MERRILL LYNCH
REAL ESTATE
FUND, INC.
FUND LOGO
Semi-Annual Report
May 31, 1999
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
Real estate-related securities experienced a strong rally for the
three months ended May 31, 1999. Merrill Lynch Real Estate Fund,
Inc. participated in the move, with total returns of +10.67%,
+10.37%, +10.24% and +10.47% for Class A, Class B, Class C and Class
D Shares, respectively. These returns compare favorably to the
+5.48% return of the Standard & Poor's 500 (S&P 500) Index, -1.78%
return on the ten-year Treasury note and +11.38% return for real
estate stocks as measured by the unmanaged Morgan Stanley REIT (Real
Estate Investment Trust) Index for the quarter ended May 31, 1999.
(Fund performance does not reflect sales charges, and would be lower
if sales charges were included. Complete performance information can
be found on pages 3 and 4 of this report to shareholders.)
The ten-year Treasury note's return for the May quarter is now the
poorest performer among comparable passive investments on a year to
date basis. We are encouraged by the newfound strength of the real
estate securities markets and continue to believe that over the
balance of the year our value-oriented stock selection should
improve the Fund's relative performance.
Investment Outlook
In our last report to shareholders, we emphasized our belief that
the REIT market was very attractively valued. The problem as we saw
it was negative flow of funds into the real estate stock sector. We
remained fully invested in spite of our inability to point to a
specific catalyst that might turn the fund flows around. Although we
did not know it at the time, legendary investor Warren Buffett was
purchasing shares in several REIT stocks for his personal account.
As this news became public, other investors began to recognize the
attractive value that we saw in REITs. As redemptions abated, REIT
fund portfolio managers were no longer forced to sell stocks. The
lack of selling, coupled with a few modest institutional buy
programs, caused the Morgan Stanley REIT Index to regain all of the
year's earlier losses and move to modest positive returns.
Prospects for continued investor interest seem bright. As concerns
about rising interest rates mount, some analysts see early signs of
market rotation out of the more growth-oriented stocks into more
defensive value-oriented stocks, which should help REITs. Several
strategists view REITs favorably at the present time. Coupled with
the better performance of the group, modest valuations and
attractive dividend yields, the ongoing high-profile investor
interest should be enough to keep investment dollars flowing into
the sector. We believe that if investors continue to favor more
defensive, value-oriented stocks, it would be a significant longer
term positive for REITs.
REITs today remain conservatively valued relative to other
investment alternatives. The average S&P 500 stock's price/earnings
multiple is still about 2.7 times the comparable REIT multiple of
adjusted funds from operations (AFFO). This is 65% above its average
over the last five years. Similarly, REITs' AFFO yields exceed the
ten-year Treasury yield by nearly 375 basis points (3.75%). This
continues to track in the upper end of the historical range, and
nearly 125 basis points above the five-year average. In our view,
these valuations indicate that REITs still have upside potential
relative to these other investment alternatives, even after their
recent rebound.
Fundamentals within the real estate sector remain intact. In
general, new construction continues to trend marginally higher. Some
months show higher permits and/or starts, while other months show
declines. On balance, most of the respected sources continue to
believe that while new supply is increasing (in some cases slightly
faster than new demand), it does not appear to be accelerating at a
rate that will threaten the overall health of the real estate
markets. We would tend to agree with this outlook. While some doubt
the ability of the public markets to exert discipline on private
investors, we continue to believe that excessive overbuilding will
not occur on a national basis. In fact, we expect that the
occasional pocket of overbuilding in a particular property type in a
particular city will add to the public markets' ability to act as a
governor over both public and private developers.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
Robust first-quarter earnings from REITs in all areas seem to
support our view that the underlying real estate fundamentals remain
healthy. Across the board, earnings generally met or exceeded
analysts' expectations, growing by 11% over the first quarter last
year. This is faster than previous consensus expectations, and has
caused some analysts to start raising their forecasts for 1999. This
newfound confidence in analyst estimates is helping to bolster REIT
investors' confidence and is an important element in the bullish
case for REITs over the balance of this year and next.
