981 14.724 12.280 Feb-1981 14.905 12.970 Mar-1981 13.478 12.650 Apr-1981 13.635 13.650 May-1981 16.295 13.060 Jun-1981 14.557 13.300 Jul-1981 14.699 13.960 Aug-1981 15.612 14.780 Sep-1981 14.951 15.190 Oct-1981 13.873 14.360 Nov-1981 11.269 12.910 Dec-1981 10.926 13.650 Jan-1982 12.412 13.910 Feb-1982 13.780 13.830 Mar-1982 12.493 13.680 Apr-1982 12.821 13.390 May-1982 12.148 13.390 Jun-1982 12.108 13.910 Jul-1982 11.914 13.420 Aug-1982 9.006 12.500 Sep-1982 8.196 11.790 Oct-1982 7.750 11.010 Nov-1982 8.042 10.700 Dec-1982 8.013 10.430 Jan-1983 7.810 10.990 Feb-1983 8.130 10.510 Mar-1983 8.304 10.690 Apr-1983 8.252 10.380 May-1983 8.185 10.960 Jun-1983 8.820 10.980 Jul-1983 9.120 11.820 Aug-1983 9.390 11.930 Sep-1983 9.050 11.410 Oct-1983 8.710 11.790 Nov-1983 8.710 11.640 Dec-1983 8.960 11.870 Jan-1984 8.930 11.750 Feb-1984 9.030 12.170 Mar-1984 9.440 12.480 Apr-1984 9.690 12.840 May-1984 9.900 13.740 Jun-1984 9.940 13.640 Jul-1984 10.130 12.770 Aug-1984 10.490 12.510 Sep-1984 10.410 12.250 Oct-1984 9.970 11.560 Nov-1984 8.790 11.530 Dec-1984 8.160 11.530 Jan-1985 7.760 11.210 Feb-1985 8.220 11.880 Mar-1985 8.570 11.640 Apr-1985 8.000 11.460 May-1985 7.560 10.560 Jun-1985 7.010 10.440 Jul-1985 7.050 10.660 Aug-1985 7.180 10.470 Sep-1985 7.080 10.560 Oct-1985 7.170 10.250 Nov-1985 7.200 9.840 Dec-1985 7.070 9.270 Jan-1986 7.040 9.320 Feb-1986 7.030 8.280 Mar-1986 6.590 7.440 Apr-1986 6.060 7.450 May-1986 6.120 7.750 Jun-1986 6.210 7.230 Jul-1986 5.840 7.420 Aug-1986 5.570 7.200 Sep-1986 5.190 7.590 Oct-1986 5.180 7.610 Nov-1986 5.350 7.400 Dec-1986 5.490 7.490 Jan-1987 5.450 7.470 Feb-1987 5.590 7.460 Mar-1987 5.560 7.910 Apr-1987 5.760 8.440 May-1987 5.750 8.640 Jun-1987 5.690 8.490 Jul-1987 5.780 8.900 Aug-1987 6.000 9.150 Sep-1987 6.320 9.740 Oct-1987 6.400 9.030 Nov-1987 5.810 9.100 Dec-1987 5.800 8.980 Jan-1988 5.900 8.420 Feb-1988 5.690 8.340 Mar-1988 5.690 8.760 Apr-1988 5.920 9.100 May-1988 6.270 9.240 Jun-1988 6.500 8.910 Jul-1988 6.730 9.210 Aug-1988 7.020 9.300 Sep-1988 7.230 9.050 Oct-1988 7.340 8.740 Nov-1988 7.680 9.070 Dec-1988 8.090 8.990 Jan-1989 8.290 8.820 Feb-1989 8.480 9.110 Mar-1989 8.830 9.090 Apr-1989 8.700 8.930 May-1989 8.400 8.600 Jun-1989 8.220 8.040 Jul-1989 7.920 7.920 Aug-1989 7.910 8.200 Sep-1989 7.720 8.240 Oct-1989 7.590 7.910 Nov-1989 7.650 7.890 Dec-1989 7.640 7.980 Jan-1990 7.640 8.450 Feb-1990 7.760 8.540 Mar-1990 7.870 8.630 Apr-1990 7.780 8.990 May-1990 7.780 8.580 Jun-1990 7.740 8.400 Jul-1990 7.660 8.410 Aug-1990 7.440 8.980 Sep-1990 7.380 8.950 Oct-1990 7.190 8.760 Nov-1990 7.070 8.490 Dec-1990 6.810 8.250 Jan-1991 6.300 8.200 Feb-1991 5.950 8.200 Mar-1991 5.910 8.250 Apr-1991 5.670 8.180 May-1991 5.510 8.270 Jun-1991 5.600 8.410 Jul-1991 5.580 8.340 Aug-1991 5.390 8.060 Sep-1991 5.250 7.810 Oct-1991 5.030 7.910 Nov-1991 4.600 7.940 Dec-1991 4.120 7.400 Jan-1992 3.800 7.760 Feb-1992 3.840 7.790 Mar-1992 4.040 7.960 Apr-1992 3.750 8.040 May-1992 3.630 7.840 Jun-1992 3.660 7.780 Jul-1992 3.210 7.460 Aug-1992 3.130 7.410 Sep-1992 2.910 7.380 Oct-1992 2.860 7.630 Nov-1992 3.130 7.600 Dec-1992 3.220 7.400 Jan-1993 3.060 7.200 Feb-1993 2.930 6.900 Mar-1993 2.950 6.930 Apr-1993 2.870 6.930 May-1993 2.960 6.980 Jun-1993 3.070 6.670 Jul-1993 3.040 6.560 Aug-1993 3.020 6.090 Sep-1993 2.950 6.030 Oct-1993 3.020 5.970 Nov-1993 3.100 6.300 Dec-1993 3.060 6.350 Jan-1994 2.980 6.240 Feb-1994 3.250 6.660 Mar-1994 3.500 7.090 Apr-1994 3.680 7.310 May-1994 4.140 7.430 Jun-1994 4.140 7.610 Jul-1994 4.330 7.400 Aug-1994 4.480 7.450 Sep-1994 4.760 7.820 Oct-1994 4.950 7.970 Nov-1994 5.290 8.000 Dec-1994 5.600 7.880 Jan-1995 5.710 7.700 Feb-1995 5.770 7.440 Mar-1995 5.730 7.430 Apr-1995 5.650 7.340 May-1995 5.670 6.650 Jun-1995 5.470 6.620 Jul-1995 5.420 6.850 Aug-1995 5.400 6.650 Sep-1995 5.280 6.500 Oct-1995 5.490 6.330 Nov-1995 5.470 6.130 Dec-1995 5.080 5.950 Jan-1996 5.050 6.030 Feb-1996 5.030 6.470 Mar-1996 5.140 6.670 Apr-1996 5.150 6.910 May-1996 5.180 6.990 Jun-1996 5.160 6.870 Jul-1996 5.310 6.970 Aug-1996 5.280 7.120 Sep-1996 5.030 6.920 Oct-1996 5.150 6.640 Nov-1996 5.130 6.350 Dec-1996 5.170 6.640 Jan-1997 5.150 6.790 Feb-1997 5.220 6.800 Mar-1997 5.320 7.100 Apr-1997 5.230 7.140 May-1997 4.940 6.910 Jun-1997 5.170 6.740 Jul-1997 5.230 6.450 Aug-1997 5.220 6.610 Sep-1997 5.100 6.400 Oct-1997 5.200 6.150 Nov-1997 5.200 6.050 Dec-1997 5.350 5.920 Jan-1998 5.183 5.805 Feb-1998 5.308 5.919 Mar-1998 5.125 5.932 Apr-1998 4.978 5.951 May-1998 5.007 5.803 Jun-1998 5.093 5.626 Jul-1998 5.080 5.714 Aug-1998 4.830 5.256 Sep-1998 4.356 4.965 Oct-1998 4.323 5.150 Nov-1998 4.488 5.072 Dec-1998 4.457 5.092 Jan-1999 4.457 5.091 Feb-1999 4.664 5.575 Mar-1999 4.470 5.621 Apr-1999 4.530 5.661 May-1999 5.007 5.803 Jun-1999 4.763 5.969 Jul-1999 4.740 6.103 Aug-1999 4.961 6.067 Sep-1999 4.846 6.053 Oct-1999 5.083 6.161 Nov-1999 5.295 6.289 Dec-1999 5.312 6.479 Jan-2000 5.687 6.492 Feb-2000 5.776 6.146 Mar-2000 5.886 5.837 Apr-2000 5.813 5.963 May-2000 5.613 6.013 Jun-2000 5.860 5.896
