<PAGE>
Dreyfus
Real Estate
Mortgage Fund
Semi-Annual
Report
April 30, 1998
<PAGE>
Dreyfus Real Estate Mortgage Fund
- --------------------------------------------------------------------------------
Letter to Shareholders
Dear Shareholder:
We are pleased to report the performance for Dreyfus Real Estate Mortgage
Fund. For the semi-annual reporting period ended April 30, 1998, your Fund
produced a total return, including share price changes and dividend income
generated, of 7.22%.* Income dividends paid from net investment income during
the period amounted to $0.393 per share, representing an annualized distribution
rate per share of 6.00%.** During this six-month period ended April 30, 1998,
the return for the Salomon Brothers Broad Investment-Grade Bond Index was
3.66%.***
THE ECONOMY
The United States is now in the eighth year of economic expansion. Inflation
continues to rise at the slowest pace since 1964 and the unemployment rate has
fallen to a level not seen in 25 years. Not surprisingly, consumer confidence
has soared. Along with continued evidence of the robustness of the economy have
come heightened expectations that the Federal Reserve Board will raise interest
rates in a preemptive move to avoid a reignition of inflation. The last increase
in short-term rates came in March 1997 when the Federal Open Market Committee
(the policy-making arm of The Fed) hiked the target rates for Federal Funds by
one quarter of a percent to 5.5%. (The Federal Funds rate is the rate of
interest that banks charge one another for overnight loans.)
Inflation has remained benign on all fronts, even in the tight labor market,
an area closely watched by the Fed for signs of incipient inflation. The Labor
Department's Employment Cost Index (ECI), a measure of wage, salary and benefit
costs, suggests that wage inflation so far is not a problem. In fact, the first
quarter increase in the ECI (0.7%) was its smallest quarterly rise in two years.
Another inflation gauge, the broad-based Gross Domestic Product Price Deflator,
rose at an annual rate of only 0.9% in the first quarter, its lowest rate since
1964. Inflation as measured by the Consumer Price Index has been similarly tame.
Prices at the consumer level have risen at an annual rate of about 1.5% over the
reporting period. The lack of inflation has been even more dramatic at the
production level of the economy where prices have fallen: in the 12 months ended
March 31, the Producer Price Index declined 1.8%. Such a generally tepid price
environment has been partly fostered by the economic problems in Asia which have
suppressed worldwide demand for commodities, particularly oil.
Reflecting a level of confidence not seen in three decades, consumers
increased their spending over the reporting period, the first-quarter rate
rising at the fastest pace in six years. Not surprisingly, the growth rate in
new home construction over the reporting period was the strongest in four years.
Plentiful and well-paying jobs (total wage and salary income is 7% higher than a
year ago), low interest rates, the absence of inflation and investment market
gains have resulted in a financially healthy consumer with a corresponding
propensity to spend. Strong domestic demand for lower-priced imports has
contributed further to the quiescent inflation environment while offsetting the
drag on the economy resulting from the Asian financial crisis. It is still
widely expected that the Asian economic slowdown will have a further dampening
effect on the U. S. economy. Although the surge in domestic spending has masked
the full impact of the fall in Asian demand, our trade deficit has reached a
ten-year high, a dramatic sign of deterioration. Expectation of an economic
slowdown is another reason why the Fed has been reluctant to raise short-term
interest rates.
The production side of the economy has remained robust. Factory utilization
has been high, production rates strong, and while exports to Asia have fallen
sharply, they are growing in the rest of the world. Such resilience has been
characteristic of one of the longest, most healthy economic advances in our
history. Yet we remain mindful that the concept of an economic cycle is not
dead, nor is inflation, and we are alert for indications of a resurgence in
price pressures.