However, there are some hurdles for REITs to overcome during the
second half of the year. First, the threat of the Internet continues
to loom over the retail market. On the one hand, the leasing
environment is healthier than it has been for many years. Lease
rates continue to rise, vacancy continues to decline and new and
existing tenants continue to expand into new markets. These trends
seem to be especially true in the regional mall format, but hold for
factory outlets and neighborhood shopping centers as well. However,
on the other hand, projected ten-fold growth in Internet retail
sales from about $10 billion in 1998 to $100 billion in 2003 keeps
investors nervous. According to Merrill Lynch Global Securities
Research, this rapid growth in Internet sales would consume about
50% of the total increase in retail sales over the 1998--2003
period. This, in turn, is likely to weaken landlords' ability to
raise rents. We remain underweight in the retail sector, not based
on current valuations, but rather in deference to stock market
valuations accorded to the leading Internet companies.
Second, there appears to be a potentially large pipeline of equity
offerings, which we view with mixed emotions. We appreciate the
concerns investors have about too much new issuance swamping the
just re-emerging demand for REIT shares. However, since the equity
market has been effectively closed over the past year to REITs that
needed to raise additional capital, they have become more leveraged.
For those REITS deserving of new equity, we believe recharging their
balance sheets makes sense and will probably enhance their ability
to continue to grow into the future. On balance, we view additional
equity offerings by REITS as necessary, even though they are likely
to interrupt the current rally. However, we hope that the
interruption will be a temporary pause in a longer-term upward trend
for REIT shares.
Investment Strategy
We continue to pursue the "barbell" strategy we have outlined in
previous letters to shareholders. This strategy emphasizes office
companies and triple net lease companies as the aggressive and
defensive components within our portfolio. (Triple net lease
companies require their tenants to pay taxes, insurance and
operating expenses.) In general, both types of stocks began to
perform better during the May quarter.
Several of our stocks performed exceptionally well over the last
quarter, providing returns in excess of 20%. Of the six stocks to
produce such high quarterly returns, three were in the office sector
and included Prentiss Properties Trust, Tower Realty Trust, Inc. and
Parkway Properties, Inc. We continue to believe in the potential of
these stocks. Although many of our holdings appreciated
dramatically, Prison Realty Corporation has continued to hurt our
relative performance. Several recent incidents have caused investors
to further question management's judgment and access to capital. We
have used the stock price weakness as an opportunity to add to our
position, believing that the fundamentals of the private prison
business remain (unfortunately) very healthy and that management
will overcome current difficulties and remain the clear leader in
this field.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
In Conclusion
We remain optimistic on the prospects for our portfolio holdings. At
May quarter-end, on average, the Fund's holdings traded at 9.2 times
estimated 1999 funds from operations, with expected growth in cash
flows of 14% and dividend yields of 7.9%. In our view, these are
attractive characteristics and suggest that there may be further
upside potential if favorable fundamental trends continue in the
real estate sector.
We thank you for your continued investment in Merrill Lynch Real
Estate Fund, Inc., and we look forward to reviewing our outlook and
strategy with you again in our next report to shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Jay Willoughby)
Jay Willoughby
Senior Vice President and
Portfolio Manager
June 29, 1999
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 "Recent Performance
Results" and "Average Annual 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.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
PERFORMANCE DATA (concluded)
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Real Estate Fund, Inc. Class A Shares -8.45% +10.67% -8.52%
ML Real Estate Fund, Inc. Class B Shares -9.37 +10.37 -9.82
ML Real Estate Fund, Inc. Class C Shares -9.45 +10.24 -9.88
ML Real Estate Fund, Inc. Class D Shares -8.80 +10.47 -8.92
<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 asset value on the ex-dividend date. The
Fund's inception date is 12/26/97.
