MERRILL LYNCH
REAL ESTATE
FUND, INC.
FUND LOGO
Semi-Annual Report
June 30, 2000
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
Economic Commentary
Real estate-related securities have begun to perform much better.
Returns for the six months ended June 30, 2000 are attractive on
both an absolute and a relative basis. The unmanaged Morgan Stanley
Real Estate Investment Trust (REIT) Index increased 13.31%,
outperforming both the unmanaged Standard & Poor's 500 (S&P 500)
Index and the ten-year Treasury note, which returned -0.42% and
+5.39%, respectively. For the six months ended June 30, 2000,
Merrill Lynch Real Estate Fund, Inc. posted attractive returns of
+11.28%, +10.66%, +10.69% and +11.06% for Class A, Class B, Class C
and Class D Shares, respectively. (Fund results shown 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.)
During the three months ended June 30, 2000, the Fund's Class A,
Class B, Class C and Class D Shares outperformed the Morgan Stanley
REIT Index, gaining +12.24%, +11.94%, +11.81% and +12.02%,
respectively, compared to +10.37% for the Index. The underlying
fundamentals of the real estate markets could support a continued
rise in stock prices while we believe that our value-oriented stock
selection process should also add value. We continue to be upbeat.
Six months ago we said that real estate securities seemed 20%--40%
undervalued compared to their underlying real estate assets, or net
asset value. The positive performance during the first half of the
year has narrowed this discount. However, during the period, the
value of the underlying real estate has also appreciated. The
result, in our opinion, is narrower discounts, but probably only by
10%--12%, leaving the current average discount in a range of 5%--
20%. If the discount holds constant and the underlying real estate
appreciates in the second half of the year, then we can look for
improved returns going forward.
Currently, real estate securities remain relatively inexpensive, in
our view. On a relative multiple basis, the S&P 500 Index trades at
a multiple that is 2.78 times higher than REITs, compared to the
long-run average of 1.94 times higher. On a yield basis, the 7.12%
generated by REITs has been much more than that of the S&P 500 Index
and of utilities. Compared to yields on ten-year Treasury
securities, REITs also appear to be inexpensive.
The fundamentals of the real estate business are very strong, in our
opinion. Twice the Federal Reserve Board has cautioned banks not to
loan too much to developers. While new construction continues, it
has slowed from last year's pace and by most accounts seems to be in
rough equilibrium with new demand. This is supporting rent increases
at rates that exceed inflation.
On the new-issue front, Merrill Lynch data indicate that no new
equity financing took place in the first six months of the year.
This is remarkable and indicates to us that most management teams
understand the basic corporate finance principle of buying low and
selling high. Not only has there been no new issuance, but many
REITs also had active stock buyback programs early in the year. Most
of these have been put on hold to some degree as prices have begun
to recover. On the demand side, things have been quiet as well. Last
year we were concerned that periodic bouts of investor redemptions
forced dedicated funds to sell REIT shares into unreceptive markets,
weighing on prices. Year to date through mid-June, fund flows have
turned mildly positive. Inflows to REIT dedicated funds in the
United States total $96 million, versus outflows for all of 1999 of
$1.32 billion. The lack of severe negative fund flows has allowed
the market to stabilize.
The real story in our minds is that the real estate markets have
continued to perform well. Consensus earnings estimates for this
year and next year are beginning to rise. This is attracting
investor attention. Our anticipation of rising earnings estimates
are not generally because of any creative financing or growth
strategies, but are mostly the result of higher internal rent growth
and leasing trends than had been expected. Although it is fair to
say most markets are healthy, California, Boston, Washington, DC,
and New York remain very strong.
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
Portfolio Matters
We have strategically attempted to overweight California and New
York, and also the office and triple net lease sectors. Broadly,
this has worked. Three of our holdings, Mission West Properties
Inc., Spieker Properties, Inc. and Glenborough Realty Trust Inc.
were in the top five of all REIT stocks, returning over 30% for the
period. Capital Automotive also posted significant positive returns
of more than 25% in the triple net lease sector.