Cyclical Outlook While the Fed's tightening cycle is almost over, monetary policy will remain restrictive until a slowdown is confirmed. Fed tightening will continue until growth slows to a pace that is sustainable without fueling inflation. Given the direction of Fed policy and higher levels of risk for non-sovereign debt, protecting principal will be the key to earning superior relative returns. 11 SEMI-ANNUAL REPORT June 30, 2000 FINANCIAL HIGHLIGHTS
------------------------------------------------------------- For the six months For the year ended For the year ended ended June 30, 2000 December 31, 1999 December 31, 1998 (Unaudited) ------------------------------------------------------------- Selected Per Share Data: Net asset value, beginning of period $ 12.89 $ 13.74 $ 13.97 Net investment income 0.58 1.08 1.24 Net realized and unrealized gain (loss) on investments (0.13) (0.75) (0.25) Total from investment operations 0.45 0.33 0.99 Less dividends from net investment income (0.56) (1.18) (1.22) Net asset value, end of period $ 12.78 $ 12.89 $ 13.74 ---------- ---------- ---------- Per share market value, end of period $ 12.13 $ 12.00 $ 13.75 ---------- ---------- ---------- Total investment return Per share market value (a) 5.85% (4.42)% 9.86% Per share net asset value (b) 3.61% 2.44% 7.33% Ratios to average net assets Operating expenses (excluding interest expense) 1.02%* 1.01% 0.99% Total operating expenses 3.95%* 3.16% 3.61% Net investment income 9.08%* 7.97% 8.81% Supplemental data Net assets, end of period (amounts in thousands) $ 140,690 $ 141,860 $ 151,222 Amount of borrowings outstanding, end of period (in thousands) $ 66,382 $ 52,233 $ 59,990 Asset coverage ratio (c) 312% 372% 352% Portfolio turnover rate 9.18% 1.86% 7.92% ------------------------------------------------------------ For the year ended For the year ended For the year ended December 31, 1997 December 31, 1996 December 31, 1995 ------------------------------------------------------------ Selected Per Share Data: Net asset value, beginning of period $ 13.71 $ 13.84 $ 12.41 Net investment income 1.20 1.23 1.16 Net realized and unrealized gain (loss) on investments 0.29 (0.13) 1.40 Total from investment operations 1.49 1.10 2.56 Less dividends from net investment income (1.23) (1.23) (1.13) Net asset value, end of period $ 13.97 $ 13.71 $ 13.84 ---------- ---------- ---------- Per share market value, end of period $ 13.69 $ 12.88 $ 12.38 ---------- ---------- ---------- Total investment return Per share market value (a) 16.40% 14.57% 21.86% Per share net asset value (b) 11.27% 8.45% 21.33% Ratios to average net assets Operating expenses (excluding interest expense) 0.97% 0.99% 1.04% Total operating expenses 3.69% 3.60% 3.94% Net investment income 8.63% 9.08% 8.93% Supplemental data Net assets, end of period (amounts in thousands) $ 153,803 $ 150,929 $ 152,375 Amount of borrowings outstanding, end of period (in thousands) $ 74,688 $ 69,850 $ 67,134 Asset coverage ratio (c) 306% 316% 327% Portfolio turnover rate 8.74% 35.98% 47.79%
* Annualized (a) Total investment return on market value is the combination of reinvested dividend income, reinvested capital gains distributions, if any, and changes in market price per share. Total investment returns exclude the effects of sales loads. (b) Total investment return on net asset value is the combination of reinvested dividend income, reinvested capital gains distributions, if any, and changes in net asset value per share. (c) Represents net assets, plus borrowings, at end of period divided by borrowings outstanding at end of period. 12 SEMI-ANNUAL REPORT June 30, 2000 STATEMENT OF ASSETS AND LIABILITIES ------------- Amounts in thousands, except per share amounts June 30, 2000 (Unaudited) ------------- Assets: Investments in securities, at market value (Identified cost: $215,365) $ 206,319 Cash 0 Interest receivable 2,428 Paydown receivable 532 Receivable for investment sold 263 Other assets 86 --------- Total assets $ 209,628 --------- Liabilities: Reverse repurchase agreements $ 66,382 Payable for investments purchased 663 Dividends payable 1,032 Accrued investment manager's fee 253 Accrued administrator's fee 35 Accrued trustees' fee 52 Written options 180 Other liabilities 341 Total liabilities $ 68,938 --------- Net assets applicable to outstanding stock $ 140,690 --------- Net Assets consist of: Capital stock - authorized 300 million shares, $.001 par value; outstanding 11,009,587 shares $ 11 Additional paid-in capital 152,271 Accumulated net investment loss (678) Accumulated net realized loss from investments (1,951) Net unrealized depreciation of investments (8,963) $ 140,690 --------- Net asset value per share outstanding $ 12.78 --------- STATEMENT OF OPERATIONS ------------------- For the six months ended June 30, 2000 Amounts in thousands (Unaudited) ------------------- Interest income $ 9,090 --------- Expenses: Interest expense 2,043 Investment manager fee 507 Administration fee 70 Custodian and portfolio accounting fee 37 Directors' fee 33 Proxy expense 9 Legal fee 3 Audit fee 7 Other expenses 49 Total expenses 2,758 --------- Net investment income $ 6,332 --------- Net realized and unrealized loss Net realized loss on investments (996) Unrealized depreciation on investments (312) Net loss on investments $ (1,308) --------- Net increase in assets resulting from operations $ 5,024 --------- 13 SEMI-ANNUAL REPORT June 30, 2000 STATEMENT OF CHANGES IN NET ASSETS
