MERRILL LYNCH
REAL ESTATE
FUND, INC.
FUND LOGO
Semi-Annual Report
May 31, 1998
This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Real Estate Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH REAL ESTATE FUND, INC.
DEAR SHAREHOLDER
We are pleased to provide you with the first shareholder report for
Merrill Lynch Real Estate Fund, Inc. The Fund seeks capital
appreciation and investment income by investing primarily in equity
securities of issuers that are principally engaged in the real
estate industry. In this and future reports to shareholders, we will
provide information on the Fund's performance, discuss our
investment strategies and highlight some of the Fund's holdings.
The Fund got off to a relatively good start in a very difficult
environment for real estate investment trusts (REITs) and other real
estate securities. Since inception (December 26, 1997) through May
31, 1998, the Fund's Class A, Class B, Class C and Class D Shares
had total returns of -0.07%, -0.49%, -0.47% and -0.13%,
respectively. This is compared to a total return of -3.0% for the
unmanaged Morgan Stanley REIT Index and +17.3% for the unmanaged
Standard & Poor's 500 Index (S&P 500).
As of May 31, 1998, the Fund was 99% invested, with the remaining 1%
of net assets in cash reserves. Although a higher cash position
would have improved the Fund's performance, our value-oriented
approach to stock selection helped to limit losses in this recent
difficult investment environment for real estate securities. Going
forward, we intend to stay fully invested, primarily in US real
estate securities. Real estate fundamentals currently appear solid,
while investor sentiment is low and valuations relative to the broad
stock market are the most attractive we have seen since 1993.
Accordingly, we believe the portfolio has respectable upside
potential with good downside protection.
Several issues have tempered investors' enthusiasm toward real
estate stocks in the first half of 1998. First, the strong
performance by the broad stock market has led investors to buy
stocks with riskier profiles. REITs, with their high dividend yields
and relatively stable rental income streams, are viewed as
conservative, income-oriented stocks and tend to be left behind when
the general stock market environment is bullish. For investors with
a long-term time horizon, REITs are likely both to hold up
relatively well in the event of broad stock market setbacks and
provide reasonable total returns. What is particularly ironic about
the preference currently for higher risk stocks is that, for the
first time in several years, most analysts expect REIT earnings
growth to outpace the earnings growth of the S&P 500 in 1998 and
perhaps 1999 as well. First quarter per share funds from operation
(FFO), which are the equivalent of cash flow per share, have all
been reported and showed +18.6% growth compared to +4.0% earnings
per share growth for the S&P 500. For the 1998 calendar year, we
look for FFO per share growth near 15% and in 1999 we believe 10%-
12% growth is likely.
Uncertainty regarding Government proposals concerning so-called
"paired share" REITs (a combination of the common shares of two
companies, one of which is a REIT, that trade as one security) has
also weighed on the REIT market this year. It is important for
investors to understand that the Government is targeting only four
REITs with a special grandfathered tax status and that the vast
majority of publicly owned REITs (more than 200) will not be
affected. In the meantime, we believe the confusion created by the
Government's actions has created buying opportunities, not only in
some of the paired share REITs but also in many high-quality REITs.
Investors have also been concerned about the accelerating pace of
commercial real estate construction and the negative impact this
could have on future rent and occupancy rates. While it is true that
construction has picked up, we see little evidence of systematic
overbuilding of the kind last seen in the 1980s. For example,
apartment starts, which peaked at 600,000 in 1986, only recovered to
the 300,000 level last year despite continued strong job growth and
household formation. Real estate market analysts also see
construction increasing across-the-board, but not enough to upset
the current supply/ demand balance. However, the securitization of
real estate, which has brought increased investor focus to the
entire sector, helps remind real estate stock market investors of
the dangers of overbuilding and thereby serves as an additional
informal monitor on the system.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
As more real estate markets attain equilibrium, it will be
increasingly important to invest in companies that can grow earnings
even without the benefit of a recovering real estate market.
Accordingly, we have been purchasing companies with experienced and
knowledgeable, shareholder-oriented management teams, clear and
credible growth strategies and strong balance sheets. We are excited
by the number of quality companies we have been able to purchase at
attractive valuations in the last few months as real estate stocks
have sold off. Also, REITs are once again attractive relative to
bonds, currently providing earnings yields nearly 300 basis points
(3.0%) above ten-year Treasury securities. Given that S&P earnings
growth per share was very modest in the March quarter and that bond
yields declined by 50 basis points, we expected REITs to do better.
We continue to believe that REITs will perform better in the second
half of the year.