Looking ahead, we are comfortable with this strategy and intend to
maintain it. The one area we will de-emphasize is our conscious
overweight in REITs with above-average balance sheet leverage. We
hope to be able to lighten these positions into strength if and as
financial restructuring occurs. We believe both our strategy and our
value-oriented stock selection methodology could come back into
favor in the market.
As of June 30, 2000, the portfolio consisted of 40 stocks, with
about 40% weighted in the office/industrial sector. The average
dividend was about 7%, the average multiple of 2001 funds from
operations registered about 8.5 times and the average expected
growth in funds from operation was near 10%. We like the way the
portfolio is positioned and are quite encouraged by recent
performance.
In Conclusion
We thank you for your continued interest and support of Merrill
Lynch Real Estate Fund, Inc., and we look forward to serving your
investment needs in the months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Jay Willoughby)
Jay Willoughby
Senior Vice President and Portfolio Manager
August 2, 2000
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
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 on-going 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.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/00 -4.14% -9.17%
Inception (12/26/97)
through 6/30/00 -6.06 -8.06
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/00 -5.22% -8.89%
Inception (12/26/97)
through 6/30/00 -7.02 -7.70
*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 6/30/00 -5.23% -6.14%
Inception (12/26/97)
through 6/30/00 -7.05 -7.05
*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 6/30/00 -4.51% -9.52%
Inception (12/26/97)
through 6/30/00 -6.33 -8.32
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
PERFORMANCE DATA (concluded)
<TABLE>
Recent Performance Results*
<CAPTION>
6 Month 12 Month Since Inception
As of June 30, 2000 Total Return Total Return Total Return
<S> <C> <C> <C>
ML Real Estate Fund, Inc. Class A Shares +11.28% -4.14% -14.54%
ML Real Estate Fund, Inc. Class B Shares +10.66 -5.22 -16.71
ML Real Estate Fund, Inc. Class C Shares +10.69 -5.23 -16.77
ML Real Estate Fund, Inc. Class D Shares +11.06 -4.51 -15.15
*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>
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
Robert C. Doll, Jr., Senior Vice President
Jay L. Willoughby, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Allan J. Oster, Secretary
Barbara G. Fraser, Secretary of Merrill Lynch
Real Estate Fund, Inc. has recently retired. The
Fund's Board of Directors wishes Ms. Fraser well
in her 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
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Percent of
Industries Held Real Estate Investment Trusts Value Net Assets
<S> <C> <S> <C> <C>
Apartments 20,000 Archstone Communities Trust $ 421,250 0.9%
15,000 Camden Property Trust 440,625 1.0
10,000 Post Properties, Inc. 440,000 1.0
------------ ------
1,301,875 2.9
Diversified/Mixed 160,000 Capital Automotive 2,220,000 4.9
Use 50,000 Duke-Weeks Realty Corporation 1,118,750 2.4
250,000 Entertainment Properties Trust 3,453,125 7.6
30,000 Glenborough Realty Trust Incorporated 523,125 1.1
10,000 Golf Trust of America, Inc. 158,750 0.3
20,000 The Rouse Company 495,000 1.1
30,000 Vornado Realty Trust 1,042,500 2.3
------------ ------
9,011,250 19.7
Factory Outlets 5,000 Chelsea GCA Realty, Inc. 172,813 0.4
722,200 Prime Retail, Inc. 902,750 2.0
------------ ------
1,075,563 2.4
Health Care 325,000 Meditrust Companies 1,218,750 2.7
Hotels & Motels 40,000 Host Marriot Corporation 375,000 0.8
15,000 Starwood Hotels & Resorts Worldwide, Inc. 488,438 1.1
------------ ------
863,438 1.9
Office Property 15,000 Boston Properties, Inc. 579,375 1.3
10,000 CarrAmerica Realty Corporation 265,000 0.6
74,258 Equity Office Properties Trust 2,046,736 4.5
5,000 Highwoods Properties, Inc. 120,000 0.3
20,000 Liberty Property Trust 518,750 1.1
40,000 Mack-Cali Realty Corporation 1,027,500 2.2
408,100 Mission West Properties Inc. 4,285,050 9.4
90,000 Prentiss Properties Trust 2,160,000 4.7
40,000 Reckson Associates Realty Corporation 1,017,500 2.2
20,000 Spieker Properties, Inc. 920,000 2.0
------------ ------