---------------------------------------- For the six months For the year ended Amounts in thousands ended June 30, 2000 December 31, 1999 (Unaudited) ---------------------------------------- Increase (Decrease) in Net Assets from: Operations Net investment income $ 6,332 $ 11,781 Net realized gain (loss) on investments (996) 66 Unrealized (depreciation) on investments (312) (8,307) Net increase resulting from operations 5,024 3,540 Distributions to Shareholders from: From net investment income (6,194) (12,934) Fund Share Transactions: Issued as reinvestment of distributions (0 and 2,418 shares, respectively) 0 32 -------- --------- Total Decrease in Net Assets (1,170) (9,362) -------- --------- Net Assets Beginning of period 141,860 151,222 End of period * $ 140,690 $ 141,860 *Including accumulated net investment loss of: $ (678) $ (817) STATEMENT OF CASH FLOWS -------------------- For the six months Amounts in thousands ended June 30, 2000 (Unaudited) -------------------- Net increase in net assets resulting from operations $ 6,332 --------- Adjustments to reconcile to net cash provided from operating activities: Increase in interest receivable (248) Amortization of premium and discount, net (548) Increase in accrued expenses 430 Increase in other assets (86) Net loss on investments 996 Total adjustments 544 Net cash provided from operating activities 6,876 Investing activities: Purchase of long-term portfolio investments 47,502) Proceeds from disposition of long-term portfolio investments 23,163 Proceeds from disposition of short-term portfolio investments, net 9,892 Net cash used in investing activities (14,447) Financing activities*: Cash dividends paid (6,743) Net increase in reverse repurchase agreements 14,149 Net cash provided by financing activities 7,406 Net decrease in cash: (165) Cash at beginning of period 165 --------- Cash at end of period $ 0 ---------
* Cash paid for interest for the six months ended June 30, 2000, amounted to $2,217. 14 SEMI-ANNUAL REPORT June 30, 2000 SCHEDULE OF INVESTMENTS Principal Amount Value (000s) (000s) -------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED SECURITIES 128.3% -------------------------------------------------------------------------------- Multi-Class 53.3% Aetna Commercial Trust 7.100% due 12/26/2030 $ 1,000 $ 970 Airplanes Pass Through Trust 10.875% due 03/15/2019 1,975 1,784 Asset Securitization Corp. 7.384% due 08/13/2029 1,500 1,399 Blackrock Capital Financial 8.480% due 10/25/2026 (e) 3,000 2,319 CBA Mortgage Corp. 6.670% due 12/25/2003 (b) 415 387 Commercial Mortgage Acceptance 6.942% due 11/15/2009 1,500 1,350 Federal Deposit Insurance Corp. 7.860% due 11/25/2026 (b)(d) 1,260 1,260 First Boston Mortgage Securities Corp. 7.182% due 01/25/2028 (b)(e) 1,299 1,229 First Chicago Lennar Trust 8.090% due 04/29/2006 (e) 5,000 4,650 Forest City Enterprises 8.500% due 03/15/2008 4,000 3,640 General Electric Capital Mortgage Services, Inc. 7.250% due 08/25/2029 (d) 2,768 2,545 General Motors Acceptance Corp. 7.080% due 05/15/2030 (b) 1,500 1,059 GMAC Commercial Mortgage Securities, Inc. 6.500% due 03/15/2012 2,000 1,659 Green Tree Financial Corp. 8.000% due 07/15/2018 (d) 3,087 2,709 7.510% due 07/15/2028 4,000 3,543 J.P. Morgan Commercial Mortgage Finance Corp. 8.540% due 11/25/2027 (e) 2,284 1,946 Keystone Owner Trust 8.500% due 01/25/2029 (e) 5,000 2,942 Merrill Lynch Mortgage 7.120% due 06/18/2029 2,000 1,781 7.427% due 06/15/2021 (b) 627 609 Morgan Stanley Capital 8.112% due 02/15/2005 (b)(e) 2,000 1,993 7.695% due 10/03/2030 (e) 2,000 1,670 6.850% due 02/15/2020 (e) 1,000 747 Mortgage Capital Funding, Inc. 7.531% due 04/20/2007 1,000 950 Nationslink Funding Corp. 7.050% due 02/20/2008 (e) 2,000 1,518 7.105% due 01/20/2013 (e) 2,500 1,873 7.100% due 01/20/2009 (d) 2,000 1,825 7.648% due 01/20/2009 (d) 2,500 2,434 NB Commercial Mortgage 8.031% due 10/20/2023 (e) 188 188 8.730% due 10/20/2023 (e) 1,000 1,001 Nomura Asset Securities Corp. 9.917% due 09/11/2019 (b) 3,000 3,127 Prudential Securities Secured Financing Corp. 7.610% due 12/26/2022 1,000 930 6.755% due 08/15/2011 (e) 1,989 1,434 Resolution Trust Corp. 6.900% due 02/25/2027 (b) 1,487 1,365 8.000% due 04/25/2025 (d) 962 937 9.450% due 05/25/2024 1,161 1,148 8.835% due 12/25/2023 (d) 1,600 1,601 7.000% due 05/25/2027 1,759 1,681 8.000% due 06/25/2026 2,098 2,070 Saco I, Inc. 7.702% due 03/01/2030 (e) 2,501 2,292 Salomon Brothers Mortgage Securities VII 7.500% due 05/25/2026 239 212 Structured Asset Securities Corp. 7.201% due 04/25/2003 (b)(e) 2,500 2,357 