<PAGE>
MARKET ENVIRONMENT
Fixed Income Market
The interest rate environment for the first part of 1998 has been
characterized by the word "stability." Current interest rate stability and low
volatility have had a very positive effect on returns on both commercial and
residential mortgage-backed securities. The one negative aspect of this interest
rate stability is that it is coming at a time when the absolute level of
interest rates is at an historic low. This is unfavorable for an investor in
U.S. Government Agency-guaranteed and AAA-rated (or equivalent non-rated)
residential mortgage securities. Having interest rate stability during an
historic low interest rate environment has led to an extraordinary level of
housing purchases and an historically unprecedented level of homeowner mortgage
refinancing. Both of these activities contribute to increased prepayments on
non-call protected mortgage-backed securities, and these increased prepayments
generally cause an erosion of the yield on such securities. Because of this
prepayment problem, investors have increased their demand for call-protected
investments, which include commercial mortgage-backed securities and high-yield
(lower-rated) residential mortgage-backed securities. Hence, the additional
yield benefit on these call-protected assets as compared to U.S. Treasuries has
tightened over the last several months, outperforming both Agency
mortgage-backed securities and U.S. Treasuries.
On the positive side of the general mortgage-backed securities market, the
pace of investor demand for these securities continues to outrun supply. The two
large government-sponsored agencies, Fannie Mae and Freddie Mac, continue to
struggle to grow their retained portfolios. Their continued demand has pushed
spreads tighter and tighter. There has also been a general increase in demand
for high-yielding, fixed income securities from hedge funds and mortgage Real
Estate Investment Trusts (REITs). These have also added to to the imbalance
between supply and demand for high-yield mortgage-backed securities.
Our market outlook, going forward, is for lower interest rates. Our
expectations are for the markets to test new lows in interest rates and for
mortgage refinancing to continue to be high. In our overall economic outlook of
a moderately growing economy, real estate loan defaults and loan delinquencies
should remain low. This will keep the risk associated with owning
credit-sensitive mortgage-backed securities to a minimum. We believe that as
more money becomes dedicated to the sector, high-yield mortgage investor demand
will remain very strong. Credit-sensitive mortgage-backed securities have the
potential to outperform other fixed-income sectors for the rest of 1998. Of
course, this is based on current conditions continuing. Any change in these
conditions could affect the relative performance of mortgage-backed securities.
And, as always, there can be no guarantee of how the Fund actually will perform
on a relative basis.
Real Estate Market
The REIT market has been plagued with excess supply, both from investor
liquidations and new issues, which has been overwhelming the demand. The impact
has been dramatic: the return for the Bloomberg Real Estate Investment Trust
Index for the first four months of 1998 was -3.38 %.+ Compared to the Standard &
Poor's 500 Composite Stock Price Index, which had a strong return of 15.08% for
the same period, REITs underperformed by 18.46%.
<PAGE>
New stock supply and demand were not the only reason for the weak performance
of REITs in the early part of 1998. Real estate fundamentals have begun to
weaken, hence new construction has begun to worry investors. In several real
estate submarkets, large-scale construction has started to soften real estate
prices and increase vacancies. This has been particularly obvious in the
limited-service hotel sector, where vacancy rates have been rising for the past
two years. More recently, in both the retail and the apartment sectors, newly
constructed space coming onto the market has outpaced demand. All this has led
to a slowdown in rental income growth.
Even given these real estate fundamentals, our outlook going forward for the
REIT sector is more positive. There is a feeling in the stock market that with
the U.S. economy slowing down, large cap industrial stock valuations are poised
for a correction. As of 4/30/98, the yield on the S&P 500 Index was at a very
low level (1.4%). We believe that this could lead to an asset allocation into
income-producing equity investments, which could include REITs. Of course, there
is no guarantee that such demand will materialize or that REIT equity will
perform in any particular way.
PORTFOLIO OVERVIEW
Consistent with our market outlook, we have made several adjustments to the
portfolio over the last few months since our last shareholder report. Our first
goal was to continue to get the portfolio, which commenced operations on October
1, 1997, completely invested in real estate-related securities. Therefore we
sold our initial position in long-term U.S. Treasuries and put money to work
mainly in the commercial mortgage-backed securities market. We increased this
position to 30.4% of total investments, mostly with diversified deals, but we
also purchased a deal backed by the two well-known hotels (Dolphin and Swan) on
the grounds of Disney World.
