MERRILL LYNCH
REAL ESTATE
FUND, INC.
FUND LOGO
Annual Report
November 30, 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
Fiscal Year in Review
Merrill Lynch Real Estate Fund, Inc. ended its first fiscal year of
operations with relative performance better than absolute
performance. Since inception (December 26, 1997) through November
30, 1998, total returns for the Fund's Class A, Class B, Class C and
Class D Shares were -10.57%, -11.36%, -11.41% and -10.74%,
respectively. While performance was disappointing on an absolute
basis, from December 31, 1997 to November 30, 1998 the Fund
outperformed the unmanaged Morgan Stanley Real Estate Investment
Trust Index, the unmanaged Wilshire Real Estate Securities Index and
the Lipper Real Estate Funds Average, which declined -15.40%,
- -16.19% and -15.07%, respectively, for the same period. (Fund results
do 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.)
Stock selection was the primary reason for the Fund's relative
outperformance. Early in the year, several of the Fund's holdings
performed better than real estate investment trusts (REITs) in
general. Subsequently, we were able to sell these stocks and move
into some of the more undervalued companies. Adherence to our value-
oriented investment discipline during the fiscal year made it easier
to sell stocks that had declined in relative attractiveness. This
benefited Fund performance.
With the benefit of hindsight, we can point to several reasons for
the pressure on REITs' stock prices this year. One reason was a
change in the legislation aimed at "paired share" REITs (a
combination of the common shares of two companies, one of which is a
REIT, that trade as one security). While this directly affected only
four REITs, it chilled investor interest in the entire sector. This
was compounded early in the year by an active financing calendar,
and by general fears that the acquisition environment was overheated
and that new development was about to take off. As the credit crunch
hit, and concerns about overbuilding began to subside, new concerns
about a sharp drop in demand developed. Simultaneously, some of the
more momentum-oriented investors moved out of the sector, noting
that peak growth rates may be behind us. This was exacerbated by a
relative lack of liquidity in the overall REIT market. Finally,
there were comparisons to the scenario of the late 1980s and early
1990s when supply far outpaced demand. While we have voiced some of
these concerns ourselves from time to time, we believe the REIT
market is significantly undervalued today. In our opinion, investors
are currently overestimating the risks inherent in the underlying
real estate markets.
The recent credit crunch, brought on by turmoil in the world's
financial markets, affected the capital-intensive real estate
industry more than most industries. During the height of the crisis,
REIT management teams were telling us that development debt was
simply no longer available for real estate. The mortgage-backed
securities market was especially hard-hit. While more traditional
sources of real estate debt--such as banks and insurance companies--
have since resumed lending, it is clear that debt financing is
scarce and more expensive than before the crisis. This is a mixed
blessing for REITs. While on the one hand it has reduced competition
for acquisitions and virtually shut down new development, many REITs
were active borrowers in the collateralized mortgage-backed
securities market. The reduced availability of capital will slow
external growth for some of these REITs. At the same time, it is
likely that the reduced development will ultimately strengthen
internal growth prospects for the entire industry.
Investment Environment
From a macroeconomic perspective, real estate fundamentals currently
are substantially better than they were in the 1980s. At that time,
there was essentially no public real estate securities market.
Accordingly, there was no public market governing power regulating
the flow of capital. In fact, the opposite was true as banks and
savings and loans were competing to make development loans, often
for more than 100% of the value of a project. This resulted in
massive construction throughout 1982--1989. For example, according
to Lehman Brothers/CB Commercial/Torto Wheaton Research, new
construction in the office sector during this period averaged about
100 million square feet per year, and vacancy rates headed toward
20%. In contrast, from 1992--1997, the same research sources report
Merrill Lynch Real Estate Fund, Inc.
November 30, 1998
that office completions were down sharply, averaging about 10
million square feet per year, and that vacancy rates were below 10%.