</TABLE>
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/99 -19.99% -24.19%
Inception (12/26/97)
through 3/31/99 -13.50 -17.12
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/99 -20.78% -23.82%
Inception (12/26/97)
through 3/31/99 -14.38 -16.34
[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*
Year Ended 3/31/99 -20.84% -21.60%
Inception (12/26/97)
through 3/31/99 -14.43 -14.43
[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*
Year Ended 3/31/99 -20.22% -24.41%
Inception (12/26/97)
through 3/31/99 -13.76 -17.38
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS
<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 Camden Property Trust $ 817,304 $ 823,125 1.5%
30,000 Summit Properties Inc. 524,899 583,125 1.0
------------ ------------ ------
1,342,203 1,406,250 2.5
Diversified/ 354,300 Capital Automotive 4,969,824 4,583,756 8.3
Mixed Use 184,800 Entertainment Properties Trust 3,342,007 3,476,550 6.3
50,000 Glenborough Realty Trust Incorporated 843,750 915,625 1.6
5,000 National Golf Properties, Inc. 122,175 129,062 0.2
73,100 Pacific Gulf Properties, Inc. 1,542,817 1,626,475 2.9
250,000 Prison Realty Corporation 4,908,444 3,156,250 5.7
------------ ------------ ------
15,729,017 13,887,718 25.0
Factory Outlets 310,000 Prime Retail, Inc. 3,082,149 2,770,625 5.0
Health Care 180,000 Meditrust Companies 4,053,332 2,497,500 4.5
Hotels & Motels 10,000 Hospitality Properties Trust 268,125 271,250 0.5
25,000 Host Marriott Corporation 326,250 312,500 0.6
------------ ------------ ------
594,375 583,750 1.1
Office Property 45,000 CarrAmerica Realty Corporation 1,264,664 1,122,188 2.0
65,000 Crescent Real Estate Equities Company 2,145,845 1,499,063 2.7
70,000 Equity Office Properties Trust 2,044,169 1,977,500 3.6
30,000 Highwoods Properties, Inc. 1,007,939 789,375 1.4
20,000 Kilroy Realty Corporation 421,100 495,000 0.9
25,000 Liberty Property Trust 598,687 603,125 1.1
15,000 Mack-Cali Realty Corporation 436,050 485,625 0.9
10,000 Parkway Properties, Inc. 289,450 330,625 0.6
139,000 Prentiss Properties Trust 3,161,075 3,283,875 5.9
40,000 Tower Realty Trust, Inc. 747,462 926,313 1.7
------------ ------------ ------
12,116,441 11,512,689 20.8
Regional Malls 115,000 Glimcher Realty Trust 2,265,050 1,947,813 3.5
105,000 JP Realty, Inc. 2,230,116 2,145,937 3.9
75,000 Simon Property Group, Inc. 1,875,750 2,193,750 3.9
------------ ------------ ------
6,370,916 6,287,500 11.3
Shopping Centers 30,000 Developers Diversified Realty Corporation 475,875 495,000 0.9
30,000 New Plan Excel Realty Trust 560,250 600,000 1.1
40,000 Philips International Realty Corp. 692,750 642,500 1.1
85,000 Regency Realty Corporation 2,066,988 1,875,312 3.4
------------ ------------ ------
3,795,863 3,612,812 6.5
Storage 50,000 Public Storage, Inc. 1,344,550 1,459,375 2.6
35,000 Storage USA, Inc. 1,317,577 1,168,125 2.1
------------ ------------ ------
2,662,127 2,627,500 4.7
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Shares Value Percent of
Industries Held Real Estate Investment Trusts Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Warehouse/Industrial 40,000 AMB Property Corporation $ 891,925 $ 900,000 1.6%
45,000 Cabot Industrial Trust 892,237 967,500 1.7
10,000 ProLogis Trust 200,700 204,375 0.4
------------ ------------ ------
1,984,862 2,071,875 3.7
Total Real Estate Investment Trusts 51,731,285 47,258,219 85.1
Common Stocks
Diversified/ 51,400 ++Security Capital Group Incorporated (Class B) 684,370 761,362 1.4
Mixed Use 165,000 TrizecHahn Corporation 3,725,771 3,403,125 6.1
1,250,000 Wihlborgs Fastigheter AB (Class B) 1,381,730 1,413,994 2.6
------------ ------------ ------
5,791,871 5,578,481 10.1
Health Care 25,000 ++Assisted Living Concepts, Inc. 80,938 70,313 0.1
30,000 ++Sunrise Assisted Living, Inc. 1,044,501 1,110,000 2.0
------------ ------------ ------
1,125,439 1,180,313 2.1
Hotels & Motels 40,000 ++Promus Hotel Corporation 1,293,637 1,000,000 1.8
Total Common Stocks 8,210,947 7,758,794 14.0
Face
Amount Short-Term Securities
Commercial Paper* $ 100,000 General Motors Acceptance Corp., 4.94%
due 6/01/1999 99,959 99,959 0.2
Total Short-Term Securities 99,959 99,959 0.2