We also decreased our total holdings of REIT securities. We already were
underweighted in the sector, but with our then-negative outlook, we further
decreased the Fund's exposure to this area. This decrease included selling our
total position in REIT preferred stock as well as decreasing our holdings in
REIT common stocks and REIT bonds. The proceeds were reallocated to asset-backed
securities, including residential credit-sensitive, lower-rated mortgage-backed
securities. We also increased our holdings of agency mortgage-backed securities
to 22.9% of total investments. These positions are mainly in discount GNMA
30-year pass-through collateral, and both Fannie Mae and Freddie Mac guaranteed
Collateralized Mortgage Obligations (CMOs).
In real estate, we continue to invest in urban central business district
office buildings. There continue to be many barriers to construction, and
currently demand consistently outpaces supply. In the New York City Grand
Central area, rents on class A office space have been accelerating for the last
two years. It is our conviction that with new construction taking at least two
years to come on line, we will continue to see rents climb in this region of
Manhattan. To take advantage of this clear trend, we have purchased commercial
mortgage-backed deals with loans on office properties in this area, as well as
maintaining a position on both Boston Properties (BXP) and SL Green Realty
(SLG), two REITs which have significant equity stakes in buildings in that
region.
<PAGE>
We intend to look for opportunities to increase our allocation to the REIT
marketplace, but at current levels, these securities don't look as attractive as
credit-sensitive mortgage-backed securities. We will continue to focus our
efforts on maintaining a diversified portfolio and continue looking for
attractively priced investment opportunities in the real estate marketplace. I
wish to thank you for your support from the beginning of this unique investment
opportunity, and we hope to continue to earn your confidence in the years to
come.
Very truly yours,
/s/ Michael Hoeh
Michael Hoeh
Portfolio Manager
May 18, 1998
New York, N.Y.
* Total return includes reinvestment of dividends and any capital gains paid.
** Distribution rate per share is based upon dividends per share paid from net
investment income during the period (annualized), divided by the net asset
value per share at the end of the period, adjusted for capital gain
distributions.
***SOURCE: SALOMON SMITH BARNEY. Salomon Brothers Broad Investment-Grade (BIG)
Bond IndexSM is market-capitalization weighted and includes Treasury,
Government-sponsored, mortgage and investment-grade (BBB-/Baa3) fixed-rate
corporate issues with a maturity of one year or longer and a minimum amount
outstanding of US$1 billion for Treasuries and mortgages and US$100 million
for corporate and Government-sponsored issues. A corporate or
Government-sponsored bond is removed if its amount falls below US$75 million.
+ SOURCE: BLOOMBERG, L.P. The Bloomberg Real Estate Investment Trust Index is a
capitalization-weighted index of infinite life Real Estate Investment Trusts
having a market capitalization of $15 million or greater. The BBREIT index
excludes healthcare and mortgage related REITs and was developed with a base
value of 100 as of December 31, 1993.
