MERRILL LYNCH
REAL ESTATE
FUND, INC.
FUND LOGO
Annual Report
November 30, 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
Fiscal Year in Review
Real estate-related securities had a difficult time in both the
quarter and the year ended November 30, 1999. For the year ended
November 30, 1999, Merrill Lynch Real Estate Fund, Inc.'s Class A,
Class B, Class C and Class D Shares had total returns of -13.31%,
- -14.28%, -14.19% and -13.53%, respectively. (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.) These annual returns trailed
those of the unmanaged Standard & Poor's 500 (S&P 500) Index at
+20.89%, the ten-year Treasury note at -6.04% and the unmanaged
Morgan Stanley Real Estate Investment Trust (REIT) Index at -9.08%.
We believe the underlying fundamentals should support higher stock
prices, and our value-oriented stock selection should add value over
time. It is our view that real estate is significantly underpriced
in the public markets. We expect that during the next 12 months an
arbitrage mechanism will emerge, narrowing the wide valuation gap
that exists between these securities as well as other public
securities and private real estate. We believe that real estate
securities are presently undervalued in a range between 20% to 40%.
A narrowing of this valuation gap coupled with a dividend yield of
approximately 8.3% is likely to provide investors with strong
returns. Since valuations are depressed, we believe an investment in
the real estate sector carries below-average risk relative to other
equity securities.
A couple of things stand out as we look back on the fiscal year.
First, we have generally sought financial leverage, believing that
in an environment where the real estate is worth more than the
stocks, financing alternatives would emerge. Meditrust Companies,
Prime Retail, Inc. and Crescent Real Estate Equities Company have
all underperformed, based in part upon the perception of reduced
financial flexibility. All three have sold or are in the process of
selling assets. We hope to see them announce meaningful share
repurchase programs with some of the proceeds. We still believe in
this theme.
Our holdings in Prison Realty Corporation underperformed for the
fiscal year. A retroactive change in lease terms with a private,
affiliated company has raised continuing questions about management
credibility and the company's ability to finance a large and
accretive pipeline of new development. The company is also bringing
in a large strategic investor (terms unknown) and may choose to de-
REIT. All of these issues have given investors reasons to sell their
stock. At its current price, we believe there is very little
downside. Despite the difficult fiscal year, we continue to have
confidence in our approach and expect it will enable us to add value
in upcoming quarters.
Overall, we agree with real estate veterans who claim the
fundamentals are the best they have seen in 40 years. The largest
real estate sectors (office, apartments and retail) all have high
and stable occupancy and growing rents. Only the hotel sector
suffers from oversupply, and the healthcare sector has been weighed
down by operator bankruptcies caused by the Medicare prospective
payment system (PPS). In general, the capital markets have proven to
be a very effective governor on new supply, in line with our often-
stated belief.
While real estate markets have remained solid, the stocks have not.
Including the reinvestment of dividends, the stocks are off nearly
24% from their October 1997 highs, according to data in Merrill
Lynch Comparative Valuation REIT Weekly (November 29, 1999). While
disappointing in absolute terms, the relative performance is even
worse, more than 71% behind the S&P 500 Index, which was up 47% over
that time. This is historically unprecedented underperformance for
the sector.
There is one last hurdle to get over this year: tax loss selling.
Investors have realized large gains in individual securities during
the last several years. To offset taxes on a portion of the gains
they may have taken, investors sell other stocks (or mutual fund
shares) they hold that are at a loss. Because REITs have performed
poorly for two consecutive years, losses here are easy to find. The
forced selling by mutual funds has been palpable. We have been
forced to do our part in this, selling what we would consider to be
core holdings of the Fund. This weight on the market is expected to
lift now that the new year has begun.
Merrill Lynch Real Estate Fund, Inc.
November 30, 1999
Portfolio Matters
For the quarter ended November 30, 1999, the Fund's Class A, Class
B, Class C and Class D Shares had total returns of -8.74%, -9.01%,
- -8.90% and -8.80%, respectively. These results trailed behind the
S&P 500 Index (+5.52%), the ten-year US Treasury notes (+0.06%) and
the unmanaged Morgan Stanley REIT Index (-7.76%).