Total Investments $ 60,042,191 55,116,972 99.3
============
Other Assets Less Liabilities 416,078 0.7
------------ ------
Net Assets $ 55,533,050 100.0%
============ ======
<FN>
*Commercial Paper is traded on a discount basis; the interest rate
shown reflects 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, 1999
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of May 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$60,042,191) (Note 1a) $ 55,116,972
Cash 966
Foreign cash (Note 1b) 1,166
Receivables:
Securities sold $ 582,331
Capital shares sold 194,236
Dividends 44,579 821,146
------------
Deferred organization expenses (Note 1f) 63,003
Prepaid registration fees and other assets (Note 1f) 56,351
------------
Total assets 56,059,604
------------
Liabilities: Payables:
Securities purchased 243,100
Capital shares redeemed 172,270
Investment adviser (Note 2) 36,422
Distributor (Note 2) 34,969 486,761
------------
Accrued expenses and other liabilities 39,793
------------
Total liabilities 526,554
------------
Net Assets: Net assets $ 55,533,050
============
Net Assets Class A Shares of Common Stock, $.10 par value, 100,000,000 shares
Consist of: authorized $ 64,500
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 416,320
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 85,692
Class D Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 77,926
Paid-in capital in excess of par 66,737,121
Undistributed investment income--net 145,295
Accumulated realized capital losses on investments and foreign currency
transactions--net (Note 5) (7,068,244)
Unrealized depreciation on investments and foreign currency
transactions--net (4,925,560)
------------
Net assets $ 55,533,050
============
Net Asset Value: Class A--Based on net assets of $5,564,130 and 645,001 shares
outstanding $ 8.63
============
Class B--Based on net assets of $35,868,708 and 4,163,199 shares
outstanding $ 8.62
============
Class C--Based on net assets of $7,379,144 and 856,916 shares
outstanding $ 8.61
============
Class D--Based on net assets of $6,721,068 and 779,263 shares
outstanding $ 8.62
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Six Months Ended May 31, 1999
<S> <S> <C> <C>
Investment Dividends (net of $11,026 foreign withholding tax) $ 2,035,453
Income Interest and discount earned 9,129
(Notes 1d & 1e): ------------
Total income 2,044,582
------------
Expenses: Investment advisory fees (Note 2) $ 226,244
Account maintenance and distribution fees--Class B (Note 2) 183,606
Registration fees (Note 1f) 66,296
Account maintenance and distribution fees--Class C (Note 2) 39,087
Printing and shareholder reports 36,397
Accounting services (Note 2) 32,178
Professional fees 28,822
Transfer agent fees--Class B (Note 2) 23,892
Custodian fees 11,750
Directors' fees and expenses 11,686
Amortization of organization expenses (Note 1f) 7,111
Account maintenance fees--Class D (Note 2) 7,078
Transfer agent fees--Class C (Note 2) 5,277
Transfer agent fees--Class D (Note 2) 3,042
Transfer agent fees--Class A (Note 2) 1,679
Pricing fees 350
Other 7,102
------------
Total expenses 691,597
------------
Investment income--net 1,352,985
------------
Realized & Realized loss from:
Unrealized Investments--net (3,070,142)
Gain (Loss) on Foreign currency transactions--net (476) (3,070,618)
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net 2,229,777
(Notes 1b, 1c, Foreign currency transactions--net (1,025) 2,228,752
1e & 3): ------------ ------------
Net realized and unrealized loss on investments and
foreign currency transactions (841,866)
------------
Net Increase in Net Assets Resulting from Operations $ 511,119
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the For the Period
Six Months Dec. 26, 1997++
Ended May 31, to Nov. 30,
Increase (Decrease) in Net Assets: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 1,352,985 $ 1,731,891
Realized loss on investments and foreign currency
transactions--net (3,070,618) (4,010,701)
Change in unrealized appreciation/depreciation on investments
and foreign currency transactions--net 2,228,752 (7,154,312)
------------ ------------
Net increase (decrease) in net assets resulting from operations 511,119 (9,433,122)