<PAGE>
Dreyfus Real Estate Mortgage Fund
- --------------------------------------------------------------------------------
Statement of Investments April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal
Bonds and Notes--126.1% Amount Value
- ------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C> <C>
Asset-Backed Securities--7.7% Nomura Depositor Trust,
Ser. 1998-ST1:
Cl. A-5, 6 7/8%, 2003.................... $ 500,000(a,b) $ 501,094
Cl. B-2, 9 7/8%, 2003.................... 500,000(a,b) 496,719
----------
997,813
----------
Commercial Mortgage-
Backed--44.5% 277 Park Avenue Finance,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1997-C1, Cl. B-1, 7.88%, 2007......... 500,000(a) 520,781
DLJ Mortgage Acceptance,
Commercial Mortgage Pass-Through Ctfs.:
Ser. 1997-CF2, Cl. B-3TB, 6.99%, 2009...... 500,000(a) 485,625
Ser.1998-STFA, Cl. B-3, 7.688%, 2000....... 1,000,000(a,b) 1,000,000
GS Mortgage Securities II,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1997-GL, Cl. G., 7.822%, 2030......... 1,000,000(b) 1,012,813
Library Tower Trust I,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1998-I, Cl. B, 6.66%, 2029............ 500,000(a) 496,689
Merrill Lynch Mortgage Investors,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1997-SD1, Cl. E., 6.669%, 2010........ 775,000(a) 775,969
Mortgage Capital Funding,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1997-MC2, Cl. C., 6.881%, 2007........ 500,000 503,906
Nomura Asset Securities,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1998-D6, Cl. A-4, 7.349%, 2028........ 1,000,000 989,844
----------
5,785,627
----------
Residential Mortgage-
Backed--32.6% BA Mortgage Securities,
Mortgage Pass-Through Ctfs.,
Ser. 1997-1, Cl. B-4, 7 1/2%, 2026......... 667,482(a) 483,925
Norwest Asset Securities,
Mortgage Pass-Through Ctfs.:
Ser. 1997-10, Cl. B-2, 7 5/8%, 2027........ 496,947 506,150
Ser. 1997-17:
Cl. B-4, 7 1/4%, 2027.................... 871,279(a) 630,044
Cl. B-5, 7 1/4%, 2027.................... 1,046,115(a) 358,294
Ser. 1997-20, Cl. B-4, 6 3/4%, 2012........ 251,000(a) 208,567
Ser. 1998-2:
Cl. B-4, 6 1/2%, 2028.................... 375,083 289,635
Cl. B-5, 6 1/2%, 2028.................... 375,628 142,739
Ser. 1998-9:
Cl. B-5, 6 1/2%, 2028.................... 274,772(a) 212,133
Cl. B-6, 6 1/2%, 2028.................... 413,211(a) 157,021
</TABLE>
<PAGE>
Dreyfus Real Estate Mortgage Fund
- --------------------------------------------------------------------------------
Statement of Investments (continued) April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal
Bonds and Notes (continued) Amount Value
- ------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C> <C>
Residential Mortgage-
Backed (continued) PNC Mortgage Securities,
Mortgage Pass-Through Ctfs.:
Ser. 1997-8:
Cl. 3B-4, 6 3/4%, 2012................... $ 256,913(a) $ 240,214
Cl. 3B-5, 6 3/4%, 2012................... 205,530(a) 161,277
Cl. 3B-6, 6 3/4%, 2012................... 205,527(a) 78,101
Ser. 1998-2:
Cl. 3B-6, 6 3/4%, 2013................... 384,715(a) 146,192
Cl. 4B-6, 6 3/4%, 2027................... 268,534(a) 85,931
Residential Funding Mortgage Securities I,
Mortgage Pass-Through Ctfs.:
Ser. 1997-S18:
Cl. B-2, 6 3/4%, 2012.................... 228,804(a) 184,751
Cl. B-3, 6 3/4%, 2012.................... 305,194(a) 104,529
Ser. 1997-S21:
Cl. B-2, 6 1/2%, 2012.................... 197,185(a) 156,808
Cl. B-3, 6 1/2%, 2012.................... 263,014(a) 90,083
----------
4,236,394
----------
Real Estate Investment
Trust--7.8% Crescent Real Estate Equities,
Notes, 7 1/8%, 2007........................ 500,000(a) 499,060
Tanger Properties,
Unsecured Notes
(Gtd. by Tanger Factory Outlet Centers),
7 7/8%, 2004............................... 500,000(c) 506,397
----------
1,005,457
----------
U.S. Government Agencies
Mortgage-Backed--33.5% Federal Home Loan Mortgage Corp., Real
Estate Mortgage Investment Conduit, Stripped
Securities, Interest Only Class:
Ser. 1542, Cl. QC, 7%, 2020................ 750,000(c,d) 146,662
Ser. 1987, Cl. PI, 7%, 2012................ 1,300,000(c,d) 325,949
Ser. 1995, Cl. PY, 7%, 2027................ 875,000(c,d) 380,078
Ser. 1999, Cl. PW, 7%, 2026................ 2,500,000(c,d) 586,719
Ser. 2048, Cl. QI, 6 1/2%, 2026............ 1,000,000(d) 225,312
Federal National Mortgage Association,
Real Estate Mortgage Investment Conduit,
Collateralized Mortgage Obligation;
Ser. 1996-64, Cl. PK, 6 1/2%, 2011....... 500,000(c) 504,800