12,939,911 28.3
Regional Malls 110,000 Glimcher Realty Trust 1,581,250 3.5
55,000 JP Realty, Inc. 979,687 2.1
80,000 Simon Property Group, Inc. 1,775,000 3.9
------------ ------
4,335,937 9.5
Shopping Centers 30,000 Developers Diversified Realty Corporation 448,125 1.0
25,000 Regency Realty Corporation 593,750 1.3
------------ ------
1,041,875 2.3
Storage 65,000 Public Storage, Inc. 1,523,437 3.3
Warehouse/Industrial 60,000 AMB Property Corporation 1,368,750 3.0
40,000 Pacific Gulf Properties, Inc. 1,002,500 2.2
50,000 ProLogis Trust 1,065,625 2.3
------------ ------
3,436,875 7.5
Total Real Estate Investment Trusts (Cost--$40,018,637) 36,748,911 80.5
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Shares Percent of
Industries Held Real Estate Investment Trusts Value Net Assets
<S> <C> <S> <C> <C>
Diversified/Mixed 25,000 ++Catellus Development Corporation $ 375,000 0.8%
Use 125,000 Cheung Kong (Holdings) Ltd. 1,375,027 3.0
185,000 TrizecHahn Corporation 3,306,875 7.3
250,000 Wharf (Holdings) Ltd. 447,385 1.0
700,000 Wihlborgs Fastigheter AB (Class B) 877,893 1.9
------------ ------
6,382,180 14.0
Health Care 45,000 ++Sunrise Assisted Living, Inc. 832,500 1.8
Total Common Stocks (Cost--$7,322,506) 7,214,680 15.8
Face
Amount Short-Term Securities
Commercial $1,114,000 Associates Corporation of North America, 7% due 7/03/2000 1,113,567 2.4
Paper*
US Government 516,000 Federal Home Loan Mortgage Corporation, 6.42% due 7/05/2000 515,632 1.1
Agency Obligations*
Total Short-Term Securities (Cost--$1,629,199) 1,629,199 3.5
Total Investments (Cost--$48,970,342) 45,592,790 99.8
Other Assets Less Liabilities 74,548 0.2
------------ ------
Net Assets $ 45,667,338 100.0%
============ ======
*Commercial Paper and certain US Government Agency Obligations are
traded on a discount basis; the interest rates shown reflect the
discount rates paid at the time of purchase by the Fund.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION
As of June 30, 2000
Percent of
Ten Largest Equity Holdings Net Assets
Mission West Properties Inc. 9.4%
Entertainment Properties Trust 7.6
TrizecHahn Corporation 7.3
Capital Automotive 4.9
Prentiss Properties Trust 4.7
Equity Office Properties Trust 4.5
Simon Property Group, Inc. 3.9
Glimcher Realty Trust 3.5
Public Storage, Inc. 3.3
Cheung Kong (Holdings) Ltd. 3.0
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of June 30, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$48,970,342) $45,592,790
Foreign cash 1,140
Receivables:
Dividends $ 457,373
Capital shares sold 91,638 549,011
-----------
Deferred organization expenses 43,610
Prepaid registration fees and other assets 41,937
-----------
Total assets 46,228,488
-----------
Liabilities: Payables:
Securities purchased 231,225
Capital shares redeemed 94,079
Investment adviser 29,204
Distributor 22,610 377,118
-----------
Accrued expenses and other liabilities 184,032
-----------
Total liabilities 561,150
-----------
Net Assets: Net assets $45,667,338
===========
Net Assets Class A Shares of Common Stock, $.10 par value, 100,000,000 shares
Consist of: authorized $ 114,656
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 263,890
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 59,576
Class D Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 156,507
Paid-in capital in excess of par 62,795,909
Undistributed investment income--net 581,342
Accumulated realized capital losses on investments and foreign currency
transactions--net (14,925,942)
Unrealized depreciation on investments and foreign currency
transactions--net (3,378,600)
-----------
Net assets $45,667,338
===========
Net Asset Value: Class A--Based on net assets of $8,812,970 and 1,146,557 shares
outstanding $ 7.69
===========
Class B--Based on net assets of $20,257,586 and 2,638,897 shares
outstanding $ 7.68
===========
Class C--Based on net assets of $4,569,882 and 595,760 shares
outstanding $ 7.67
===========
Class D--Based on net assets of $12,026,900 and 1,565,071 shares
outstanding $ 7.68
===========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Six Months Ended June 30, 2000
<S> <S> <C> <C>
Investment Dividends (net of $13,265 foreign withholding tax) $ 1,450,139
Income: Interest and discount earned 33,127
-----------
Total income 1,483,266
-----------