Another significant positive for REITs is the stable nature of their
business. The typical lease at many REITs averages about seven
years. This means approximately 85% of the Fund's revenue stream is
known from one year to the next. As a result, investors
theoretically can calculate future period revenue levels relatively
easily, making earnings models more reliable. Additionally, most
contracts have inflationary rent increases built in. Finally, the
Fund had no Asian exposure at May 31, 1998.
By May 31, 1998, the portfolio was structured to take advantage of
both the most stable cash flow providers and those companies
positioned in markets likely to show the strongest rental revenue
growth. Specifically, we have overweighted both the triple net lease
and regional mall sectors on the stable side and the office and
industrial companies on the high-growth side. This "barbell"
approach should help us to continue to preserve assets during the
current correction phase and to benefit strongly from any
improvement in the stock market environment for REITs. Companies
focused on central business district offices should do well, in our
opinion, especially in New York City. Similarly, we believe
companies with quality tenants and strong coverage ratios could
rally if interest rates continue to fall. Finally, we would suggest
that restructuring in one or more of the paired share REITs could
unlock significant stock value and help improve investors' attitudes
toward the entire REIT sector.
While cognizant of the risks, we are optimistic about the prospects
for real estate securities during the second half of the Fund's
fiscal year. As of May 31, 1998, our portfolio of stocks traded at
about 12 times consensus 1999 FFO per share estimates with about 13%
expected growth.
In Conclusion
We thank you for your investment in Merrill Lynch Real Estate Fund,
Inc., and we look forward to discussing our investment strategy and
outlook with you in our upcoming quarterly report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Jay Willoughby)
Jay Willoughby
Senior Vice President and Portfolio Manager
July 9, 1998
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors, as detailed in the Fund's prospectus.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after 8 years. (There is no initial sales charge for
automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Aggregate Total Return"
tables assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Investment
return and principal value of shares will fluctuate so that shares,
when redeemed, may be worth more or less than their original cost.
Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer
agency fees applicable to each class, which are deducted from the
income available to be paid to shareholders.
Recent Performance Results*
3 Month Since Inception
Total Return Total Return
ML Real Estate Fund, Inc. Class A Shares -1.55% -0.07%
ML Real Estate Fund, Inc. Class B Shares -1.77 -0.49
ML Real Estate Fund, Inc. Class C Shares -1.75 -0.47
ML Real Estate Fund, Inc. Class D Shares -1.51 -0.13
[FN]
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net assetvalue on the ex-dividend date. The
Fund's inception date is December 26, 1997.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
PERFORMANCE DATA (concluded)
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (12/26/97)
through 3/31/98 +4.10% -1.37%
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (12/26/97)
through 3/31/98 +3.80% -0.20%
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (12/26/97)
through 3/31/98 +3.80% +2.80%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Inception (12/26/97)
through 3/31/98 +4.00% -1.46%
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Real Estate Investment Trusts Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Apartments 30,000 Avalon Properties, Inc. $ 887,331 $ 843,750 1.1%
10,000 Bay Apartment Communities, Inc. 370,600 367,500 0.5
68,310 Camden Property Trust 1,994,738 2,087,724 2.7
66,000 Post Properties, Inc. 2,568,460 2,714,250 3.4
40,000 Summit Properties Inc. 812,349 797,500 1.0
------------ ------------ ------
6,633,478 6,810,724 8.7
Diversified/Mixed Use 270,000 Capital Automotive 4,081,950 3,881,250 4.9
96,700 Cousins Properties, Inc. 2,802,590 2,955,394 3.8
104,000 Entertainment Properties Trust 2,026,175 2,021,500 2.6
------------ ------------ ------
8,910,715 8,858,144 11.3
Health Care 65,000 Meditrust Companies 2,107,938 1,832,188 2.3
Hotel/Restaurant 40,000 Boykin Lodging Company 995,275 847,500 1.1
20,000 FelCor Suite Hotels, Inc. 702,012 688,750 0.9
75,000 Starwood Hotels & Resorts 3,875,888 3,539,063 4.5
------------ ------------ ------
5,573,175 5,075,313 6.5