Stripped Securities, Interest Only Class:
Ser. 1993-119, Cl. JA, 7%, 2019.......... 1,969,914(d) 130,310
Ser. 1998-17, Cl. PL, 7%, 2019........... 1,250,000(d) 239,063
</TABLE>
<PAGE>
Dreyfus Real Estate Mortgage Fund
- --------------------------------------------------------------------------------
Statement of Investments (continued) April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal
Bonds and Notes (continued) Amount Value
- ------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C> <C>
U.S. Government Agencies
Mortgage-Backed (continued) Government National Mortgage Association I:
6 1/2%..................................... $ 300,000(e) $ 296,529
7%......................................... 1,500,000(e) 1,516,875
-----------
4,352,297
-----------
TOTAL BONDS AND NOTES
(cost $16,334,505)......................... $16,377,588
===========
Equity-Related Securities--20.4% Shares
- --------------------------------------------------------------------------------- ------------
Common Stocks
Real Estate Investment
Trust: Alexandria Real Estate Equities............... 14,000 $ 461,125
Avalon Properties............................. 3,000 84,375
Boston Properties............................. 5,000 165,312
Cabot Industrial Trust........................ 15,100 341,637
Crescent Real Estate Equities................. 10,000 341,250
Equity Residential Properties Trust........... 3,000 147,375
FelCor Suite Hotels........................... 6,000 210,000
SL Green Realty............................... 17,000 408,000
Spieker Propeities............................ 5,000 198,125
Trammell Crow................................. 3,700 98,050
Vornado Realty Trust.......................... 5,000 200,312
-----------
TOTAL EQUITY-RELATED SECURITIES
(cost $2,679,650).......................... $ 2,655,561
===========
TOTAL INVESTMENTS (cost $19,014,155)........................................... 146.5% $19,033,149
====== ===========
LIABILITIES, LESS CASH AND RECEIVABLES......................................... (46.5%) $(6,042,988)
====== ===========
NET ASSETS..................................................................... 100.0% $12,990,161
====== ===========
<FN>
Notes to Statement of Investments:
- --------------------------------------------------------------------------------
(a) Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At April 30,
1998, these securities amounted to $7,075,994 or 54.5% of net assets.
(b) Variable rate security-interest rate subject to change periodically.
(c) Held by the custodian in a segregated account as collateral for securities
purchased on a forward commitment basis.
(d) Reflects notional face.
(e) Purchased on a forward commitment basis.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
Dreyfus Real Estate Mortgage Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Cost Value
------------- -------------
<S> <C> <C> <C>
ASSETS: Investments in securities--See Statement of Investments $19,014,155 $19,033,149
Cash............................................. 45,640
Receivable for investment securities sold........ 8,928,421
Interest and dividends receivable................ 203,058
Paydowns receivable.............................. 10,334
Prepaid expenses................................. 65,368
Due from The Dreyfus Corporation and affiliates.. 374
-----------
28,286,344
-----------
LIABILITIES: Due to Distributor............................... 2,646
Payable for investment securities purchased...... 11,902,466
Bank loan payable--Note 2........................ 3,365,000
Interest payable--Note 2......................... 14,890
Accrued expenses................................. 11,181
-----------
15,296,183
-----------
NET ASSETS..................................................................... $12,990,161
===========
REPRESENTED BY: Paid-in capital.................................. $12,516,048
Accumulated undistributed investment income--net. 144,416
Accumulated net realized gain (loss) on investments 310,703
Accumulated net unrealized appreciation (depreciation)
on investments--Note 4......................... 18,994
-----------
NET ASSETS..................................................................... $12,990,161
===========
SHARES OUTSTANDING
(unlimited number of $.001 par value shares of Beneficial Interest authorized). 995,066
NET ASSET VALUE, offering and redemption price per share--Note 3(d)............ $13.05
======
</TABLE>
See notes to financial statements.