We would like our shareholders to know what we are doing in the
current environment. The short answer is we are doing the same thing
we have always done. We read and digest all the internal and
external research we can. Incorporating company contacts, we
construct valuation models of each company. We try to buy those
specific stocks that we believe represent the best value on either a
stock (cash flow) or real estate (net asset value) basis. We are
indifferent about who we sell our stocks to (a stock or real estate
buyer), our concern is the price.
We continue to see the best value in the office and triple net lease
sectors. Some of our largest holdings representing the office sector
include Mission West Properties Inc., TrizecHahn Corporation and
Prentiss Properties Trust. In the triple net lease sector we prefer
Capital Automotive and Entertainment Properties Trust. The office
companies are generally faster growing and lower yielding, whereas
the net lease companies are higher yielding and slower growing. We
think this gives the portfolio a nice balance. At November 30, 1999,
our portfolio of stocks traded at about 8 times consensus funds from
operation estimates with expected growth of 10%, and paid a dividend
of 10.5% to the Fund.
In Conclusion
We want to reiterate our strong belief that there is excellent value
in the REIT sector. We expect the tax loss selling underway now will
end and when it does, we think share prices may improve. The new
year should bring with it much better overall returns for REIT
investors. The good news for REIT investors is we get to start with
an above-average dividend, which will go up as REIT earnings go up.
The bad news, for now, is that no one cares. Now is the time to lock
in these high and growing income streams.
We thank you for your continued interest and support of 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
January 18, 2000
To reduce shareholder expenses, Merrill Lynch Real Estate Fund, Inc.
will no longer be printing and mailing quarterly reports to
shareholders. We will continue to provide you with reports on a semi-
annual and annual basis.
Merrill Lynch Real Estate Fund, Inc.
November 30, 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 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.
<TABLE>
Recent Performance Results*
<CAPTION>
3 Month 12 Month Since Inception
As of November 30, 1999 Total Return Total Return Total Return
<S> <C> <C> <C>
ML Real Estate Fund, Inc. Class A Shares -8.74% -13.31% -22.47%
ML Real Estate Fund, Inc. Class B Shares -9.01 -14.28 -24.02
ML Real Estate Fund, Inc. Class C Shares -8.90 -14.19 -23.98
ML Real Estate Fund, Inc. Class D Shares -8.80 -13.53 -22.82
<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, 1999
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 11/99
ML Real Estate, Inc.++--
Class A Shares* $ 9,475 $7,346
ML Real Estate, Inc.++--
Class B Shares* $10,000 $7,385
ML Real Estate, Inc.++--
Class C Shares* $10,000 $7,602
ML Real Estate, Inc.++--
Class D Shares* $ 9,475 $7,313
Morgan Stanley REIT Index++++ $10,000 $7,692
[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 in the graph is from 12/31/97.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/99 - 7.04% -11.92%
Inception (12/26/97)
through 9/30/99 -10.62 -13.31
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/99 - 7.88% -11.41%
Inception (12/26/97)
through 9/30/99 -11.48 -12.91
[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 9/30/99 - 7.98% - 8.86%
Inception (12/26/97)
through 9/30/99 -11.52 -11.52
[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 9/30/99 - 7.18% -12.06%
Inception (12/26/97)
through 9/30/99 -10.81 -13.50
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Real Estate Fund, Inc.