Other major differences between the late 1980s and late 1990s
include interest rates that were 10% then and are 5% now, and cap
rates (yields received at the time of purchase of real estate
investments) that were 5% then (as a result of aggressive Japanese
buyers) and are near 10% now. Most research points to more
construction in 1998--2000, which approximately matches anticipated
demand. In our view, limited new construction, low vacancy rates,
low interest rates and high yields demonstrate that today's
fundamentals are very different from those that prevailed in the
late 1980s.
It is still possible that there will be pockets of overbuilding from
time to time. For example, REIT "bears" point to the Atlanta and
Dallas office markets as having too much supply. Our expectation is
that the economy will continue to make modest progress and that this
space will be absorbed without significant negative consequences.
From a secular standpoint, we believe the capital allocation role
now played by the public markets is extremely important to the long-
term health of the real estate industry. This should lengthen the
traditional real estate cycle and reduce its volatility. If we are
correct, the risk premium (the cost associated with assuming
additional risk) demanded by investors should ultimately decline.
Lower risk premiums, coupled with stable to rising contractual
rental revenue streams, are likely to benefit REIT share prices in
the future.
On a microeconomic level, the repricing of risk has been painful to
many REIT stockowners and shows up dramatically in the relative
valuations versus the broader market. Using data from Merrill Lynch
Comparative Valuation REIT Weekly (November 30, 1998), as compared
to the Standard & Poor's 500 Index (S&P 500), REITs are the least
expensive they have been in five years. At month-end, the relative
multiple investors were willing to pay for the S&P 500 was over 2.5
times greater than what they would pay for REITs. For REITs to be
priced at their average relative multiple over the last five years
would imply a price gain for REITs of more than 60%.
Similarly, as compared to the current yield of the ten-year Treasury
bond, the average adjusted funds from operations (AFFO) REIT yield
is very high. With the exception of the last few months, it has not
exceeded the long-term Treasury bond yield by a wider margin in the
last five years. For REITs to be priced at their average yield
premium versus the ten-year Treasury suggests a price gain for REITs
of over 35%. While in our opinion the valuations on REIT shares are
currently very attractive, we do not mean to imply that we believe
REIT share prices will appreciate by 35%--60% in the upcoming year.
The funding calendar is likely to pick up from the third quarter
level of less than $100 million (out of about $8 billion year to
date). Hopefully, offsetting this will be a return of investor cash
flows into REIT-oriented mutual funds, including ours. Real estate
mutual funds have experienced net outflows virtually every month
since February. To date, that trend has not reversed. We look for
REIT cash flows to continue to grow in 1999, by about 10% on
average. Investors who have questioned REITs' ability to grow
earnings in a less favorable economic environment should be
pleasantly surprised. We also believe that REIT dividends will
continue to show mid-single digit growth next year.
Portfolio Matters
The quarter ended November 30, 1998 was better for most REITs as the
capital markets began to recover from the earlier capital crunch.
The Fund performed well, with Class A, Class B, Class C and Class D
Shares' total returns of +8.29%, +8.10%, +8.00% and +8.21%,
respectively. This compares favorably with the unmanaged Morgan
Stanley REIT Index (+5.83%), the unmanaged Wilshire Real Estate
Securities Index (+6.06%) and the Lipper Real Estate Funds Average
(+6.47%). Large holdings in office stocks, such as TrizecHahn
Corporation, Equity Office Properties Trust, Cousins Properties,
Inc. and Crescent Real Estate Equities Company, also helped the
Fund. Our general belief that the office sector would tend to
perform better in a market recovery was recognized during the
November quarter.
Looking ahead, we are excited about the prospects for the stocks in
our portfolio. We have made a conscious decision to own companies
with the highest-quality real estate and the strongest management
teams in the industry. We are currently able to do this at prices
that we believe are, on average, less than the prices the properties
are worth. Specifically, we are overweighted in the office sector
where expiring rents are rolling up to today's new higher rates,
helping to generate strong internal growth. We expect this sector to
perform particularly well if investors regain confidence in REITs.
We also have a large position in the triple net lease sector, where
we like the longer-term nature of the leases. This sector is likely
to perform particularly well if investors become more cautious. The
Merrill Lynch Real Estate Fund, Inc.