Expenses: Investment advisory fees $ 178,807
Account maintenance and distribution fees--Class B 104,463
Registration fees 82,607
Professional fees 32,246
Accounting services 26,259
Printing and shareholder reports 25,345
Account maintenance and distribution fees--Class C 23,483
Directors' fees and expenses 12,402
Transfer agent fees--Class B 12,234
Account maintenance fees--Class D 12,033
Custodian fees 11,628
Amortization of organization expenses 7,589
Transfer agent fees--Class D 4,379
Transfer agent fees--Class A 3,128
Transfer agent fees--Class C 2,837
Pricing fees 755
Other 12,846
-----------
Total expenses 553,041
-----------
Investment income--net 930,225
-----------
Realized & Realized loss from:
Unrealized Investments--net (2,790,092)
Gain (Loss) on Foreign currency transactions--net (802) (2,790,894)
Investments & -----------
Foreign Currency Change in unrealized depreciation on:
Transactions--Net: Investments--net 6,159,710
Foreign currency transactions--net (415) 6,159,295
----------- -----------
Net Increase in Net Assets Resulting from Operations $ 4,298,626
===========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Six For the Period For the Year
Months Ended Dec. 1, 1999 Ended
June 30, to Dec. 31, Nov. 30,
Increase (Decrease) in Net Assets: 2000 1999 1999
<S> <S> <C> <C> <C>
Operations: Investment income--net $ 930,225 $ 471,315 $ 2,016,032
Realized loss on investments and foreign currency
transactions--net (2,790,894) (1,988,294) (6,149,791)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net 6,159,295 1,164,332 (3,547,915)
------------ ------------ ------------
Net increase (decrease) in net assets resulting
from operations 4,298,626 (352,647) (7,681,674)
------------ ------------ ------------
Dividends to Investment income--net:
Shareholders: Class A (103,307) (68,137) (157,728)
Class B (257,961) (261,220) (1,344,422)
Class C (62,813) (53,994) (290,556)
Class D (133,379) (66,651) (264,265)
------------ ------------ ------------
Net decrease in net assets resulting from dividends
to shareholders (557,460) (450,002) (2,056,971)
------------ ------------ ------------
Capital Share Net increase (decrease) in net assets derived from
Transactions: capital share transactions 1,127,191 2,325,405 (13,727,936)
------------ ------------ ------------
Net Assets: Total increase (decrease) in net assets 4,868,357 1,522,756 (23,466,581)
Beginning of period 40,798,981 39,276,225 62,742,806
------------ ------------ ------------
End of period* $ 45,667,338 $ 40,798,981 $ 39,276,225
============ ============ ============
*Undistributed investment income--net $ 581,342 $ 208,577 $ 187,264
============ ============ ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A++++
For the For the
For the Period For the Period
The following per share data and ratios have been derived Six Months Dec. 1, Year Dec. 26,
from information provided in the financial statements. Ended 1999 to Ended 1997++ to
June 30, Dec. 31, Nov. 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 2000 1999 1999 1998
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 7.02 $ 7.19 $ 8.70 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .26 .10 .43 .33
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .52 (.17) (1.55) (1.37)
-------- -------- -------- --------
Total from investment operations .78 (.07) (1.12) (1.04)
-------- -------- -------- --------
Less dividends from investment income--net (.11) (.10) (.39) (.26)
-------- -------- -------- --------
Net asset value, end of period $ 7.69 $ 7.02 $ 7.19 $ 8.70
======== ======== ======== ========
Total Investment Based on net asset value per share 11.28%+++ (.94%)+++ (13.31%) (10.57%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.94%* 2.46%* 1.89% 1.39%*
Net Assets: ======== ======== ======== ========
Investment income--net 7.29%* 17.44%* 5.33% 3.67%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 8,813 $ 6,028 $ 4,602 $ 2,255
Data: ======== ======== ======== ========
Portfolio turnover 20.60% 7.34% 53.53% 108.25%
======== ======== ======== ========
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. 1, Year Dec. 26,
from information provided in the financial statements. Ended 1999 to Ended 1997++ to
June 30, Dec. 31, Nov. 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 2000 1999 1999 1998