November 30, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Percent of
Industries Held Real Estate Investment Trusts Value Net Assets
<S> <C> <S> <C> <C>
Apartments 20,000 Camden Property Trust $ 535,000 1.3%
10,000 Summit Properties Inc. 182,500 0.5
------------ ------
717,500 1.8
Diversified/Mixed 290,000 Capital Automotive 3,933,125 10.0
Use 18,000 Duke-Weeks Realty Corporation 333,000 0.9
224,800 Entertainment Properties Trust 2,950,500 7.5
35,000 Glenborough Realty Trust Incorporated 459,375 1.2
5,000 Golf Trust of America, Inc. 85,000 0.2
58,000 Pacific Gulf Properties, Inc. 1,167,250 3.0
195,000 Prison Realty Corporation 1,584,375 4.0
------------ ------
10,512,625 26.8
Factory Outlets 340,000 Prime Retail, Inc. 2,167,500 5.5
Health Care 265,000 Meditrust Companies 1,739,063 4.4
Hotels & Motels 40,000 Host Marriott Corporation 372,500 0.9
Office Property 10,000 CarrAmerica Realty Corporation 207,500 0.5
80,000 Crescent Real Estate Equities Company 1,355,000 3.5
70,000 Equity Office Properties Trust 1,535,625 3.9
5,000 Highwoods Properties, Inc. 110,000 0.3
5,000 Liberty Property Trust 114,062 0.3
35,000 Mack-Cali Realty Corporation 864,063 2.2
350,000 Mission West Properties Inc. 2,778,125 7.1
98,000 Prentiss Properties Trust 1,984,500 5.0
33,456 Reckson Associates Realty Corporation 698,394 1.8
------------ ------
9,647,269 24.6
Regional Malls 115,000 Glimcher Realty Trust 1,638,750 4.2
75,000 JP Realty, Inc. 1,279,687 3.3
80,000 Simon Property Group, Inc. 1,865,000 4.7
------------ ------
4,783,437 12.2
Shopping Centers 23,000 Developers Diversified Realty Corporation 320,562 0.8
10,000 New Plan Excel Realty Trust 162,500 0.4
45,000 Regency Realty Corporation 911,250 2.4
------------ ------
1,394,312 3.6
Storage 60,000 Public Storage, Inc. 1,368,750 3.5
25,000 Storage USA, Inc. 675,000 1.7
------------ ------
2,043,750 5.2
Warehouse/ 40,000 AMB Property Corporation 800,000 2.0
Industrial 10,000 CenterPoint Properties Corporation 347,500 0.9
10,000 ProLogis Trust 181,875 0.5
------------ ------
1,329,375 3.4
Total Real Estate Investment Trusts
(Cost--$44,109,542) 34,707,331 88.4
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
November 30, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Shares Percent of
Industries Held Common Stocks Value Net Assets
<S> <C> <S> <C> <C>
Diversified/Mixed 135,000 TrizecHahn Corporation $ 2,219,063 5.6%
Use 1,100,000 Wihlborgs Fastigheter AB (Class B) 1,255,590 3.2
------------ ------
3,474,653 8.8
Health Care 25,000 ++Assisted Living Concepts, Inc. 39,062 0.1
65,000 ++Sunrise Assisted Living, Inc. 853,125 2.2
------------ ------
892,187 2.3
Total Common Stocks (Cost--$5,666,198) 4,366,840 11.1
Total Investments (Cost--$49,775,740) 39,074,171 99.5
Other Assets Less Liabilities 202,054 0.5
------------ ------
Net Assets $ 39,276,225 100.0%
============ ======
<FN>
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
PORTFOLIO INFORMATION
As of November 30, 1999
Percent of
Ten Largest Equity Holdings Net Assets
Capital Automotive 10.0%
Entertainment Properties Trust 7.5
Mission West Properties Inc. 7.1
TrizecHahn Corporation 5.6
Prime Retail, Inc. 5.5
Prentiss Properties Trust 5.0
Simon Property Group, Inc. 4.7
Meditrust Companies 4.4
Glimcher Realty Trust 4.2
Prison Realty Corporation 4.0
Merrill Lynch Real Estate Fund, Inc.