November 30, 1998
average dividend yield of the stocks in our portfolio is about
7.25%, the price to AFFO multiple is less than ten times, and the
average expected growth in cash flows next year is greater than 15%.
This is a portfolio that we believe will perform well both in an
absolute and relative sense in the coming 12 months.
We enter the New Year with a renewed sense of optimism. Real estate
fundamentals remain healthy, and the market has repriced real estate
shares, incorporating a much higher risk premium. We thank you for
your interest in and continued support of Merrill Lynch Real Estate
Fund, Inc., and we look forward to serving your investment needs in
the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Jay Willoughby)
Jay Willoughby
Senior Vice President and Portfolio Manager
January 19, 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 "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.
<TABLE>
Recent Performance Results*
<CAPTION>
3 Month Since Inception
Total Return Total Return
<S> <C> <C>
ML Real Estate Fund, Inc. Class A Shares +8.29% -10.57%
ML Real Estate Fund, Inc. Class B Shares +8.10 -11.36
ML Real Estate Fund, Inc. Class C Shares +8.00 -11.41
ML Real Estate Fund, Inc. Class D Shares +8.21 -10.74
<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 commenced operations on 12/26/97.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
November 30, 1998
PERFORMANCE DATA (concluded)
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the
Fund's Class A Shares, Class B Shares, Class C Shares and
Class D Shares compared to growth of an investment in the
Morgan Stanley REIT Index. Beginning and ending values are:
12/26/97** 11/98
ML Real Estate, Inc.++--
Class A Shares* $ 9,475 $ 8,473
ML Real Estate, Inc.++--
Class B Shares* $10,000 $ 8,517
ML Real Estate, Inc.++--
Class C Shares* $10,000 $ 8,772
ML Real Estate, Inc.++--
Class D Shares* $ 9,475 $ 8,457
Morgan Stanley REIT Index++++ $10,000 $ 8,460
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++ML Real Estate Fund, Inc. invests primarily in equity securities
of issuers that are principally engaged in the real estate industry.
++++This unmanaged Index is a total return index comprised of the
most actively traded real estate investment trusts. The starting
date for the Index is 12/31/97.
Past performance is not predictive of future performance.
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (12/26/97)
through 9/30/98 -11.72% -16.35%
[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 9/30/98 -12.43% -15.88%
[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 9/30/98 -12.41% -13.27%
[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 9/30/98 -11.93% -16.55%
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Real Estate Fund, Inc.
November 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Value Percent of
Industries Held Real Estate Investment Trusts Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C>
Apartments 47,000 Avalonbay Communities, Inc. $ 1,692,470 $ 1,592,125 2.5%
65,000 Camden Property Trust 1,853,348 1,669,687 2.7
80,000 Summit Properties Inc. 1,503,413 1,400,000 2.2
------------ ------------ ------
5,049,231 4,661,812 7.4
Diversified/ 355,000 Capital Automotive 5,085,700 4,703,750 7.5
Mixed Use 50,000 Cousins Properties, Inc. 1,446,125 1,543,750 2.5