7.750% due 02/25/2028 (d) 3,841 3,788 ------- 74,922 Multi-Family 37.1% Aames Mortgage Trust 7.821% due 06/15/2028 2,000 1,853 Chase Commercial Mortgage Securities Corp. 6.900% due 11/19/2006 (e) 1,500 1,340 6.900% due 11/19/2028 5,500 4,508 Donaldson, Lufkin & Jenrette 7.350% due 12/18/2003 (d) 3,000 2,940 Federal Housing Administration 8.360% due 01/01/2012 867 857 6.430% due 12/01/2019 2,603 2,535 6.875% due 11/01/2023 1,921 1,741 8.250% due 02/01/2028 2,544 2,506 7.500% due 12/31/2031 1,566 1,437 8.875% due 06/01/2035 5,912 5,679 7.380% due 04/01/2041 676 621 7.380% due 04/01/2041 1,824 1,691 Federal National Mortgage Assn. 7.864% due 12/25/2015 (b)(e) 874 619 7.865% due 12/25/2015 (b)(e) 1,608 1,282 9.375% due 04/01/2016 (d) 1,160 1,186 7.875% due 11/01/2018 247 247 First Boston Mortgage Securities Corp. 7.554% due 09/25/2006 (b) 976 963 Government National Mortgage Assn. 9.500% due 09/15/2030 (d) 4,255 4,282 8.625% due 10/15/2034 (d) 3,439 3,478 ICI Funding Corp. Secured Assets Corp. 7.750% due 03/25/2028 1,014 915 Merrill Lynch Mortgage Investors, Inc. 9.448% due 11/25/2020 (d)(e) 2,500 2,503 Multi-Family Capital Access One, Inc. 7.400% due 01/15/2024 1,591 1,570 Nationsbanc Mortgage Capital 8.048% due 05/25/2028 2,000 1,606 Resolution Trust Corp. 7.407% due 09/25/2020 (b) 167 161 Structured Asset Securities Corp. 7.050% due 11/25/2007 6,000 5,663 ------- 52,183 Healthcare 23.1% Daiwa Mortgage Acceptance Corp. 6.063% due 09/25/2006 510 501 LTC Commercial Corp. 9.200% due 11/28/2012 (e) 1,500 1,486 9.300% due 06/15/2026 (d)(e) 4,000 4,009 Nomura Asset Securities Corp. 6.680% due 12/15/2001 (d)(e) 12,100 11,660 Red Mountain Funding Corp. 8.926% due 01/15/2019 (e) 1,000 515 7.471% due 01/15/2019 (e) 1,000 660 7.072% due 01/15/2019 (e) 2,000 1,590 9.150% due 11/28/2027 (e) 3,200 2,161 SC Commercial 7.050% due 11/28/2013 (d)(e) 5,000 4,967 7.800% due 11/28/2013 (d)(e) 5,000 4,971 ------- 32,520 15 SEMI-ANNUAL REPORT June 30, 2000 SCHEDULE OF INVESTMENTS (CONT.) Principal Amount Value (000s) (000s) -------------------------------------------------------------------------------- Hospitality 13.0% Cooper Hotel 7.500% due 07/15/2013 (d)(e) $ 7,445 $ 7,295 Franchise Mortgage Acceptance Corp. 7.981% due 11/15/2018 (e) 2,300 1,886 German American Capital Corp. 8.535% due 10/10/2002 (e) 2,000 1,921 Host Marriott Pool Trust 8.310% due 08/03/2009 (e) 2,000 1,973 Hotel First 8.520% due 08/05/2008 (e) 2,583 2,549 J.Q. Hammons Hotels 8.875% due 02/15/2004 450 399 Starwood Commercial Mortgage Trust 6.920% due 02/03/2009 2,500 2,331 --------- 18,354 Retail 1.8% Trizec Finance Ltd. 10.875% due 10/15/2005 2,505 2,533 --------- Total Commercial Mortgage-Backed Securities 180,512 ========= (Cost $188,786) -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES 7.3% -------------------------------------------------------------------------------- Banking & Finance 1.2% Mercury Finance Co. 10.000% due 03/23/2001 (e) 1,602 1,631 --------- Industrials 4.0% Building Materials Corp. 8.000% due 10/15/2007 3,000 2,558 Container Corp. of America 11.250% due 05/01/2004 1,500 1,530 Nuevo Grupo Iusacell 10.000% due 07/15/2004 750 731 U.S. Air, Inc. 9.330% due 01/01/2006 902 829 --------- 5,648 Utilities 2.1% Calpine Corp. 8.750% due 07/15/2007 1,680 1,694 Flag Ltd. 8.250% due 01/30/2008 1,400 1,246 --------- 2,940 --------- Total Corporate Bonds & Notes 10,219 ========= (Cost $10,935) -------------------------------------------------------------------------------- ASSET-BACKED SECURITIES 10.9% -------------------------------------------------------------------------------- First International Bank Business Loan Trust 9.665% due 04/15/2026 3,250 3,007 Firstplus Global Issuance 7.690% due 09/11/2023 (e) 5,000 4,370 Keystone Owner Trust 8.500% due 01/25/2029 (e) 5,000 4,145 Life Financial Home Loan Owner Trust 9.090% due 04/25/2024 (d) 4,373 3,868 --------- Total Asset-Backed Securities 15,390 (Cost $15,446) ========= -------------------------------------------------------------------------------- SHORT-TERM INSTRUMENTS 0.1% -------------------------------------------------------------------------------- Commercial Paper 0.1% Federal Home Loan Mortgage 6.420% due 08/17/2000 200 198 --------- Total Short-Term Instruments 198 (Cost $198) ========= Total Investments (a) 146.6% 206,319 (Cost $215,365) Written Options (c) (0.1%) (180) (Premium $263) Other Assets and Liabilities (Net) (46.5%) (65,449) --------- Net Assets 100.0% $ 140,690 ========= Notes to Schedule of Investments (amounts in thousands): (a) The identified cost of investments owned as of June 30, 2000, was the same for federal income tax and financial statement purposes. (b) Variable rate security. The rate listed is as of June 30, 2000. (c) Premiums received on written options: # of Type Contracts Premium Value -------------------------------------------------------------------------------- Call - OTC 3 Month LIBOR Interest Rate Swap Strike @ 7.00 Exp. 09/15/2000 2,150 $ 263 $ 180 (d) Securities pledged as collateral for reverse repurchase agreements. (e) Securities purchased under Rule 144A of the 1933 Securities Act and, unless registered under the Act or exempt from registration, may only be sold to qualified institutional investors. 