November 30, 1999
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of November 30, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$49,775,740) $ 39,074,171
Foreign cash 1,177
Receivables:
Securities sold $ 565,850
Dividends 50,604
Capital shares sold 37,761 654,215
------------
Deferred organization expenses 47,574
Prepaid registration fees and other assets 55,352
------------
Total assets 39,832,489
------------
Liabilities: Payables:
Capital shares redeemed 246,392
Custodian bank 204,391
Distributor 28,482
Investment adviser 3,664 482,929
------------
Accrued expenses and other liabilities 73,335
------------
Total liabilities 556,264
------------
Net Assets: Net assets $ 39,276,225
============
Net Assets Class A Shares of Common Stock, $.10 par value, 100,000,000 shares
Consist of: authorized $ 64,032
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 343,433
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 72,310
Class D Shares of Common Stock, $.10 par value, 100,000,000 shares
authorized 67,147
Paid-in capital in excess of par 59,391,020
Undistributed investment income--net 187,264
Accumulated realized capital losses on investments--net (10,146,754)
Unrealized depreciation on investments and foreign currency
transactions--net (10,702,227)
------------
Net assets $ 39,276,225
============
Net Asset Value: Class A--Based on net assets of $4,602,044 and 640,316 shares
outstanding $ 7.19
============
Class B--Based on net assets of $24,659,981 and 3,434,332 shares
outstanding $ 7.18
============
Class C--Based on net assets of $5,189,236 and 723,099 shares
outstanding $ 7.18
============
Class D--Based on net assets of $4,824,964 and 671,471 shares
outstanding $ 7.19
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
November 30, 1999
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended November 30, 1999
<S> <S> <C> <C>
Investment Dividends (net of $15,489 foreign withholding tax) $ 3,376,064
Income: Interest and discount earned 14,672
------------
Total income 3,390,736
------------
Expenses: Investment advisory fees $ 434,733
Account maintenance and distribution fees--Class B 338,846
Registration fees 186,799
Professional fees 74,591
Account maintenance and distribution fees--Class C 72,089
Accounting services 55,850
Printing and shareholder reports 51,225
Transfer agent fees--Class B 45,303
Directors' fees and expenses 25,670
Custodian fees 22,555
Amortization of organization expenses 15,429
Account maintenance fees--Class D 14,862
Transfer agent fees--Class C 9,992
Transfer agent fees--Class D 6,688
Transfer agent fees--Class A 4,808
Other 15,264
------------
Total expenses 1,374,704
------------
Investment income--net 2,016,032
------------
Realized & Realized loss from:
Unrealized Investments--net (6,149,128)
Loss on Foreign currency transactions--net (663) (6,149,791)
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net: Investments--net (3,546,573)
Foreign currency transactions--net (1,342) (3,547,915)
------------ ------------
Net realized and unrealized loss on investments and foreign
currency transactions (9,697,706)
------------
Net Decrease in Net Assets Resulting from Operations $ (7,681,674)
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
November 30, 1999
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year For the Period
Ended Dec. 26, 1997++
Nov. 30, to Nov. 30,
Increase (Decrease) in Net Assets: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 2,016,032 $ 1,731,891
Realized loss on investments and foreign currency
transactions--net (6,149,791) (4,010,701)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions--net (3,547,915) (7,154,312)
------------ ------------
Net decrease in net assets resulting from operations (7,681,674) (9,433,122)
------------ ------------
Dividends to Investment income--net:
Shareholders: Class A (157,728) (56,990)
Class B (1,344,422) (1,018,928)
Class C (290,556) (216,101)
Class D (264,265) (197,931)
------------ ------------
Net decrease in net assets resulting from dividends
to shareholders (2,056,971) (1,489,950)
------------ ------------
Capital Share Net increase (decrease) in net assets derived from
Transactions: capital share transactions (13,727,936) 73,565,878
------------ ------------
Net Assets: Total increase (decrease) in net assets (23,466,581) 62,642,806
Beginning of period 62,742,806 100,000
------------ ------------
End of period* $ 39,276,225 $ 62,742,806
============ ============
<FN>
*Undistributed investment income--net $ 187,264 $ 228,866
============ ============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Real Estate Fund, Inc.