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (70,484) (56,990)
(Note 1g): Class B (986,704) (1,018,928)
Class C (214,541) (216,101)
Class D (164,827) (197,931)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (1,436,556) (1,489,950)
------------ ------------
Capital Share Net increase (decrease) in net assets derived from capital
Transactions share transactions (6,284,319) 73,565,878
(Note 4): ------------ ------------
Net Assets: Total increase (decrease)in net assets (7,209,756) 62,642,806
Beginning of period 62,742,806 100,000
------------ ------------
End of period* $ 55,533,050 $ 62,742,806
============ ============
<FN>
*Undistributed investment income--net $ 145,295 $ 228,866
============ ============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
Class A++++ Class B++++
For the For the
For the Period For the Period
The following per share data and ratios have been derived Six Months Dec. 26, Six Months Dec. 26,
from information provided in the financial statements. Ended 1997++ to Ended 1997++ to
May 31, Nov. 30, May 31, Nov. 30,
Increase (Decrease) in Net Asset Value: 1999 1998 1999 1998
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.70 $ 10.00 $ 8.69 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .22 .33 .20 .24
Realized and unrealized loss on investments and
foreign currency transactions--net (.04) (1.37) (.06) (1.36)
-------- -------- -------- --------
Total from investment operations .18 (1.04) .14 (1.12)
-------- -------- -------- --------
Less dividends from investment income--net (.25) (.26) (.21) (.19)
-------- -------- -------- --------
Net asset value, end of period $ 8.63 $ 8.70 $ 8.62 $ 8.69
======== ======== ======== ========
Total Investment Based on net asset value per share 2.29%+++ (10.57%)+++ 1.74%+++ (11.36%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.74%* 1.39%* 2.74%* 2.41%*
Net Assets: ======== ======== ======== ========
Investment income--net 5.77%* 3.67%* 4.90%* 2.58%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 5,564 $ 2,255 $ 35,869 $ 44,482
Data: ======== ======== ======== ========
Portfolio turnover 29.86% 108.25% 29.86% 108.25%
======== ======== ======== ========
<CAPTION>
Class C++++ Class D++++
For the For the
For the Period For the Period
The following per share data and ratios have been derived Six Months Dec. 26, Six Months Dec. 26,
from information provided in the financial statements. Ended 1997++ to Ended 1997++ to
May 31, Nov. 30, May 31, Nov. 30,
Increase (Decrease) in Net Asset Value: 1999 1998 1999 1998
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.68 $ 10.00 $ 8.70 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .21 .24 .23 .30
Realized and unrealized loss on investments and
foreign currency transactions--net (.07) (1.37) (.07) (1.36)
-------- -------- -------- --------
Total from investment operations .14 (1.13) .16 (1.06)
-------- -------- -------- --------
Less dividends from investment income--net (.21) (.19) (.24) (.24)
-------- -------- -------- --------
Net asset value, end of period $ 8.61 $ 8.68 $ 8.62 $ 8.70
======== ======== ======== ========
Total Investment Based on net asset value per share 1.73%+++ (11.41%)+++ 2.04%+++ (10.74%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.74%* 2.42%* 1.97%* 1.64%*
Net Assets: ======== ======== ======== ========
Investment income--net 5.20%* 2.63%* 5.75%* 3.34%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 7,379 $ 9,737 $ 6,721 $ 6,269
Data: ======== ======== ======== ========
Portfolio turnover 29.86% 108.25% 29.86% 108.25%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
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. The Fund's financial statements
are prepared in accordance with generally accepted accounting
principles which may require the use of management accruals and
estimates. 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 or
purchased are valued at the last sale price in the case of exchange-
traded options. In the case of options traded in the over-the-
counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). 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.