<PAGE>
Dreyfus Real Estate Mortgage Fund
- --------------------------------------------------------------------------------
Statement of Operations Six Months Ended April 30, 1998 (Unaudited)
<TABLE>
INVESTMENT INCOME
<S> <C> <C> <C>
INCOME: Interest................................... $495,459
Cash Dividends............................. 73,561
--------
Total Income.......................... $569,020
EXPENSES: Management fee--Note 3(a).................. 37,865
Interest expense--Note 2................... 71,358
Registration fees.......................... 23,986
Shareholder servicing costs--Note 3(b)..... 15,432
Professional fees.......................... 5,140
Prospectus and shareholders' reports....... 2,338
Custodian fees--Note 3(b).................. 1,203
Miscellaneous.............................. 6,561
--------
Total Expenses........................ 163,883
Less--expense reimbursement from the Manager
due to undertakings--Note 3(a)............ (40,096)
--------
Net Expenses.......................... 123,787
--------
INVESTMENT INCOME--NET................................................... 445,233
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--Note 4:
Net realized gain (loss) on investments.... $310,062
Net unrealized appreciation (depreciation)
on investments........................... 37,346
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS................... 347,408
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $792,641
========
</TABLE>
See notes to financial statements.
<PAGE>
Dreyfus Real Estate Mortgage Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1998 Year Ended
(Unaudited) October 31, 1997*
--------------- ------------------
<S> <C> <C>
OPERATIONS:
Investment income--net................................................. $ 445,233 $ 47,994
Net realized gain (loss) on investments................................ 310,062 124,382
Net unrealized appreciation (depreciation) on investments.............. 37,346 (18,352)
----------- -----------
Net Increase (Decrease) in Net Assets Resulting from Operations..... 792,641 154,024
----------- -----------
DIVIDENDS TO SHAREHOLDERS FROM:
Investment income--net................................................. (348,811) --
Net realized gain on investments....................................... (123,741) --
----------- -----------
Total Dividends..................................................... (472,552) --
----------- -----------
BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from shares sold.......................................... 2,259,370 10,243,097
Dividends reinvested................................................... 468,074 --
Cost of shares redeemed................................................ (453,493) (1,000)
----------- -----------
Increase (Decrease) in Net Assets from Beneficial Interest Transactions 2,273,951 10,242,097
----------- -----------
Total Increase (Decrease) in Net Assets.......................... 2,594,040 10,396,121
NET ASSETS:
Beginning of Period.................................................... 10,396,121 --
----------- -----------
End of Period.......................................................... $12,990,161 $10,396,121
=========== ===========
Undistributed investment income--net...................................... $ 144,416 $ 47,994
----------- -----------
CAPITALSHARETRANSACTIONS: Shares Shares
----------- -----------
Shares sold............................................................ 174,058 819,457
Shares issued for dividends reinvested................................. 36,370 --
Shares redeemed........................................................ (34,739) (80)
----------- -----------
Net Increase (Decrease) in Shares Outstanding.................... 175,689 819,377
============ ===========
<FN>
- -------------------
*From September 30, 1997 (commencement of operations) to October 31, 1997.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
Dreyfus Real Estate Mortgage Fund
- --------------------------------------------------------------------------------
Financial Highlights
Contained below is per share operating performance data for a share of
Beneficial Interest outstanding, total investment return, ratios to average net
assets and other supplemental data for each period indicated. This information
has been derived from the Fund's financial statements.
