Annual Report
Real Estate Fund
December 31, 1997
T. Rowe Price
Report Highlights
Real Estate Fund
o Real estate stocks posted good returns in the final two
months of 1997, a period marked by volatility due to
concerns about turmoil in Asian markets.
o Your fund returned 7.82% during its first two months of
operation, ahead of its Lipper peers and the Wilshire Real
Estate Securities Index.
o Your fund is well diversified across various sectors of the
real estate industry, with no area accounting for more than
14% of total assets.
o We believe valuations are relatively attractive for real
estate stocks, offering good long-term return potential.
Fellow Shareholders
This is our first report since the inception of your fund on
October 31, 1997, and we would like to welcome you as
shareholders. Your fund turned in a strong performance during
its first two months, a period of market volatility due to
turmoil in Asian markets that affected U.S. stocks.
Performance Comparison
Period Ended 12/31/97
2 Months
Since Inception
10/31/97
_____________________________________________________
Real Estate Fund 7.82%
Wilshire Real Estate
Securities Index 4.28
Lipper Real Estate Funds Average 3.90
Your fund generated a total return of 7.82%, comfortably
surpassing the returns for the Wilshire Real Estate Securities
Index and the average for other real estate funds over the
two-month period. The fund's gain also exceeded the 6.43% return
of the unmanaged Standard & Poor's 500 Stock Index. The strong
relative performance was primarily due to stock selection and
allocation among the various sectors of the real estate
industry.
DIVIDEND DISTRIBUTION
Your Board of Directors declared an income dividend of $0.09 per
share, paid on December 30, 1997, to shareholders of record on
December 26. You should have already received your check or
statement reflecting this activity.
INVESTMENT PHILOSOPHY
In our first report, we would like to review our investment
philosophy for this fund. To begin with, several studies have
shown that real estate can provide an enhanced overall return to
a diversified portfolio of assets. We view the increasing
securitization of real estate as a continuing trend that can
provide growing opportunities for investors in the years ahead.
Your fund seeks attractive returns from real estate securities
through a combination of capital appreciation and current
income. In pursuit of the best investment alternatives, we will
employ rigorous "bottom-up" fundamental research. Our strategy
of investing in superior organizations will employ direct
contact with companies and interviews with management. We will
take advantage of our flexible program to provide shareholders
with broader exposure to real estate opportunities and will
review each holding for its individual investment merits and its
place in the context of the entire portfolio. In addition, we
strive to produce a well-diversified portfolio that is poised to
take advantage of numerous opportunities across the real estate
spectrum.
A well-diversified portfolio does not mean that we cannot be
selective or focused. There are many companies and themes from
which to choose. For example, we feel that we have suitable
exposure to the lodging and leisure sector by virtue of our 8%
position there. At the same time, we purposely weighted our
holdings toward the full-service, upscale segment of this market
since we currently are less sanguine about the limited-service
area due to our concerns about oversupply.
While we believe strongly in portfolio diversification, at times
we may selectively concentrate fund holdings when our conviction
level is particularly high. We believe the current portfolio is
well-balanced, as detailed in the Industry Diversification table
to the left.
Industry Diversification
Percent of
Net Assets
12/31/97
___________________________________________________
Diversified 14%
Apartment/Residential 14
Office and Industrial 9
Office 8
Lodging and Leisure 8
Shopping Center 8
Industrial 6
Services 6
Miscellaneous 5
Regional Mall 4
Self Storage 3
Manufactured Housing 3
Other Real Estate 2
Reserves 10
___________________________________________________
Total 100.0%
MARKET ENVIRONMENT AND PORTFOLIO REVIEW
The past year was rewarding once again for real estate investors
as industry securities posted a respect-able 19.8% return,
measured by the Wilshire Real Estate Securities Index. While the
broad market outpaced real estate stocks, this is not unusual in
times of powerful market advances such as have occurred in
recent years. The fourth quarter of 1997 was challenging, with
a difficult October partly offset by better returns in the final
two months.