190,000 Entertainment Properties Trust 3,462,037 3,503,125 5.6
73,100 Pacific Gulf Properties, Inc. 1,542,822 1,407,175 2.2
------------ ------------ ------
11,536,684 11,157,800 17.8
Factory Outlets 243,400 Prime Retail, Inc. 2,541,712 2,570,913 4.1
Health Care 195,000 Meditrust Companies 4,557,495 2,961,563 4.7
Hotel/Restaurant 30,000 Starwood Hotels & Resorts 1,030,925 911,250 1.5
Office Property 100,000 CarrAmerica Realty Corp. 2,970,596 2,425,000 3.9
125,000 Crescent Real Estate Equities Company 4,288,764 3,101,562 4.9
120,000 Equity Office Properties Trust 3,618,384 3,015,000 4.8
45,000 Highwoods Properties, Inc. 1,542,935 1,223,437 2.0
114,100 Kilroy Realty Corporation 2,667,376 2,552,987 4.1
20,000 Mack-Cali Realty Corporation 581,400 593,750 0.9
104,000 Prentiss Properties Trust 2,428,830 2,262,000 3.6
45,000 Tower Realty Trust, Inc. 867,525 846,563 1.3
------------ ------------ ------
18,965,810 16,020,299 25.5
Regional Malls 100,000 Glimcher Realty Trust 2,105,005 1,687,500 2.7
144,300 JP Realty, Inc. 3,306,643 3,219,694 5.1
25,000 Urban Shopping Centers, Inc. 830,516 821,875 1.3
------------ ------------ ------
6,242,164 5,729,069 9.1
Shopping Centers 45,000 Philips International Realty Corp. 780,250 697,500 1.1
95,000 Regency Realty Corporation 2,335,688 2,214,688 3.6
------------ ------------ ------
3,115,938 2,912,188 4.7
Storage 55,000 Public Storage, Inc. 1,479,275 1,460,938 2.3
35,000 Storage USA, Inc. 1,350,017 1,111,250 1.8
------------ ------------ ------
2,829,292 2,572,188 4.1
Warehouse/Industrial 215,000 Cabot Industrial Trust 4,435,037 4,501,562 7.2
Total Real Estate Investment Trusts 60,304,288 53,998,644 86.1
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
November 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Shares Value Percent of
Industries Held Common Stocks Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C>
Diversified/ 50,000 Castellum AB $ 500,576 $ 468,528 0.8%
Mixed Use 160,000 ++Corrections Corporation of America 3,385,569 3,280,000 5.2
180,000 TrizecHahn Corporation 4,070,883 3,712,500 5.9
1,150,000 Wihlborgs Fastigheter AB (Class B) 1,392,798 1,120,153 1.8
------------ ------------ ------
9,349,826 8,581,181 13.7
Hotel/Restaurant 40,000 ++Homestead Village Incorporated 343,207 262,500 0.4
Total Common Stocks 9,693,033 8,843,681 14.1
Total Investments $ 69,997,321 62,842,325 100.2
============
Liabilities in Excess of Other Assets (99,519) (0.2)
------------ ------
Net Assets $ 62,742,806 100.0%
============ ======
<FN>
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION
As of November 30, 1998
Percent of
Ten Largest Equity Holdings Net Assets
Capital Automotive 7.5%
Cabot Industrial Trust 7.2
TrizecHahn Corporation 5.9
Entertainment Properties Trust 5.6
Corrections Corporation of America 5.2
JP Realty, Inc. 5.1
Crescent Real Estate Equities Company 4.9
Equity Office Properties Trust 4.8
Meditrust Companies 4.7
Prime Retail, Inc. 4.1
Portfolio Changes for the Quarter
Ended November 30, 1998
Additions
Mack-Cali Realty Corporation
*Post Properties, Inc.
Deletions
Brandywine Realty Trust
Burnham Pacific Properties, Inc.
Federal Realty Investment Trust
MeriStar Hospitality Corporation
Patriot American Hospitality, Inc.
*Post Properties, Inc.
Taubman Centers, Inc.
[FN]
*Added and deleted in the same quarter.
Merrill Lynch Real Estate Fund, Inc.