Manufactured Homes 52,000 Sun Communities, Inc. 1,764,495 1,764,750 2.3
Office Property 50,000 Arden Realty, Inc. 1,415,625 1,371,875 1.8
90,000 CarrAmerica Realty Corporation 2,732,422 2,520,000 3.2
115,000 Crescent Real Estate Equities Company 4,079,839 3,938,750 5.0
125,000 Equity Office Properties Trust 3,781,163 3,437,500 4.4
65,000 Highwood Properties, Inc. 2,267,681 2,145,000 2.7
65,000 Kilroy Realty Corporation 1,672,025 1,702,187 2.2
55,000 SL Green Realty Corp. 1,223,750 1,247,813 1.6
360 ++Sponda OYJ 2,327 2,326 0.0
128,100 Tower Realty Trust, Inc. 3,009,844 2,938,294 3.7
------------ ------------ ------
20,184,676 19,303,745 24.6
Outlet Centers 36,000 Chelsea GCA Realty, Inc. 1,332,210 1,442,250 1.8
Regional Malls 90,100 CBL & Associates Properties, Inc. 2,236,341 2,213,081 2.8
91,800 Glimcher Realty Trust 2,042,827 1,910,587 2.4
84,200 JP Realty, Inc. 2,093,290 1,926,075 2.5
115,000 Taubman Centers, Inc. 1,435,039 1,574,062 2.0
35,000 Urban Shopping Centers, Inc. 1,164,363 1,155,000 1.5
------------ ------------ ------
8,971,860 8,778,805 11.2
Shopping Centers 82,600 Federal Realty Investment Trust 2,085,318 2,044,350 2.6
40,000 ++Philips International Realty Corp. 700,000 690,000 0.9
65,000 Regency Realty Corporation 1,730,713 1,592,500 2.0
------------ ------------ ------
4,516,031 4,326,850 5.5
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Value Percent of
Industries Held Real Estate Investment Trusts Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Storage 50,000 Shurgard Storage Centers, Inc. $ 1,443,269 $ 1,434,375 1.8%
48,000 Storage USA, Inc. 1,870,005 1,785,000 2.3
------------ ------------ ------
3,313,274 3,219,375 4.1
Warehouse/Industrial 213,900 Cabot Industrial Trust 4,448,534 4,692,431 6.0
65,000 Weeks Corporation 2,076,295 2,075,937 2.6
------------ ------------ ------
6,524,829 6,768,368 8.6
Total Real Estate Investment Trusts 69,832,681 68,180,512 86.9
Common Stocks
Diversified 70,000 ++Corrections Corporation of America 1,718,575 1,592,500 2.0
165,000 TrizecHahn Corporation 3,803,883 3,537,188 4.5
------------ ------------ ------
5,522,458 5,129,688 6.5
Hotels & Motels 4,737 Accor S.A. 1,204,048 1,300,773 1.7
94,500 ++Interstate Hotels Company 3,226,902 3,065,344 3.9
------------ ------------ ------
4,430,950 4,366,117 5.6
Total Common Stocks 9,953,408 9,495,805 12.1
Face
Amount Short-Term Securities
Commercial Paper* $822,000 General Motors Acceptance Corp., 5.69%
due 6/01/1998 821,740 821,740 1.0
Total Short-Term Securities 821,740 821,740 1.0
Total Investments $ 80,607,829 78,498,057 100.0
============
Other Assets Less Liabilities 13,418 0.0
------------ ------
Net Assets $ 78,511,475 100.0%
============ ======
<FN>
*Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of May 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$80,607,829) (Note 1a) $ 78,498,057
Cash 674
Foreign cash (Note 1b) 256,081
Receivables:
Securities sold $ 673,484
Capital shares sold 147,336
Dividends 60,000 880,820
------------
Deferred organization expenses (Note 1f) 63,819
Prepaid registration fees and other assets (Note 1f) 88,174
------------
Total assets 79,787,625
------------
Liabilities: Payables:
Securities purchased 1,007,161
Distributor (Note 2) 56,051
Investment adviser (Note 2) 53,498
Capital shares redeemed 34,492 1,151,202
------------
Accrued expenses and other liabilities 124,948
------------
Total liabilities 1,276,150
------------
Net Assets: Net assets $ 78,511,475
============
Net Assets Class A Shares of Common Stock, $.10 par value, 100,000,000 shares
Consist of: authorized $ 21,882
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 571,587
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 113,862
Class D Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 86,427
Paid-in capital in excess of par 78,942,488
Undistributed investment income--net 343,852
Undistributed realized capital gains on investments and foreign currency
transactions--net 543,319
Unrealized depreciation on investments and foreign currency
transactions--net (2,111,942)
------------
Net assets $ 78,511,475
============
Net Asset Value: Class A--Based on net assets of $2,168,467 and 218,817 shares
outstanding $ 9.91
============
Class B--Based on net assets of $56,524,968 and 5,715,876 shares
outstanding $ 9.89
============
Class C--Based on net assets of $11,257,366 and 1,138,616 shares
outstanding $ 9.89
============
Class D--Based on net assets of $8,560,674 and 864,276 shares
outstanding $ 9.91
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Period December 26, 1997++ to May 31, 1998
<S> <S> <C> <C>
Investment Dividends (net of $2,588 foreign withholding tax) $ 1,309,056
Income Interest and discount earned 204,287