During the year, we observed a continuation of a strong trend
toward the securitization of real estate. Mergers and
acquisitions within the sector remained robust, and industry
consolidators delivered some of the highest returns. We believe
this type of consolidation will continue, and your fund is
positioned to take advantage of it.
Mergers and acquisitions within the sector remained robust, and
industry consolidators delivered some of the highest returns.
Our largest holding, Crescent Real Estate Equities, is a
diversified real estate organization adept at seizing
opportunities across various segments of the industry. We also
like the value-added approach favored by Reckson Associates
Realty, an office and industrial real estate investment trust
(REIT) with a focus on enhancing returns through controlled and
selective growth. Avalon Properties is an apartment REIT
specializing in locations with high barriers to entry from
potential competition. Simon DeBartolo Group is the largest
public owner of regional malls, which has made the company the
partner of choice for companies seeking superior access to
consumers. Additionally, the flexibility of the fund allowed it
to benefit from investments in services companies such as
Trammell Crow. In total, when reviewing the composition of the
portfolio, we believe we have effectively invested in an
assembly of quality organizations, well positioned to take
advantage of the industry's potential.
OUTLOOK
We remain cautiously optimistic that the real estate recovery,
as well as the current balance between limited supply and strong
demand, will continue to reward investors during the foreseeable
future. A growing economy provides steady demand for the
products and services offered by our holdings. A more crucial
variable, building supply, appears reasonably balanced at this
time. The earnings visibility provided by the typical lead times
for construction, and the contractual nature of rents in the
industry, make real estate securities attractive, in our view.
While we have observed some new construction and higher prices
being paid for real estate transactions, we do not feel that the
prices of real estate securities are fully valued.
Once again, we would like to welcome shareholders to the fund
and assure you that we will remain vigilant in our search for
rewarding investment opportunities in the real estate industry.
Respectfully submitted,
David M. Lee
Chairman of the Investment Advisory Committee
January 23, 1998
T. Rowe Price Real Estate Fund
Portfolio Highlights
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/97
___________________________________________________
Crescent Real Estate Equities 3.1%
Equity Residential Properties Trust 2.4
Simon DeBartolo Group 2.3
Vornado Realty Trust 2.1
Equity Office Properties 2.1
___________________________________________________
Starwood Lodging 2.0
Reckson Associates Realty 2.0
Spieker Properties 1.9
SECURITY CAPITAL PACIFIC TRUST 1.9
AMB Property 1.9
___________________________________________________
FelCor Suite Hotels 1.9
Trammell Crow 1.8
Developers Diversified Realty 1.8
Avalon Properties 1.8
Trizec Hahn 1.8
___________________________________________________
Patriot American Hospitality 1.8
Sun Communities 1.8
Boston Properties 1.8
Weeks 1.8
Kimco Realty 1.7
___________________________________________________
Public Storage 1.7
Apartment Investment & Management 1.7
Security Capital Industrial Trust 1.7
Duke Realty Investments 1.7
Post Properties 1.7
___________________________________________________
Total 48.2%
T. Rowe Price Real Estate Fund
For a share outstanding throughout each period
Financial Highlights
10/31/97
Through
12/31/97
NET ASSET VALUE
Beginning of period $ 10.00
Investment activities
Net investment income 0.08*
Net realized and unrealized
gain (loss) 0.70
Total from investment activities 0.78
Distributions
Net investment income (0.09)
NET ASSET VALUE
End of period $ 10.69
__________
Ratios/Supplemental Data
Total return 7.82%*
Ratio of expenses to average
net assets 1.00%*!
Ratio of net investment income
to average net assets 6.07%*!
Portfolio turnover rate 8.4%
Average commission rate paid $ 0.0366
Net assets, end of period
(in thousands) $ 7,259
* Excludes expenses in excess of a 1.00% voluntary expense
limitation in effect through 12/31/99.
! Annualized.