16 SEMI-ANNUAL REPORT June 30, 2000 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. General Information The PIMCO Commercial Mortgage Securities Trust, Inc. commenced operations on September 2, 1993. The Fund is registered under the Investment Company Act of 1940, as amended, as a closed-end, non-diversified, investment management company organized as a Maryland corporation. The stock exchange symbol of the Fund is PCM. Shares are traded on the New York Stock Exchange. 2. Significant Accounting Policies The following is a summary of significant accounting policies followed in preparation of the Fund's financial statements. The policies are in conformity with accounting principles generally accepted in the United States. Security valuation. It is the policy of the Fund to value portfolio securities at market value. Market value is determined on the basis of last reported sales prices, or if no sales are reported, as is the case for most securities traded over-the-counter, the mean between representative bid and asked quotations. Certain fixed income securities for which daily market quotations are not readily available may be valued, pursuant to guidelines established by the Board of Directors, with reference to fixed income securities whose prices are more readily obtainable and whose durations are comparable to the securities being valued. Short-term investments having a maturity of sixty days or less are valued at amortized cost. Subject to the foregoing, other securities for which market quotations are not readily available are valued at fair value as determined in good faith by the Board of Directors. Securities transactions and investment income. Securities transactions are recorded as of the trade date. Securities purchased or sold on a when-issued or delayed-delivery basis may be settled a month or more after the trade date. Securities purchased on a when-issued basis are subject to market value fluctuations during this period. On the commitment date of such purchases, the Fund designates specific assets with a value at least equal to the commitment, to be utilized to settle the commitment. The proceeds to be received from delayed-delivery sales are included in the Fund's net assets on the date the commitment is executed. Accordingly, any fluctuation in the value of such assets is excluded from the Fund's net asset value while the commitment is in effect. Realized gains and losses from securities sold are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and includes the accretion of discounts and amortization of premiums. 17 SEMI-ANNUAL REPORT June 30, 2000 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.) Dividends and distributions to shareholders.The Fund intends to distribute all its net investment income monthly. Distributions, if any, of net realized short- or long-term capital gains will be distributed no less frequently than once each year. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States. These differences are primarily due to the accounting for paydown gains and losses on mortgage-backed securities. Federal income taxes. The Fund intends to qualify as a regulated investment company and distribute all of its taxable income and net realized gains, if any, to shareholders. Accordingly, no provision for Federal income taxes has been made. Reverse repurchase agreements.Reverse repurchase agreements involve the sale of a portfolio-eligible security by the Fund, coupled with an agreement to repurchase the security at a specified date and price. Reverse repurchase agreements involve the risk that the market value of securities retained by the Fund may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase. Reverse repurchase agreements are considered to be borrowings by the Fund, and are subject to the Fund's overall restriction on borrowing under which it must maintain asset coverage of at least 300%. Repurchase Agreements. The Fund may engage in repurchase transactions. Under the terms of a typical repurchase agreement, the Fund takes possession of an underlying debt obligation subject to an obligation of the seller to repurchase, and the Fund to resell, the obligation at an agreed-upon price and time. The market value of the collateral must be equal at all times to the total amount of the repurchase obligations, including interest. Generally, in the event of counterparty default, the Fund has the right to use the collateral to offset losses incurred. Written Options. When a Fund writes an option, the premium received by the Fund is presented in the Fund's Statement of Assets and Liabilities as an asset and equivalent liability. The amount of the liability is subsequently "market-to-market" to reflect the current market value of the option written. Written options are valued at the last sale price or, in absence of a sale, the last offering price on the market on which it is principally traded. If an option expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a written call option is exercised, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds of the sale are increased by the premium originally received. If a written put option is exercised, the amount of the premium originally received reduces the cost of the security which the Fund purchases upon exercise of the option. 