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 7.03 $ 7.18 $ 8.69 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .11 .08 .30 .24
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .63 (.15) (1.51) (1.36)
-------- -------- -------- --------
Total from investment operations .74 (.07) (1.21) (1.12)
-------- -------- -------- --------
Less dividends from investment income--net (.09) (.08) (.30) (.19)
-------- -------- -------- --------
Net asset value, end of period $ 7.68 $ 7.03 $ 7.18 $ 8.69
======== ======== ======== ========
Total Investment Based on net asset value per share 10.66%+++ (.95%)+++ (14.28%) (11.36%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.97%* 3.49%* 2.85% 2.41%*
Net Assets: ======== ======== ======== ========
Investment income--net 3.00%* 14.09%* 3.67% 2.58%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 20,257 $ 23,844 $ 24,660 $ 44,482
Data: ======== ======== ======== ========
Portfolio turnover 20.60% 7.34% 53.53% 108.25%
======== ======== ======== ========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class C++++
For the For the
For the Period For the Period
The following per share data and ratios have been derived Six Months Dec. 1, Year Dec. 26,
from information provided in the financial statements. Ended 1999 to Ended 1997++ to
June 30, Dec. 31, Nov. 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 2000 1999 1999 1998
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 7.02 $ 7.18 $ 8.68 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .10 .08 .30 .24
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .64 (.16) (1.50) (1.37)
-------- -------- -------- --------
Total from investment operations .74 (.08) (1.20) (1.13)
-------- -------- -------- --------
Less dividends from investment income--net (.09) (.08) (.30) (.19)
-------- -------- -------- --------
Net asset value, end of period $ 7.67 $ 7.02 $ 7.18 $ 8.68
======== ======== ======== ========
Total Investment Based on net asset value per share 10.69%+++ (1.09%)+++ (14.19%) (11.41%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.97%* 3.50%* 2.86% 2.42%*
Net Assets: ======== ======== ======== ========
Investment income--net 2.82%* 13.93%* 3.77% 2.63%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 4,570 $ 4,793 $ 5,189 $ 9,737
Data: ======== ======== ======== ========
Portfolio turnover 20.60% 7.34% 53.53% 108.25%
======== ======== ======== ========
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. 1, Year Dec. 26,
from information provided in the financial statements. Ended 1999 to Ended 1997++ to
June 30, Dec. 31, Nov. 30, Nov. 30,
Increase (Decrease) in Net Asset Value: 2000 1999 1999 1998
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 7.02 $ 7.19 $ 8.70 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income--net .23 .08 .39 .30
Realized and unrealized gain (loss) on investments
and foreign currency transactions--net .53 (.16) (1.53) (1.36)
-------- -------- -------- --------
Total from investment operations .76 (.08) (1.14) (1.06)
-------- -------- -------- --------
Less dividends from investment income--net (.10) (.09) (.37) (.24)
-------- -------- -------- --------
Net asset value, end of period $ 7.68 $ 7.02 $ 7.19 $ 8.70
======== ======== ======== ========
Total Investment Based on net asset value per share 11.06%+++ (1.01%)+++ (13.53%) (10.74%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.18%* 2.71%* 2.10% 1.64%*
Net Assets: ======== ======== ======== ========
Investment income--net 6.19%* 15.56%* 4.74% 3.34%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 12,027 $ 6,134 $ 4,825 $ 6,269
Data: ======== ======== ======== ========
Portfolio turnover 20.60% 7.34% 53.53% 108.25%
======== ======== ======== ========
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
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 accounting principles generally
accepted in the United States of America, 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 Pricingsm 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 that 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 that 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 investment strategies to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. 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.