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1998 Year Ended
PER SHARE DATA: (Unaudited) October 31, 1997(1)
---------------- ------------------
<S> <C> <C>
Net asset value, beginning of period................... $12.69 $12.50
------ ------
Investment Operations:
Investment income--net................................. .48 .06
Net realized and unrealized gain (loss)
on investments...................................... .42 .13
------ ------
Total from Investment Operations....................... .90 .19
------ ------
Distributions:
Dividends from investment income--net.................. (.39) --
Dividends from net realized gain on investments........ (.15) --
------ ------
Total Distributions.................................... (.54) --
------ ------
Net asset value, end of period......................... $13.05 $12.69
====== ======
TOTAL INVESTMENT RETURN(2)................................ 14.56%(3) 17.34%(3)
RATIOS/SUPPLEMENTAL DATA:
Ratio of operating expenses to average net assets...... .90%(3) .90%(3)
Ratio of interest expense to average net assets........ 1.22%(3) --
Ratio of net investment income to average net assets... 7.64%(3) 5.39%(3)
Decrease reflected in above expense ratio due to
undertaking by the Manager.......................... .69%(3) 2.77%(3)
Portfolio Turnover Rate................................ 533.88%(4) 244.61%(4)
Net Assets, end of period (000's Omitted).............. $12,990 $10,396
<FN>
- ------------------
(1) From September 30, 1997 (commencement of operations) to October 31, 1997.
(2) Exclusive of redemption fee.
(3) Annualized.
(4) Not annualized.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
Dreyfus Real Estate Mortgage Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
NOTE 1--Significant Accounting Policies:
Dreyfus Real Estate Mortgage Fund (the "Fund") is a separate non-diversified
series of Dreyfus Income Funds (the "Company") which is registered under the
Investment Company Act of 1940 ("Act") as an open-end management investment
company and operates as a series company currently offering five series,
including the Fund. The Fund's investment objective is to maximize total
return, consisting of capital appreciation and current income. The Dreyfus
Corporation ("Manager") serves as the Fund's investment adviser. The Manager is
a direct subsidiary of Mellon Bank, N.A. ("Mellon") which is a wholly-owned
subsidiary of Mellon Bank Corporation. Premier Mutual Fund Services, Inc. (the
"Distributor") is the distributor of the Fund's shares, which are sold to the
public without a sales charge.
As of April 30, 1998, MBIC Investments Corp., an indirect subsidiary of
Mellon Bank Corporation, held 834,082 shares of the Fund.
The Company accounts separately for the assets, liabilities and operations of
each fund. Expenses directly attributable to each fund are charged to that
fund's operations; expenses which are applicable to all funds are allocated
among them on a pro rata basis.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management estimates
and assumptions. Actual results could differ from those estimates.
(A) PORTFOLIO VALUATION: Investments in securities (excluding short-term
investments and financial futures) are valued each business day by an
independent pricing service ("Service") approved by the Board of Trustees.
Investments for which quoted bid prices are readily available and are
representative of the bid side of the market in the judgment of the Service are
valued at the mean between the quoted bid prices (as obtained by the Service
from dealers in such securities) and asked prices (as calculated by the Service
based upon its evaluation of the market for such securities). Other investments
(which constitute a majority of the portfolio securities) are carried at fair
value as determined by the Service, based on methods which include consideration
of: yields or prices of securities of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions.
Securities for which there are no such valuations are valued at fair value as
determined in good faith under the direction of the Board of Trustees.
Short-term investments, excluding U.S. Treasury Bills, are carried at amortized
cost, which approximates value. Financial futures are valued at the last sales
price on the securities exchange on which such securities are primarily traded
or at the last sales price on the national securities market on each business
day.
(B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions
are recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including, where
applicable, amortization of discount on investments, is recognized on the
accrual basis.
(C) DIVIDENDS TO SHAREHOLDERS: It is the policy of the Fund to declare and
pay dividends quarterly from investment income-net. Dividends from net realized
capital gain are normally declared and paid annually, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. To the extent that net realized
capital gain can be offset by capital loss carryovers, if any, it is the policy
of the Fund not to distribute such gain.