18 SEMI-ANNUAL REPORT June 30, 2000 The risk in writing a call option is that the Fund relinquishes the opportunity to profit if the market price of the underlying security increases and the option is exercised. In writing a put option, the Fund assumes the risk of incurring a loss if the market price of the underlying security decreases and the option is exercised. In addition, there is a risk the Fund may not be able to enter into a closing transaction because of an illiquid secondary market, or if the counterparties do not perform under the contracts' terms. 3. Investment Manager Fee, Administration Fee, and Directors' Fee Investment Manager Fee. Pacific Investment Management Company (PIMCO) serves as investment manager to the Fund, pursuant to an investment management agreement. (PIMCO) receives a quarterly fee from the Fund at an annual rate of 0.725% based on average weekly net assets of the Fund. Administration Fee. PIMCO also provides administrative services to the Fund and receives from the Fund a quarterly administrative fee at the annual rate of 0.10% of the Fund's average weekly net assets. Directors' Fee. Each unaffiliated Director receives an annual retainer of $6,000, plus $1,000 for each Board of Directors meeting attended, plus reimbursement of related expenses. 4. Securities Transactions Cost of purchases and proceeds from sales of securities (excluding short-term investments) for the period ended June 30, 2000, were as follows: U.S. Government/Agency All Other -------------------------------------------------------------------------------- Purchases Sales Purchases Sales -------------------------------------------------------------------------------- $ 0 $ 7,432,718 $ 44,450,537 $ 10,786,468 5. Transaction in Written Call and Put Options Transaction in written call and put options were as follows: # of Contracts Premium --------------------------------------- Balance at 12/31/1999 0 $ 0 Sales 2,650 441,109 Closing Buys (500) (177,734) Expirations 0 0 Exercised 0 0 Balance at 6/30/2000 2,150 $ 263,375 19 SEMI-ANNUAL REPORT June 30, 2000 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.) 6. Federal Income Tax Matters At June 30, 2000, the net unrealized depreciation of investments based on cost for federal income tax purposes was as follows: Aggregate gross unrealized appreciation $ 1,456,104 Aggregate gross unrealized depreciation (10,502,693) -------------- Net unrealized depreciation $ (9,046,589) ============== The accumulated net realized loss on sales of investments for federal income tax purposes at December 31, 1999, amounting to $955,439, is available to offset future taxable gains. If not applied, $229,745, $687,550, and $38,144 of the loss will expire in 2003, 2004, and 2007, respectively. 7. Borrowings under Reverse Repurchase Agreements The average amount of borrowings outstanding during the period ended June 30, 2000 was $61,511,090 at a weighted average interest rate of 6.60%. On June 30, 2000, securities valued at $76,809,223 were pledged as collateral for reverse repurchase agreements. The Fund is authorized to borrow funds and utilize leverage in amounts not exceeding thirty-three and one-third percent of its total assets. The Fund's ability to leverage creates an opportunity for increased net income, but at the same time poses special risks. If the income from the securities purchased with borrowed funds is not sufficient to cover the cost of borrowing, the net income of the Fund will be less than if borrowing had not been used, reducing the amount available for distribution to shareholders. 8. Acquisition by Allianz AG On May 5, 2000, Allianz AG completed the acquisition of approximately 70% of the outstanding partnership interests in PIMCO Advisors L.P. ("PIMCO Advisors"), of which PIMCO is a subsidiary partnership. As a result of this transaction, PIMCO Advisors, and its subsidiaries, are now controlled by Allianz AG, a leading provider of financial services, particularly in Europe. PIMCO remains operationally independent, continues to operate under its existing name, and now leads the global fixed income efforts of Allianz AG. Key employees at each PIMCO Advisors' investment units, including PIMCO's Bill Gross, have signed long-term employment contracts and have significant profit-sharing and retention arrangements to ensure continuity of the investment process and staff. With the addition of PIMCO Advisors, the Allianz Group manages assets of approximately US$650 billion, including more than 300 mutual funds for retail and institutional clients around the world. 