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.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
NOTES TO FINANCIAL STATEMENTS (continued)
* 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 period not exceeding five years. 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
Merrill Lynch Asset Management, L.P. ("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 ("MLFD" or the "Distributor"), a division of Princeton
Funds Distributor, Inc. ("PFD"), which is 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, MLAM receives monthly
compensation at the annual rate of 0.85% of the average daily net
assets of the Fund.
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 Incorporated ("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.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
For the six months ended May 31, 1999, 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 $1,855 $39,683
For the six months ended May 31, 1999, MLPF&S received contingent
deferred sales charges of $119,790 and $8,498 relating to
transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $1,650 in commissions on the execution
of portfolio security transactions for the Fund for the six months
ended May 31, 1999.
Financial Data Services, Inc. ("FDS"), 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, PFD, FDS, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended May 31, 1999 were $16,284,531 and
$23,544,336, respectively.
Net realized losses for the six months ended May 31, 1999 and net
unrealized losses as of May 31, 1999 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(3,070,142) $(4,925,219)
Foreign currency transactions (476) (341)
----------- -----------
Total $(3,070,618) $(4,925,560)
=========== ===========
As of May 31, 1999, net unrealized depreciation for Federal income
tax purposes aggregated $4,925,219, of which $1,588,342 related to
appreciated securities and $6,513,561 related to depreciated
securities. At May 31, 1999, the aggregate cost of investments for
Federal income tax purposes was $60,042,191.
4. Capital Share Transactions:
The net increase (decrease) in net assets derived from capital share
transactions was $(6,284,319) and $73,565,878 for the six months
ended May 31, 1999 and for the period December 26, 1997 to November
30, 1998.
Class A Shares for the Six Months Dollar
Ended May 31, 1999 Shares Amount
Shares sold 486,780 $ 4,083,929
Shares issued to shareholders in
reinvestment of dividends 6,947 56,179
--------- ------------
Total issued 493,727 4,140,108
Shares redeemed (107,898) (895,489)
--------- ------------
Net increase 385,829 $ 3,244,619
========= ============
Class A Shares for the Period
December 26, 1997++ to Dollar
November 30, 1998 Shares Amount
Shares sold 377,111 $ 3,593,591
Shares issued to shareholders in
reinvestment of dividends 4,933 45,780
--------- ------------
Total issued 382,044 3,639,371
Shares redeemed (125,372) (1,090,914)
--------- ------------
Net increase 256,672 $ 2,548,457
========= ============
[FN]
++Prior to December 26, 1997 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
Class B Shares for the Six Months Dollar
Ended May 31, 1999 Shares Amount
Shares sold 305,609 $ 2,543,193
Shares issued to shareholders in
reinvestment of dividends 89,526 730,142
--------- ------------
Total issued 395,135 3,273,335
Shares redeemed (1,344,879) (11,075,330)
Automatic conversion of shares (7,534) (60,703)
--------- ------------
Net decrease (957,278) $ (7,862,698)
========= ============
Class B Shares for the Period
December 26, 1997++ to Dollar
November 30, 1998 Shares Amount
Shares sold 6,447,479 $ 64,264,672
Shares issued to shareholders in
reinvestment of dividends 79,692 749,347