November 30, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of November 30, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$69,997,321) (Note 1a) $ 62,842,325
Foreign cash (Note 1b) 135
Receivables:
Securities sold $ 201,916
Dividends 73,263
Capital shares sold 16,877 292,056
------------
Deferred organization expenses (Note 1f) 63,003
Prepaid registration fees and other assets (Note 1f) 53,407
------------
Total assets 63,250,926
------------
Liabilities: Payables:
Capital shares redeemed 175,772
Custodian bank (Note 1h) 123,383
Distributor (Note 2) 47,247
Investment adviser (Note 2) 45,114 391,516
------------
Accrued expenses and other liabilities 116,604
------------
Total liabilities 508,120
------------
Net Assets: Net assets $ 62,742,806
============
Net Assets Class A Shares of Common Stock, $.10 par value,
Consist of: 100,000,000 shares authorized $ 25,917
Class B Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 512,048
Class C Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 112,153
Class D Shares of Common Stock, $.10 par value,
100,000,000 shares authorized 72,059
Paid-in capital in excess of par 72,943,701
Undistributed investment income--net 228,866
Accumulated realized capital losses on investments and foreign currency
transactions--net (Note 5) (3,997,626)
Unrealized depreciation on investments and foreign currency
transactions--net (7,154,312)
------------
Net assets $ 62,742,806
============
Net Asset Value: Class A--Based on net assets of $2,255,323 and 259,172 shares
outstanding $ 8.70
============
Class B--Based on net assets of $44,481,562 and 5,120,477 shares
outstanding $ 8.69
============
Class C--Based on net assets of $9,737,420 and 1,121,528 shares
outstanding $ 8.68
============
Class D--Based on net assets of $6,268,501 and 720,597 shares
outstanding $ 8.70
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
November 30, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Period December 26, 1997++ to November 30, 1998
<S> <S> <C> <C>
Investment Dividends (net of $6,300 foreign withholding tax) $ 2,986,204
Income Interest and discount earned 217,505
(Notes 1d & 1e): ------------
Total income 3,203,709
------------
Expenses: Investment advisory fees (Note 2) $ 544,585
Account maintenance and distribution fees--Class B (Note 2) 460,841
Account maintenance and distribution fees--Class C (Note 2) 91,240
Registration fees (Note 1f) 76,397
Accounting services (Note 2) 52,413
Transfer agent fees--Class B (Note 2) 49,031
Amortization of organization expenses (Note 1f) 47,003
Printing and shareholder reports 35,113
Directors' fees and expenses 25,043
Professional fees 24,119
Custodian fees 22,702
Account maintenance fees--Class D (Note 2) 17,619
Transfer agent fees--Class C (Note 2) 10,196
Transfer agent fees--Class D (Note 2) 6,180
Transfer agent fees--Class A (Note 2) 1,582
Pricing fees 1,020
Other 6,734
------------
Total expenses 1,471,818
------------
Investment income--net 1,731,891
------------
Realized & Realized loss from:
Unrealized Investments--net (3,997,626)
Gain (Loss) on Foreign currency transactions--net (13,075) (4,010,701)
Investments & ------------
Foreign Currency Unrealized appreciation/depreciation on:
Transactions--Net Investments--net (7,154,996)
(Notes 1b, 1c, Foreign currency transactions--net 684 (7,154,312)
1e & 3): ------------ ------------
Net realized and unrealized loss on investments and foreign currency
transactions (11,165,013)
------------
Net Decrease in Net Assets Resulting from Operations $ (9,433,122)
============
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
November 30, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
For the Period
December 26, 1997++
Increase (Decrease) in Net Assets: to November 30, 1998
<S> <S> <C>
Operations: Investment income--net $ 1,731,891
Realized loss on investments and foreign currency transactions--net (4,010,701)
Unrealized appreciation/depreciation on investments and foreign currency
transactions--net (7,154,312)
------------
Net decrease in net assets resulting from operations (9,433,122)
------------
Dividends to Investment income--net:
Shareholders Class A (56,990)
(Note 1g): Class B (1,018,928)
Class C (216,101)
Class D (197,931)
------------
Net decrease in net assets resulting from dividends to shareholders (1,489,950)
------------
Capital Share Net increase in net assets derived from capital share transactions 73,565,878
Transactions ------------
(Note 4):
Net Assets: Total increase in net assets 62,642,806
Beginning of period 100,000
------------
End of period* $ 62,742,806
============
<FN>
*Undistributed investment income--net (Note 1i) $ 228,866
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
November 30, 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
November 30, 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 .33 .24 .24 .30
Realized and unrealized loss on investments and
foreign currency transactions--net (1.37) (1.36) (1.37) (1.36)
-------- -------- -------- --------
Total from investment operations (1.04) (1.12) (1.13) (1.06)
-------- -------- -------- --------
Less dividends from investment income--net (.26) (.19) (.19) (.24)
-------- -------- -------- --------
Net asset value, end of period $ 8.70 $ 8.69 $ 8.68 $ 8.70
======== ======== ======== ========
Total Investment Based on net asset value per share (10.57%)+++ (11.36%)+++ (11.41%)+++ (10.74%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.39%* 2.41%* 2.42%* 1.64%*
Net Assets: ======== ======== ======== ========
Investment income--net 3.67%* 2.58%* 2.63%* 3.34%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 2,255 $ 44,482 $ 9,737 $ 6,269
Data: ======== ======== ======== ========
Portfolio turnover 108.25% 108.25% 108.25% 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.