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Real Estate Fund
December 31, 1997
Portfolio of Investments
Shares/Par Value
In thousands
Common Stocks 90.5%
REAL ESTATE 79.8%
Apartment/Residential 14.4%
Apartment Investment &
Management, REIT 3,400 $ 125
Avalon Properties, REIT 4,300 133
Bay Apartment Community, REIT 3,100 121
Camden Property Trust, REIT 3,700 115
Equity Residential Properties
Trust, REIT 3,500 177
Post Properties, REIT 3,000 122
Security Capital Atlantic, REIT 5,400 114
SECURITY CAPITAL PACIFIC
TRUST, REIT 5,700 138
1,045
Diversified 13.4%
AMB Property 5,500 138
Colonial Properties Trust, REIT 3,600 109
Cousins Properties, REIT 3,900 114
Crescent Real Estate
Equities, REIT 5,800 228
Glenborough Realty Trust, REIT 3,300 98
Trizec Hahn 5,600 130
Vornado Realty Trust, REIT 3,300 155
972
Industrial 6.4%
Eastgroup Properties, REIT 4,800 104
Meridan Industrial Trust, REIT 4,200 107
Security Capital Industrial
Trust, REIT 5,000 124
Weeks, REIT 4,000 128
463
Lodging & Leisure 8.3%
FelCor Suites Hotels, REIT 3,800 135
Homestead Village * 4,600 69
Hospitality Properties Trust, REIT 3,700 121
Patriot American Hospitality, REIT 4,500 130
Starwood Lodging, REIT 2,500 145
600
Manufactured Housing 3.2%
Manufactured Home
Communities, REIT 3,900 105
Sun Communities, REIT 3,600 130
235
Office 8.3%
Arden Realty, REIT 3,500 $ 108
Boston Properties, REIT 3,900 129
Cali Realty, REIT 2,600 106
Equity Office Properties, REIT 4,800 151
Koger Equity, REIT 5,000 110
604
Office & Industrial 8.5%
Duke Realty Investments, REIT 5,100 124
Kilroy Realty, REIT 4,100 118
Liberty Property, REIT 3,200 91
Reckson Associates Realty, REIT 5,700 145
Spieker Properties, REIT 3,300 141
619
Other Real Estate 1.6%
Catellus Development * 5,700 114
114
Regional Mall 4.2%
CBL & Associates Properties, REIT 3,900 96
Macerich, REIT 1,600 46
Simon DeBartolo Group, REIT 5,000 163
305
Self Storage 3.4%
Public Storage, REIT 4,300 126
Storage USA, REIT 3,000 120
246
Shopping Center 8.1%
Developers Diversified Realty, REIT 3,500 134
Excel Realty Trust, REIT 3,800 120
JP Realty, REIT 4,100 106
Kimco Realty, REIT 3,600 127
Weingarten Realty Investors,
REIT 2,300 103
590
Total Real Estate 5,793
SERVICES 5.7%
Service 5.7%
Insignia Financial Group (Class A) * 4,000 92
Lasalle Partners * 2,000 71
Security Capital Group (Class B) * 3,500 $ 114
Trammell Crow * 5,200 134
Total Services 411
Miscellaneous Common Stocks 5.0% 363
Total Common Stocks (Cost $6,269) 6,567
Short-Term Investments 11.5%
Money Market Funds 11.5%
Reserve Investment Fund, 5.84% # 839,593 840
Total Short-Term Investments
(Cost $840) 840
Total Investments in Securities
102.0% of Net Assets (Cost $7,109) $ 7,407
Other Assets Less Liabilities (148)
NET ASSETS $ 7,259
_________
# Seven-day yield
* Non-income producing
REIT Real Estate Investment Trust
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Real Estate Fund
December 31, 1997
Statement of Assets and Liabilities
In thousands
Assets
Investments in securities,
at value (cost $7,109) $ 7,407
Receivable for shares sold 395
Other assets 91
Total assets 7,893
Liabilities
Payable for investment securities
purchased 573
Other liabilities 61
Total liabilities 634
NET ASSETS $ 7,259
_________
Net Assets Consist of:
Accumulated net realized gain/loss -
net of distributions $ 24
Net unrealized gain (loss) 298
Paid-in-capital applicable to
679,250 shares of $0.0001 par
value capital stock outstanding;
1,000,000,000 shares authorized 6,937
NET ASSETS $ 7,259
_________
NET ASSET VALUE PER SHARE $ 10.69
_________
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Real Estate Fund
Statement of Operations
In thousands
10/31/97
Through
12/31/97
Investment Income
Income
Dividend $ 49
Interest 6
Total income 55
Expenses
Custody and accounting 14
Legal and audit 8
Registration 1
Directors 1
Miscellaneous 2
Reimbursed by manager (18)
Total expenses 8
Net investment income 47
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on securities 28
Change in net unrealized gain or
loss on securities 298
Net realized and unrealized gain (loss) 326
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 373
_________
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Real Estate Fund