June 30, 2000
* 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 Investment Managers, L.P. ("MLIM"). The general
partner of MLIM 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 FAM Distributors,
Inc. ("FAMD" or the "Distributor"), which is a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLIM 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, MLIM receives monthly
compensation at the annual rate of .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
Maintenance Distribution
Fee Fee
Class B .25% .75%
Class C .25% .75%
Class D .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 six months ended June 30, 2000, FAMD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class D Shares as follows:
FAMD MLPF&S
Class D $3,568 $40,217
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
For the six months ended June 30, 2000, MLPF&S received contingent
deferred sales charges of $194,828 and $2,657 relating to
transactions in Class B and Class C Shares, respectively.
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 MLIM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, FAMD, FDS, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 2000 were $10,288,802 and
$8,437,703, respectively.
Net realized losses for the six months ended June 30, 2000 and net
unrealized losses as of June 30, 2000 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(2,790,092) $(3,377,552)
Foreign currency transactions (802) (1,048)
----------- -----------
Total $(2,790,894) $(3,378,600)
=========== ===========
As of June 30, 2000, net unrealized depreciation for Federal income
tax purposes aggregated $3,377,552, of which $3,999,454 related to
appreciated securities and $7,377,006 related to depreciated
securities. At June 30, 2000, the aggregate cost of investments for
Federal income tax purposes was $48,970,342.
4. Capital Share Transactions:
The net increase (decrease) in net assets derived from capital share
transactions was $1,127,191, $2,325,405 and $(13,727,936) for the
six months ended June 30, 2000, for the period December 1, 1999 to
December 31, 1999 and for the year ended November 30, 1999,
respectively.
Transactions in shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended June 30, 2000 Shares Amount
Shares sold 592,141 $ 4,178,675
Shares issued to shareholders in
reinvestment of dividends 14,018 95,463
---------- ------------
Total issued 606,159 4,274,138
Shares redeemed (318,319) (2,235,755)
---------- ------------
Net increase 287,840 $ 2,038,383
========== ============
Class A Shares for the Period Dollar
Dec. 1, 1999 to Dec. 31, 1999 Shares Amount
Shares sold 262,203 $ 1,801,145
Shares issued to shareholders in
reinvestment of dividends 9,015 61,393
---------- ------------
Total issued 271,218 1,862,538
Shares redeemed (52,817) (370,913)
---------- ------------
Net increase 218,401 $ 1,491,625
========== ============
Class A Shares for the Year Dollar
Ended November 30, 1999 Shares Amount
Shares sold 678,806 $ 5,592,075
Shares issued to shareholders in
reinvestment of dividends 16,702 133,711
---------- ------------
Total issued 695,508 5,725,786
Shares redeemed (314,364) (2,513,033)
---------- ------------
Net increase 381,144 $ 3,212,753
========== ============
Class B Shares for the Six Months Dollar
Ended June 30, 2000 Shares Amount
Shares sold 317,709 $ 2,241,269
Shares issued to shareholders in
reinvestment of dividends 25,623 174,749
---------- ------------
Total issued 343,332 2,416,018
Shares redeemed (1,088,319) (7,612,825)
Automatic conversion of shares (9,508) (67,419)
---------- ------------
Net decrease (754,495) $ (5,264,226)
========== ============
Class B Shares for the Period Dollar
Dec. 1, 1999 to Dec. 31, 1999 Shares Amount
Shares sold 247,237 $ 1,702,230
Shares issued to shareholders in
reinvestment of dividends 26,979 183,995
---------- ------------
Total issued 274,216 1,886,225
Shares redeemed (315,078) (2,177,709)
Automatic conversion of shares (78) (533)
---------- ------------
Net decrease (40,940) $ (292,017)
========== ============
Merrill Lynch Real Estate Fund, Inc.