November 30, 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. The Fund's financial statements
are prepared in accordance with generally accepted accounting
principles which may require the use of management accruals and
estimates. 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. 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. Premium or discount is amortized over the life of the
contracts.
Merrill Lynch Real Estate Fund, Inc.
November 30, 1998
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.
(h) Custodian bank--The Fund recorded an amount payable to the
Custodian Bank reflecting an overdraft which resulted from a
security transaction settlement.
(i) Reclassification--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of
$13,075 have been reclassified between accumulated net realized
capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset values
per share.
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 ("MLFD" or "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:
Merrill Lynch Real Estate Fund, Inc.
November 30, 1998
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.
For the period December 26, 1997 to November 30, 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 $3,800 $221,533
For the period December 26, 1997 to November 30, 1998, MLPF&S
received contingent deferred sales charges of $138,310 and $15,828
relating to transactions in Class B and Class C Shares, respectively.
In addition, MLPF&S received $31,651 in commissions on the execution
of portfolio security transactions for the Fund for the period
December 26, 1997 to November 30, 1998.
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 period December 26, 1997 to November 30, 1998 were
$137,971,478 and $63,284,381, respectively.
Net realized gains (losses) for the period December 26, 1997 to
November 30, 1998 and net unrealized gains (losses) as of November
30, 1998 were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $(3,997,669) $(7,154,996)
Short-term investments 43 --
Foreign currency transactions (13,075) 684
----------- -----------
Total $(4,010,701) $(7,154,312)
=========== ===========
As of November 30, 1998, net unrealized deprecia-tion for Federal
income tax purposes aggregated $7,706,968, of which $184,117 related
to appreciated securities and $7,891,085 related to depreciated
securities. At November 30, 1998, the aggregate cost of investments
for Federal income tax purposes was $70,549,293.
4. Capital Share Transactions:
The net increase in net assets derived from capital share
transactions was $73,565,878 for the period December 26, 1997 to
November 30, 1998.
Transactions in shares for each class were as follows:
Class A Shares for the Period Dollar
Dec. 26, 1997++ to Nov. 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 Period Dollar
Dec. 26, 1997++ to Nov. 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.
November 30, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
Class C Shares for the Period Dollar
Dec. 26, 1997++ to Nov. 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 Period Dollar
Dec. 26, 1997++ to Nov. 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.
6.Subsequent Event:
On December 1, 1998, the Fund's Board of Directors declared an
ordinary income dividend in the amount of $.169505 per Class A
Share, $.147259 per Class B Share, $.147163 per Class C Share and
$.163873 per Class D Share, payable on December 24, 1998 to
shareholders of record as of December 16, 1998.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Real Estate Fund, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
Real Estate Fund, Inc. as of November 30, 1998, the related
statements of operations and changes in net assets for the period
December 26, 1997 (commencement of operations) to November 30, 1998,
and the financial highlights for the period December 26, 1997
(commencement of operations) to November 30, 1998. These financial
statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reason-able assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at November
30, 1998 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Real Estate Fund, Inc. as of November 30, 1998, the
results of its operations, the changes in its net assets, and the
financial highlights for the period December 26, 1997 (commencement
of operations) to November 30, 1998 in conformity with generally
accepted accounting principles.
Deloitte &Touche LLP
Princeton, New Jersey
January 19, 1999
</AUDIT-REPORT>
Merrill Lynch Real Estate Fund, Inc.
November 30, 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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