Statement of Changes in Net Assets
In thousands
10/31/97
Through
12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 47
Net realized gain (loss) 28
Change in net unrealized gain
or loss 298
Increase (decrease) in net
assets from operations 373
Distributions to shareholders
Net investment income (52)
Capital share transactions*
Shares sold 6,845
Distributions reinvested 50
Shares redeemed (57)
Increase (decrease) in net
assets from capital
share transactions 6,838
Net Assets
Increase (decrease) during period 7,159
Beginning of period 100
End of period $ 7,259
_________
*Share information
Shares sold 670
Distributions reinvested 5
Shares redeemed (6)
Increase (decrease) in shares
outstanding 669
The accompanying notes are an integral part of these financial
statements.
T. Rowe Price Real Estate Fund
December 31, 1997
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Real Estate Fund, Inc. (the fund) is registered
under the Investment Company Act of 1940 as a diversified,
open-end management investment company and commenced operations
on October 31, 1997.
The accompanying financial statements are prepared in accordance
with generally accepted accounting principles for the investment
company industry; these principles may require the use of
estimates by fund management.
Valuation Equity securities listed or regularly traded on a
securities exchange are valued at the last quoted sales price on
the day the valuations are made. A security which is listed or
traded on more than one exchange is valued at the quotation on
the exchange determined to be the primary market for such
security. Listed securities not traded on a particular day and
securities regularly traded in the over-the-counter market are
valued at the mean of the latest bid and asked prices. Other
equity securities are valued at a price within the limits of the
latest bid and asked prices deemed by the Board of Directors, or
by persons delegated by the Board, best to reflect fair value.
Investments in mutual funds are valued at the closing net asset
value per share of the mutual fund on the day of valuation.
For purposes of determining the fund's net asset value per
share, the U.S. dollar value of all assets and liabilities
initially expressed in foreign currencies is determined by using
the mean of the bid and offer prices of such currencies against
U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures
are inappropriate or are deemed not to reflect fair value are
stated at fair value as determined in good faith by or under the
supervision of the officers of the fund, as authorized by the
Board of Directors.
Currency Translation Assets and liabilities are translated into
U.S. dollars at the prevailing exchange rate at the end of the
reporting period. Purchases and sales of securities and income
and expenses are translated into U.S. dollars at the prevailing
exchange rate on the dates of such transactions. The effect of
changes in foreign exchange rates on realized and unrealized
security gains and losses is reflected as a component of such
gains and losses.
Other Income and expenses are recorded on the accrual basis.
Investment transactions are accounted for on the trade date.
Realized gains and losses are reported on the identified cost
basis. Dividend income and distributions to shareholders are
recorded by the fund on the ex-dividend date. Income and capital
gain distributions are determined in accordance with federal
income tax regulations and may differ from those determined in
accordance with generally accepted accounting principles.
Note 2 - Investment Transactions
Purchases and sales of portfolio securities, other than
short-term securities, aggregated $6,603,000 and $358,000,
respectively, for the year ended December 31, 1997.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund
intends to qualify as a regulated investment company and
distribute all of its taxable income.
In order for the fund's capital accounts and distributions to
shareholders to reflect the tax character of certain
transactions, the following reclassifications were made during
the year ended December 31, 1997. The results of operations and
net assets were not affected by the increases/(decreases) to
these accounts.