20 SEMI-ANNUAL REPORT June 30, 2000 DIVIDEND REINVESTMENT PLAN What is the Dividend Reinvestment Plan for PIMCO Commercial Mortgage Securities Trust, Inc.? The Dividend Reinvestment Plan offers shareholders in the Fund an efficient and simple way to reinvest dividends and capital gains distributions, if any, in shares of the Fund. Each month the Fund will distribute to shareholders substantially all of its net investment income. The Fund expects to distribute at least annually any net realized long-term or short-term capital gains. State Street Bank & Trust Co. acts as Plan Agent for shareholders in administering the Plan. Who can participate in the Plan? All shareholders in the Fund may participate in the Plan by following the instructions for enrollment provided later in this section. What does the Plan offer? The Plan offers shareholders a simple and convenient means to reinvest dividends and capital gains distributions in additional shares of the Fund. How is the reinvestment of income dividends and capital gains distributions accomplished? If you are a participant in the Plan, your dividends and capital gains distributions will be reinvested automatically for you, increasing your holding in the Fund. If the Fund declares a dividend or capital gains distribution payable either in cash or in shares of the Fund, you will automatically receive shares of the Fund. If the market price of shares is equal to or exceeds the net asset value per share on the Valuation Date (as defined below), Plan participants will be issued shares valued at the net asset value most recently determined or, if net asset value is less than 95% of the then current market price, then at 95% of the market price. If the market price is less than the net asset value on the Valuation Date, the Plan Agent will buy shares in the open market, on the New York Stock Exchange ("NYSE") or elsewhere, for the participants' accounts. If, following the commencement of the purchase and before the Plan Agent has completed its purchases, the market price exceeds the net asset value, the average per share purchase price paid by the Plan Agent may exceed the net asset value, resulting in the acquisition of fewer shares than if the dividend or capital gains distribution had been paid in shares issued by the Fund at net asset value. Additionally, if the market price exceeds the net asset value before the Plan Agent has completed its purchases, the Plan Agent is permitted to cease purchasing shares and the Fund may issue the remaining shares at a price equal to the greater of net asset value or 95% of the then current market price. In a case where the Plan Agent has terminated open market purchases and the Fund has issued the remaining shares, the 21 SEMI-ANNUAL REPORT June 30, 2000 DIVIDEND REINVESTMENT PLAN (CONT.) number of shares received by the participant will be based on the weighted average of prices paid for shares purchased in the open market and the price at which the Fund issues the remaining shares. The Plan Agent will apply all cash received to purchase shares as soon as practicable after the payment date of the dividend or capital gains distribution, but in no event later than 30 days after that date, except when necessary to comply with applicable provisions of the federal securities laws. The Valuation Date is the dividend or capital gains distribution payment date or, if that date is not a NYSE trading day, the immediately preceding trading day. All reinvestments are in full and fractional shares, carried to three decimal places. Is there a cost to participate? There is no direct charge to participants for reinvesting dividends and capital gains distributions, since the Plan Agent's fees are paid by the Fund. There are no brokerage charges for shares issued directly by the Fund. Whenever shares are purchased on the NYSE or elsewhere in connection with the reinvestment of dividends or capital gains distributions, each participant will pay a pro rata portion of brokerage commissions. Brokerage charges for purchasing shares through the Plan are expected to be less than the usual brokerage charges for individual transactions, because the Plan Agent will purchase shares for all participants in blocks, resulting in lower commissions for each individual participant. What are the tax implications for participants? You will receive tax information annually for your personal records to help you prepare your federal income tax return. The automatic reinvestment of dividends and capital gains distributions does not affect the tax characterization of the dividends and capital gains. Other questions should be directed to your tax adviser. How do participating shareholders benefit? You will build holdings in the Fund easily and automatically at reduced costs. You will receive a detailed account statement from the Plan Agent, showing total dividends and distributions, dates of investments, shares acquired and price per share, and total shares of record held by you and by the Plan Agent for you. The proxy you receive in connection with the Fund's shareholder meetings will include shares purchased for you by the Plan Agent according to the Plan. As long as you participate in the Plan, shares acquired through the Plan will be held for you in safekeeping in non-certificated form by State Street Bank & Trust Co., the Plan Agent. This convenience provides added protection against loss, theft or inadvertent destruction of certificates. 