(D) FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a
regulated investment company, if such qualification is in the best interests of
its shareholders, by complying with the applicable provisions of the Internal
Revenue Code, and to make distributions of taxable income sufficient to relieve
it from substantially all Federal income and excise taxes.
<PAGE>
Dreyfus Real Estate Mortgage Fund
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NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
NOTE 2--Bank Lines of Credit:
The Fund may borrow up to $10 million for leveraging purposes under a
short-term unsecured line of credit and participates with other Dreyfus-managed
funds in a $100 million unsecured line of credit primarily to be utilized for
temporary or emergency purposes, including the financing of redemptions.
Interest is charged to the Fund at rates which are related to the Federal Funds
rate in effect at the time of borrowings.
The average daily amount of borrowings outstanding under both arrangements
during the period ended April 30, 1998 was approximately $2,456,000, with a
related weighted average annualized interest rate of 5.96%.
NOTE 3--Management Fee and Other Transactions With Affiliates:
(A) Pursuant to a management agreement with the Manager, the management fee
is computed at the annual rate of .65 of 1% of the value of the Fund's average
daily net assets and is payable monthly. The Manager has undertaken from
November 1, 1997 through April 30, 1998, to reduce the management fee paid by,
or reimburse such excess expenses of the Fund to the extent that the Fund's
aggregate annual expenses, exclusive of taxes, brokerage, interest on borrowings
and extraordinary expenses, exceed an annual rate of .90 of 1% of the value of
the Fund's average daily net assets. The expense reimbursement, pursuant to the
undertaking, amounted to $40,096 for the period ended April 30, 1998.
(B) Under the Shareholder Services Plan, the Fund pays the Distributor at an
annual rate of .25 of 1% of the value of the Fund's average daily net assets for
the provision of certain services. The services provided may include personal
services relating to shareholder accounts, such as answering shareholder
inquiries regarding the Fund and providing reports and other information, and
services related to the maintenance of shareholder accounts. The Distributor may
make payments to Service Agents (a securities dealer, financial institution or
other industry professional) in respect of these services. The Distributor
determines the amounts to be paid to Service Agents. During the period ended
April 30, 1998, the Fund was charged $14,564 pursuant to the Shareholder
Services Plan.
The Fund compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary of the
Manager, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the Fund. During the period
ended April 30, 1998, the Fund was charged $533 pursuant to the transfer agency
agreement.
The Fund compensates Mellon under a custody agreement to provide custodial
services for the Fund. During the period ended April 30, 1998, the Fund was
charged $1,203 pursuant to the custody agreement.
(C) Each trustee who is not an "affiliated person" as defined in the Act
receives from the Company an annual fee of $2,500 and an attendance fee of $500
per meeting. The Chairman of the Board receives an additional 25% of such
compensation.
(D) A 1% redemption fee is charged and retained by the Fund on certain
redemptions of Fund shares (including redemptions through the use of the Fund
Exchanges service) where the redemption or exchange occurs within a six-month
period following the date of issuance.
NOTE 4--Securities Transactions:
The aggregate amount of purchases and sales (including paydowns) of
investment securities, excluding short-term securities, during the period ended
April 30, 1998, amounted to $90,515,619 and $83,123,056, respectively.
At April 30, 1998, accumulated net unrealized appreciation on investments
was $18,994, consisting of $239,897 gross unrealized appreciation and $220,903
gross unrealized depreciation.
At April 30, 1998, the cost of investments for Federal income tax purposes
was substantially the same as the cost for financial reporting purposes (see the
Statement of Investments).
<PAGE>
Dreyfus Real Estate Mortgage Fund
200 Park Avenue
New York, NY 10166
Manager
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166
Custodian
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258
Transfer Agent &
Dividend Disbursing Agent
Dreyfus Transfer, Inc.
P.O. Box 9671
Providence, RI 02940
Printed in U.S.A. 045SA984