Undistributed net investment income $ 5,000
Undistributed net realized gain (4,000)
Paid-in-capital (1,000)
At December 31, 1997, the aggregate cost of investments for
federal income tax and financial reporting purposes was
$7,109,000, and net unrealized gain aggregated $298,000, of
which $329,000 related to appreciated investments and $31,000 to
depreciated investments.
Note 4 - Related Party Transactions
The investment management agreement between the fund and T. Rowe
Price Associates, Inc. (the manager) provides for an annual
investment management fee. The fee is computed daily and paid
monthly, consisting of an individual fund fee equal to 0.30% of
average daily net assets and a group fee. The group fee is based
on the combined assets of certain mutual funds sponsored by the
manager or Rowe Price-Fleming International, Inc. (the group).
The group fee rate ranges from 0.48% for the first $1 billion of
assets to 0.30% for assets in excess of $80 billion. The
effective annual group fee rate was 0.32% at December 31, 1997,
and 0.33% for the year then ended. The fund pays a pro-rata
share of the group fee based on the ratio of its net assets to
those of the group.
Under the terms of the investment management agreement, the
manager is required to bear any expenses through December 31,
1999, which would cause the fund's ratio of expenses to average
net assets to exceed 1.00%. Thereafter, through December 31,
2001, the fund is required to reimburse the manager for these
expenses, provided that average net assets have grown or
expenses have declined sufficiently to allow reimbursement
without causing the fund's ratio of expenses to average net
assets to exceed 1.00%. Pursuant to this agreement, $5,000 of
management fees were not accrued by the fund for the year ended
December 31, 1997, and $18,000 of other expenses were borne by
the manager.
In addition, the fund has entered into agreements with the
manager and two wholly owned subsidiaries of the manager,
pursuant to which the fund receives certain other services. The
manager computes the daily share price and maintains the
financial records of the fund. T. Rowe Price Services, Inc., is
the fund's transfer and dividend disbursing agent and provides
shareholder and administrative services to the fund. T. Rowe
Price Retirement Plan Services, Inc., provides subaccounting and
recordkeeping services for certain retirement accounts invested
in the fund. The fund incurred expenses pursuant to these
related party agreements totaling approximately $11,000 for the
year ended December 31, 1997, of which $5,000 was payable at
period-end.
The fund may invest in the Reserve Investment Fund and
Government Reserve Investment Fund (collectively, the Reserve
Funds), open-end management investment companies managed by T.
Rowe Price Associates, Inc. The Reserve Funds are offered as
cash management options only to mutual funds and other accounts
managed by T. Rowe Price and its affiliates and are not
available to the public. The Reserve Funds pay no investment
management fees. Distributions from the Reserve Funds to the
fund for the year ended December 31, 1997, totaled $6,000 and
are reflected as interest income in the accompanying Statement
of Operations.
T. Rowe Price Real Estate Fund
Report of Independent Accountants
To the Board of Directors and Shareholders of T. Rowe Price Real
Estate Fund
In our opinion, the accompanying statement of assets and
liabilities, including the portfolio of investments, and the
related statements of operations and of changes in net assets
and the financial highlights present fairly, in all material
respects, the financial position of T. Rowe Price Real Estate
Fund (the "Fund") at December 31, 1997, and the results of its
operations, the changes in its net assets and the financial
highlights for the period October 31, 1997 (commencement of
operations) through December 31, 1997, in conformity with
generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally
accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit,
which included confirmation of securities at December 31, 1997
by correspondence with custodians and, where appropriate, the
application of alternative auditing procedures for unsettled
security transactions, provides a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
January 21, 1998
Tax Information (Unaudited) for the Tax Year Ended 12/31/97
We are providing this information as required by the Internal
Revenue Code. The amounts shown may differ from those elsewhere
in this report because of differences between tax and financial
reporting requirements.
For corporate shareholders, 9% of the fund's distributed income
qualified for the dividends-received deduction.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Real Estate Fund.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor.
F12-050 12/31/97