June 30, 2000
Class B Shares for the Year Dollar
Ended November 30, 1999 Shares Amount
Shares sold 444,297 $ 3,631,085
Shares issued to shareholders in
reinvestment of dividends 121,972 989,020
---------- ------------
Total issued 566,269 4,620,105
Shares redeemed (2,229,275) (17,930,533)
Automatic conversion of shares (23,139) (185,640)
---------- ------------
Net decrease (1,686,145) $(13,496,068)
========== ============
Class C Shares for the Six Months Dollar
Ended June 30, 2000 Shares Amount
Shares sold 170,623 $ 1,221,722
Shares issued to shareholders in
reinvestment of dividends 7,406 50,508
---------- ------------
Total issued 178,029 1,272,230
Shares redeemed (264,734) (1,858,353)
---------- ------------
Net decrease (86,705) $ (586,123)
========== ============
Class C Shares for the Period Dollar
Dec. 1, 1999 to Dec. 31, 1999 Shares Amount
Shares sold 20,637 $ 142,229
Shares issued to shareholders in
reinvestment of dividends 6,151 41,949
---------- ------------
Total issued 26,788 184,178
Shares redeemed (67,422) (468,660)
---------- ------------
Net decrease (40,634) $ (284,482)
========== ============
Class C Shares for the Year Dollar
Ended November 30, 1999 Shares Amount
Shares sold 291,428 $ 2,388,607
Shares issued to shareholders in
reinvestment of dividends 29,144 236,418
---------- ------------
Total issued 320,572 2,625,025
Shares redeemed (719,001) (5,815,671)
---------- ------------
Net decrease (398,429) $ (3,190,646)
========== ============
Class D Shares for the Six Months Dollar
Ended June 30, 2000 Shares Amount
Shares sold 815,256 $ 5,789,656
Automatic conversion of shares 9,505 67,419
Shares issued to shareholders in
reinvestment of dividends 12,625 86,103
---------- ------------
Total issued 837,386 5,943,178
Shares redeemed (145,929) (1,004,021)
---------- ------------
Net increase 691,457 $ 4,939,157
========== ============
Class D Shares for the Period Dollar
Dec. 1, 1999 to Dec. 31, 1999 Shares Amount
Shares sold 290,944 $ 2,034,725
Automatic conversion of shares 78 533
Shares issued to shareholders in
reinvestment of dividends 4,931 33,579
---------- ------------
Total issued 295,953 2,068,837
Shares redeemed (93,810) (658,558)
---------- ------------
Net increase 202,143 $ 1,410,279
========== ============
Class D Shares for the Year Dollar
Ended November 30, 1999 Shares Amount
Shares sold 339,464 $ 2,842,618
Automatic conversion of shares 23,112 185,640
Shares issued to shareholders in
reinvestment of dividends 19,046 153,709
---------- ------------
Total issued 381,622 3,181,967
Shares redeemed (430,748) (3,435,942)
---------- ------------
Net decrease (49,126) $ (253,975)
========== ============
5. Capital Loss Carryforward:
At December 31, 1999, the Fund had a net capital loss carryforward
of approximately $11,122,000, of which $3,290,000 expires in 2005,
$4,766,000 expires in 2006 and $3,066,000 expires in 2007. This
amount will be available to offset like amounts of any future
taxable gains.
6. Subsequent Event:
On July 3, 2000, the Fund's Board of Directors declared an ordinary
income dividend in the amount of $.109163 per Class A Share,
$.089683 per Class B Share, $.090103 per Class C Share and $.104916
per Class D Share, payable on July 11, 2000 to shareholders of
record as of July 5, 2000.
</TABLE>