--------- ------------
Total issued 6,527,171 65,014,019
Shares redeemed (1,389,954) (12,500,414)
Automatic conversion of shares (19,240) (183,702)
--------- ------------
Net increase 5,117,977 $ 52,329,903
========= ============
[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, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Six Months Dollar
Ended May 31, 1999 Shares Amount
Shares sold 231,218 $ 1,899,170
Shares issued to shareholders in
reinvestment of dividends 21,501 175,480
--------- ------------
Total issued 252,719 2,074,650
Shares redeemed (517,331) (4,258,494)
--------- ------------
Net decrease (264,612) $ (2,183,844)
========= ============
Class C Shares for the Period
December 26, 1997++ to Dollar
November 30, 1998 Shares Amount
Shares sold 1,420,370 $ 14,079,175
Shares issued to shareholders in
reinvestment of dividends 19,205 179,846
--------- ------------
Total issued 1,439,575 14,259,021
Shares redeemed (320,547) (2,985,037)
--------- ------------
Net increase 1,119,028 $ 11,273,984
========= ============
[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 Six Months Dollar
Ended May 31, 1999 Shares Amount
Shares sold 235,119 $ 1,994,023
Automatic conversion of shares 7,526 60,703
Shares issued to shareholders in
reinvestment of dividends 11,657 94,871
--------- ------------
Total issued 254,302 2,149,597
Shares redeemed (195,636) (1,631,993)
--------- ------------
Net increase 58,666 $ 517,604
========= ============
Class D Shares for the Period
December 26, 1997++ to Dollar
November 30, 1998 Shares Amount
Shares sold 966,865 $ 9,656,369
Automatic conversion of shares 19,213 183,702
Shares issued to shareholders in
reinvestment of dividends 12,854 121,219
--------- ------------
Total issued 998,932 9,961,290
Shares redeemed (280,835) (2,547,756)
--------- ------------
Net increase 718,097 $ 7,413,534
========= ============
[FN]
++Prior to December 26, 1997 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.
5. Capital Loss Carryforward:
At November 30, 1998, the Fund had a net capital loss carryforward
of approximately $3,459,000, all of which expires in 2006. This
amount will be available to offset like amounts of any future
taxable gains.
Merrill Lynch Real Estate Fund, Inc.
May 31, 1999
PORTFOLIO INFORMATION
As of May 31, 1999
Percent of
Ten Largest Holdings Net Assets
Capital Automotive 8.3%
Entertainment Properties Trust 6.3
TrizecHahn Corporation 6.1
Prentiss Properties Trust 5.9
Prison Realty Corporation 5.7
Prime Retail, Inc. 5.0
Meditrust Companies 4.5
Simon Property Group, Inc. 3.9
JP Realty, Inc. 3.9
Equity Office Properties Trust 3.6
Portfolio Changes for the Quarter
Ended May 31, 1999
Additions
AMB Property Corporation
Assisted Living Concepts, Inc.
*Chelsea GCA Realty Inc.
Developers Diversified
Realty Corporation
Glenborough Realty Trust
Incorporated
Hospitality Properties Trust
Host Marriott Corporation
Liberty Property Trust
National Golf Properties, Inc.
New Plan Excel Realty Trust
Parkway Properties, Inc.
ProLogis Trust
Promus Hotel Corporation
Sunrise Assisted Living, Inc.
Deletions
Avalonbay Communities,
Inc.
*Chelsea GCA Realty Inc.
Cousins Properties, Inc.
IRSA Inversiones y
Representaciones SA
(GDR)
[FN]
*Added and deleted in the
same quarter.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Steven B. Swensrud, Director
Arthur Zeikel, Director
Jay L. Willoughby, Senior Vice President
and Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Philip M. Mandel, Secretary of Merrill Lynch Real Estate Fund, Inc.
has recently retired. His colleagues at Merrill Lynch Asset
Management, L.P. join the Fund's Board of Directors in wishing Mr.
Mandel well in his retirement.
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