(Notes 1d & 1e): ------------
Total income 1,513,343
------------
Expenses: Investment advisory fees (Note 2) $ 250,899
Account maintenance and distribution fees--Class B (Note 2) 214,263
Printing and shareholder reports 42,338
Account maintenance and distribution fees--Class C (Note 2) 39,715
Registration fees (Note 1f) 29,263
Transfer agent fees--Class B (Note 2) 20,569
Accounting services (Note 2) 17,401
Professional fees 12,221
Directors' fees and expenses 11,130
Account maintenance fees--Class D (Note 2) 8,521
Custodian fees 7,058
Amortization of organization expenses (Note 1f) 6,253
Transfer agent fees--Class C (Note 2) 3,948
Transfer agent fees--Class D (Note 2) 2,726
Pricing fees 956
Transfer agent fees--Class A (Note 2) 558
Other 2,615
------------
Total expenses 670,434
------------
Investment income--net 842,909
------------
Realized & Realized gain (loss) from:
Unrealized Investments--net 545,657
Gain (Loss) on Foreign currency transactions--net (2,338) 543,319
Investments & ------------
Foreign Currency Unrealized depreciation on:
Transactions--Net Investments--net (2,109,772)
(Notes 1b, 1c, Foreign currency transactions--net (2,170) (2,111,942)
1e & 3): ------------ ------------
Net realized and unrealized loss on investments and foreign
currency transactions (1,568,623)
------------
Net Decrease in Net Assets Resulting from Operations $ (725,714)
============
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
For the Period
December 26, 1997++
Increase (Decrease) in Net Assets: to May 31, 1998
<S> <S> <C>
Operations: Investment income--net $ 842,909
Realized gain on investments and foreign currency transactions--net 543,319
Unrealized depreciation on investment and foreign currency
transactions--net (2,111,942)
------------
Net decrease in net assets resulting from operations (725,714)
------------
Dividends to Investment income--net:
Shareholders Class A (16,546)
(Note 1g): Class B (344,521)
Class C (70,360)
Class D (67,630)
------------
Net decrease in net assets resulting from dividends to shareholders (499,057)
------------
Capital Share Net increase in net assets derived from capital share transactions 79,636,246
Transactions ------------
(Note 4):
Net Assets: Total increase in net assets 78,411,475
Beginning of period 100,000
------------
End of period* $ 78,511,475
============
<FN>
*Undistributed investment income--net $ 343,852
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements For the Period December 26, 1997++ to
May 31, 1998
Increase (Decrease) in Net Asset Value: Class A Class B Class C Class D
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .21 .16 .17 .22
Realized and unrealized loss on investments and
foreign currency transactions--net (.21) (.21) (.21) (.23)
-------- -------- -------- --------
Total from investment operations -- (.05) (.04) (.01)
-------- -------- -------- --------
Less dividends from investment income--net (.09) (.06) (.07) (.08)
-------- -------- -------- --------
Net asset value, end of period $ 9.91 $ 9.89 $ 9.89 $ 9.91
======== ======== ======== ========
Total Investment Based on net asset value per share (.07%)+++ (.49%)+++ (.47%)+++ (.13%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.36%* 2.38%* 2.38%* 1.62%*
Net Assets: ======== ======== ======== ========
Investment income--net 3.80%* 2.73%* 2.77%* 3.52%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 2,168 $ 56,525 $ 11,257 $ 8,561
Data: ======== ======== ======== ========
Portfolio turnover 43.71% 43.71% 43.71% 43.71%
======== ======== ======== ========
Average commission rate paid+++++ $ .0616 $ .0616 $ .0616 $ .0616
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
+++Aggregate total investment return.
+++++The "Average Commission Rate Paid" includes commissions paid in
foreign currencies, which have been converted into US dollars using
the prevailing exchange rate on the date of the transaction. Such
conversions may significantly affect the rate shown.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Real Estate Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. Prior to commencement of
operations on December 26, 1997, the Fund had no operations other
than those relating to organizational matters and the issue of
10,000 capital shares of the Fund to Merrill Lynch Asset Management,
L.P. ("MLAM") for $100,000 on September 24, 1997. These unaudited
financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a
normal recurring nature. The Fund offers four classes of shares
under the Merrill Lynch Select Pricing SM System. Shares of Class A
and Class D are sold with a front-end sales charge. Shares of Class
B and Class C may be subject to a contingent deferred sales charge.
All classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to
the account maintenance of such shares, and Class B and Class C
Shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
NOTES TO FINANCIAL STATEMENTS (continued)
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such
contracts. Premium or discount is amortized over the life of the
contracts.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts as
a hedge against adverse changes in the interest rate. A futures
contract is an agreement between two parties to buy and sell a
security, respectively, for a set price on a future date. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to
its shareholders. Therefore, no Federal income tax provision is
required. Under the applicable foreign tax law, a withholding tax
may be imposed on interest and capital gains at various rates.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Dividends from foreign securities where the ex-
dividend date may have passed are subsequently recorded when the
Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis.
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
MLAM. The general partner of MLAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. As
compensation for its services to the Fund, MLAMreceives monthly
compensation at the annual rate of 0.85% of the average daily net
assets of the Fund.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the period December 26, 1997 to May 31, 1998, MLFD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of the Fund's Class D Shares as follows:
MLFD MLPF&S
Class D $3,492 $216,706
For the period December 26, 1997 to May 31, 1998, MLPF&S received
contingent deferred sales charges of $14,574 and $7,208 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $26,696 in commissions on the execution
of portfolio security transactions for the Fund for the period
December 26, 1997 to May 31, 1998.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLFD, MLFDS, PSI and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period December 26, 1997 to May 31, 1998 were $101,896,497
and $22,655,894, respectively.
Net realized gains (losses) for the period December 26, 1997 to May
31, 1998 and net unrealized losses as of May 31, 1998 were as
follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $ 545,613 $(2,109,772)
Short-term investments 44 --
Foreign currency transactions (2,338) (2,170)
----------- -----------
Total $ 543,319 $(2,111,942)
=========== ===========
As of May 31, 1998, net unrealized depreciation for Federal income
tax purposes aggregated $2,109,772, of which $1,035,745 related to
appreciated securities and $3,145,517 related to depreciated
securities. At May 31, 1998, the aggregate cost of investments for
Federal income tax purposes was $80,607,829.
4. Capital Share Transactions:
The net increase in net assets derived from capital share
transactions was $79,636,246 for the period ended May 31, 1998.
Transactions in shares for each class were as follows:
Class A Shares for the Period Dollar
Dec. 26, 1997++ to May 31, 1998 Shares Amount
Shares sold 224,256 $ 2,257,036
Shares issued to shareholders in
reinvestment of dividends 1,299 13,356
----------- -----------
Total issued 225,555 2,270,392
Shares redeemed (9,238) (93,512)
----------- -----------
Net increase 216,317 $ 2,176,880
=========== ===========
[FN]
++Prior to December 26, 1997 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
Class B Shares for the Period
December 26, 1997++ to Dollar
May 31, 1998 Shares Amount
Shares sold 5,930,301 $ 59,581,854
Shares issued to shareholders
in reinvestment of dividends 24,614 252,788
----------- ------------
Total issued 5,954,915 59,834,642
Shares redeemed (239,954) (2,429,801)
Automatic conversion of shares (1,585) (16,069)
----------- ------------
Net increase 5,713,376 $ 57,388,772
=========== ============
[FN]
++Prior to December 26, 1997 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class C Shares for the Period
December 26, 1997++ to Dollar
May 31, 1998 Shares Amount
Shares sold 1,242,753 $ 12,516,491
Shares issued to shareholders
in reinvestment of dividends 5,809 59,656
----------- ------------
Total issued 1,248,562 12,576,147
Shares redeemed (112,446) (1,147,832)
----------- ------------
Net increase 1,136,116 $ 11,428,315
=========== ============
[FN]
++Prior to December 26, 1997 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class D Shares for the Period
December 26, 1997++ to Dollar
May 31, 1998 Shares Amount
Shares sold 911,424 $ 9,149,238
Automatic conversion of shares 1,584 16,069
Shares issued to shareholders in
reinvestment of dividends 4,092 42,064
----------- ------------
Total issued 917,100 9,207,371
Shares redeemed (55,324) (565,092)
----------- ------------
Net increase 861,776 $ 8,642,279
=========== ============
[FN]
++Prior to December 26, 1997 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
5. Commitments:
At May 31, 1998, the Fund had entered into foreign exchange
contracts under which it had agreed to purchase various foreign
currencies with an approximate value of $2,000.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1998
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Steven B. Swensrud, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Jay L. Willoughby, Senior Vice President
and Portfolio Manager
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
Philip M. Mandel, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863