November 30, 1999
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
Class A++++ Class B++++
For For the For For the
the Period the Period
The following per share data and ratios have been derived Year Dec. 26, Year Dec. 26,
from information provided in the financial statements Ended 1997++ to Ended 1997++ to
Nov. 30, Nov. 30, Nov. 30, 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 .43 .33 .30 .24
Realized and unrealized loss on investments
and foreign currency transactions--net (1.55) (1.37) (1.51) (1.36)
-------- -------- -------- --------
Total from investment operations (1.12) (1.04) (1.21) (1.12)
-------- -------- -------- --------
Less dividends from investment income--net (.39) (.26) (.30) (.19)
-------- -------- -------- --------
Net asset value, end of period $ 7.19 $ 8.70 $ 7.18 $ 8.69
======== ======== ======== ========
Total Investment Based on net asset value per share (13.31%) (10.57%)+++ (14.28%) (11.36%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.89% 1.39%* 2.85% 2.41%*
Net Assets: ======== ======== ======== ========
Investment income--net 5.33% 3.67%* 3.67% 2.58%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 4,602 $ 2,255 $ 24,660 $ 44,482
Data: ======== ======== ======== ========
Portfolio turnover 53.53% 108.25% 53.53% 108.25%
======== ======== ======== ========
<CAPTION>
Class C++++ Class D++++
For For the For For the
the Period the Period
The following per share data and ratios have been derived Year Dec. 26, Year Dec. 26,
from information provided in the financial statements Ended 1997++ to Ended 1997++ to
Nov. 30, Nov. 30, Nov. 30, 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 .30 .24 .39 .30
Realized and unrealized loss on investments
and foreign currency transactions--net (1.50) (1.37) (1.53) (1.36)
-------- -------- -------- --------
Total from investment operations (1.20) (1.13) (1.14) (1.06)
-------- -------- -------- --------
Less dividends from investment income--net (.30) (.19) (.37) (.24)
-------- -------- -------- --------
Net asset value, end of period $ 7.18 $ 8.68 $ 7.19 $ 8.70
======== ======== ======== ========
Total Investment Based on net asset value per share (14.19%) (11.41%)+++ (13.53%) (10.74%)+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 2.86% 2.42%* 2.10% 1.64%*
Net Assets: ======== ======== ======== ========
Investment income--net 3.77% 2.63%* 4.74% 3.34%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 5,189 $ 9,737 $ 4,825 $ 6,269
Data: ======== ======== ======== ========
Portfolio turnover 53.53% 108.25% 53.53% 108.25%
======== ======== ======== ========
<FN>
*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.
November 30, 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. 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 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 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.
* 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.
Merrill Lynch Real Estate Fund, Inc.
November 30, 1999
NOTES TO FINANCIAL STATEMENTS (continued)
(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, dividends 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 overnight overdraft which resulted from
Management estimates of available cash.
(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 $663
have been reclassified between undistributed net investment income
and accumulated net realized capital losses. 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
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 .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 .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.
Merrill Lynch Real Estate Fund, Inc.
November 30, 1999
For the year ended November 30, 1999, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ -- $ 8
Class D $3,277 $58,091
For the year ended November 30, 1999, MLPF&S received contingent
deferred sales charges of $209,054 and $9,192 relating to
transactions in Class B and Class C Shares, respectively.
Furthermore, MLPF&S received contingent deferred sales charges of
$1,347 relating to transactions subject to front-end sales charge
waivers in Class D Shares.
In addition, MLPF&S received $5,450 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
November 30, 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 year ended November 30, 1999 were $27,277,560 and
$40,722,681, respectively.
Net realized losses for the year ended November 30, 1999 and net
unrealized losses as of November 30, 1999 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(6,149,128) $(10,701,569)
Foreign currency transactions (663) (658)
----------- ------------
Total $(6,149,791) $(10,702,227)
=========== ============
As of November 30, 1999, net unrealized depreciation for Federal
income tax purposes aggregated $11,440,702, of which $110,673
related to appreciated securities and $11,551,375 related to
depreciated securities. At November 30, 1999, the aggregate cost of
investments for Federal income tax purposes was $50,514,873.
4. Capital Share Transactions:
The net increase (decrease) in net assets derived from capital share
transactions was $(13,727,936) and $73,565,878 for the year ended
November 30, 1999 and for the period December 26, 1997 to November
30, 1998, respectively.
Transactions in shares for each class were as follows:
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 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 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 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, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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 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 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)
========== ============
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, 1999, the Fund had a net capital loss carryforward
of approximately $8,122,000, of which $3,289,000 expires in 2006 and
$4,833,000 expires in 2007. This amount will be available to offset
like amounts of any future taxable gains.
6. Subsequent Event:
On December 17, 1999, the Fund's Board of Directors declared an
ordinary income dividend in the amount of $.099422 per Class A
Share, $.079545 per Class B Share, $.079118 per Class C Share and
$.094790 per Class D Share, payable on December 23, 1999 to
shareholders of record as of December 17, 1999.
Merrill Lynch Real Estate Fund, Inc.
November 30, 1999
<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, 1999, the related
statements of operations for the year then ended and changes in net
assets for the year then ended and for the period December 26, 1997
(commencement of operations) to November 30, 1998, and the financial
highlights for the year then ended and the period December 26, 1997
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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable 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, 1999 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 audits provide
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, 1999, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
January 20, 2000
</AUDIT-REPORT>
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, Senior Vice President
Jay L. Willoughby, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Barbara G. Fraser, 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