22 SEMI-ANNUAL REPORT June 30, 2000 Whom should I contact for additional information? If you hold shares in your own name, please address all notices, correspondence, questions or other communications regarding the Plan to: PIMCO Commercial Mortgage Securities Trust, Inc. c/o State Street Bank & Trust Co. 150 Royalle Street Canton, MA 02021 Telephone: 800-213-3606 If your shares are not held in your name, you should contact your brokerage firm, bank or other nominee for more information. How do I enroll in the Plan? If you hold shares of the Fund in your own name, you are already enrolled in this Plan. Your reinvestments will begin with the first dividend after you purchase your shares. If your shares are held in the name of a brokerage firm, bank, or other nominee, you should contact your nominee to see if it will participate in the Plan on your behalf. If your nominee is unable to participate in the Plan on your behalf, you may want to request that your shares be registered in your name so that you can participate in the Plan. Once enrolled in the Plan, may I withdraw from it? You may withdraw from the Plan without penalty at any time by providing written notice to State Street Bank & Trust Co.. Elections to withdraw from the Plan will be effective for distributions with a Record Date of at least ten days after such elections are received by the Plan Agent. If you withdraw, you will receive, without charge, a share certificate issued in your name for all full shares accumulated in your account from dividend and capital gains distributions, plus a check for any fractional shares based on market price. Experience under the Plan may indicate that changes are desirable. Accordingly, either the Fund or the Plan Agent may amend or terminate the Plan. Participants will receive written notice at least 30 days before the effective date of any amendment. In the case of termination, participants will receive written notice at least 30 days before the record date of any dividend or capital gains distribution by the Fund. 23 SEMI-ANNUAL REPORT June 30, 2000 PROXY VOTING RESULTS A special meeting of the Funds shareholders was held on March 3, 2000. The result of votes taken among shareholders on proposals are listed below. 1. To elect Directors to the Board of Directors of the Fund. # of % of Shares Voted Shares Voted ------------------------------------ R. Wesley Burns For 10,390,736 98.742% Withheld 132,414 1.258% Total 10,523,150 100.000% E. Philip Cannon For 10,390,736 98.742% Withheld 132,414 1.258% Total 10,523,150 100.000% J. Michael Hagan For 10,390,736 98.742% Withheld 132,414 1.258% Total 10,523,150 100.000% Brent R. Harris For 10,390,736 98.742% Withheld 132,414 1.258% Total 10,523,150 100.000% 2. To approve a new investment management agreement. # of % of Shares Voted Shares Voted ------------------------------------ For 10,135,755 96.319% Against 169,908 1.615% Abstain 217,484 2.067% Total 10,523,147 100.000% 3. To ratify selection of Ernst & Young LLP as independent public accountant of the Fund for its fiscal year ending December 31, 2000. # of % of Shares Voted Shares Voted ------------------------------------ For 10,355,626 98.408% Against 48,900 0.465% Abstain 118,624 1.127% Total 10,523,150 100.000% 24 SEMI-ANNUAL REPORT June 30, 2000 BOARD OF DIRECTORS AND OTHER INFORMATION Directors and Officers Brent R. Harris, Chairman of the Board and Director R. Wesley Burns, President and Director Guilford C. Babcock, Director E. Philip Cannon, Director Vern O. Curtis, Director J. Michael Hagan, Director Thomas P. Kemp, Sr., Director William J. Popejoy, Director Garlin G. Flynn, Secretary John P. Hardaway, Treasurer Investment Manager and Administrator Pacific Investment Management Company 840 Newport Center Drive, Suite 300 Newport Beach, California 92660 Transfer Agent State Street Bank & Trust Co. 150 Royalle Street Canton, MA02021 Custodian State Street Bank & Trust Co. 801 Pennsylvania Kansas City, Missouri 64105 Legal Counsel Dechert Price & Rhoads 1775 Eye Street, N.W. Washington, D.C. 20006-2401 Independent Auditors Ernst & Young LLP One Kansas City Place 1200 Main Street Kansas City, Missouri 64105 PIMCO COMMERCIAL MORTGAGE SECURITIES TRUST, INC. This report, including the financial statements herein, is provided to the shareholders of PIMCO Commercial Mortgage Securities Trust, Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.