As filed with the Securities and Exchange Commission on July 7, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file Number: 811-21315
NEUBERGER BERMAN REALTY INCOME FUND INC.
----------------------------------------
(Exact Name of the Registrant as Specified in Charter)
c/o Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Registrant's Telephone Number, including area code: (212) 476-8800
Peter E. Sundman, Chief Executive Officer
c/o Neuberger Berman Management Inc.
Neuberger Berman Realty Income Fund Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur C. Delibert, Esq. Ellen Metzger, Esq.
Kirkpatrick & Lockhart LLP Neuberger Berman, LLC
1800 Massachusetts Avenue, N.W. 2nd Floor 605 Third Avenue
Washington, DC 20036-1800 New York, New York 10158-3698
(Names addresses of agents for service)
Date of fiscal year end: October 31, 2004
Date of reporting period: April 30, 2004
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS
SEMI-ANNUAL REPORT
APRIL 30, 2004
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN
REALTY INCOME
FUND INC
NEUBERGER BERMAN APRIL 30, 2004 (UNAUDITED)
CHAIRMAN'S LETTER
DEAR FELLOW SHAREHOLDER,
I am pleased to present to you this semi-annual report of the Neuberger Berman
Realty Income Fund Inc. for the period ending April 30, 2004. The report
includes a portfolio commentary, a listing of the Fund's investments, and its
financial statements for the reporting period.
The Fund, which marked its one-year anniversary on April 24, 2004, seeks to
provide high current income with capital appreciation as a secondary objective.
In seeking to accomplish both, we have assembled a portfolio with a broad mix of
equity securities of real estate investment trusts (REITs) and other real estate
companies.
Portfolio Manager Steven Brown's investment approach combines analysis of
security fundamentals and real estate with property sector diversification. His
disciplined valuation methodology seeks out real estate securities that are
attractively priced relative to their historical growth rates and to the
valuation of other property sectors.
We believe our conservative investing philosophy and disciplined investment
process will benefit you with positive returns over the long term.
Thank you for your confidence in Neuberger Berman. We will continue to do our
best to keep earning it.
Sincerely,
/s/ Peter Sundman
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN
REALTY INCOME FUND INC.
"Neuberger Berman" and the Neuberger Berman logo are service marks of Neuberger
Berman, LLC. "Neuberger Berman Management Inc." and the individual fund name in
this shareholder report are either service marks or registered service marks of
Neuberger Berman Management Inc. (C)2004 Neuberger Berman Management Inc. All
rights reserved.
CONTENTS
THE FUND
CHAIRMAN'S LETTER 1
PORTFOLIO COMMENTARY/
PERFORMANCE HIGHLIGHTS 2
SCHEDULE OF INVESTMENTS/
TOP TEN EQUITY HOLDINGS 5
FINANCIAL STATEMENTS 8
FINANCIAL HIGHLIGHTS/
PER SHARE DATA 18
DIVIDEND REINVESTMENT PLAN 20
DIRECTORY 22
DIRECTORS AND OFFICERS 23
PROXY VOTING POLICIES AND PROCEDURES 30
1
REALTY INCOME FUND INC. PORTFOLIO COMMENTARY
For the six-month period ending April 30, 2004, on a Net Asset Value
(NAV) basis, the Neuberger Berman Realty Income Fund (NYSE: NRI)
returned 2.74% compared to 3.35% for the NAREIT Equity REIT Index.
The portfolio is broadly diversified across real estate market
sectors. It includes overweight positions in the Diversified,
Healthcare, and Office sectors and is underweighted in the
Lodging/Resorts and Specialty sectors relative to the benchmark. The
portfolio's concentration in Healthcare REITs and Office/Industrial
REITs enhanced performance for the reporting period. Stock selection
among the Shopping Centers and Regional Malls sectors detracted from
performance relative to their respective benchmark sectors.
REITs posted modestly positive performance for the six months ended
April 30, 2004. The route to that performance, however, was uneven.
REITs performed strongly during the five-month period from October 31
to March 31, but during the month of April experienced a decline of
nearly 15%. April's weak REIT performance was primarily due to a
strong jobs report released early in the month, which sparked concern
over potentially higher interest rates. The fear of higher interest
rates led to a sell-off in the bond market and subsequently ignited a
sell-off in the REIT market.
In our experience, interest rate changes have not significantly
affected the performance of REITs over long periods of time.
Correlation studies over the last five, ten, and twenty-five years
show a very low correlation between REIT performance and the direction
of interest rates. In addition, during periods when interest rates
rose for twelve consecutive months, REITs have historically generated
positive total returns.
We believe that REIT valuation levels are currently attractive.
Although we expect interest rates and inflation to move higher over
the next twelve months, we also expect GDP growth (Gross Domestic
Product) to remain robust, employment to accelerate and business
spending to pick up. In our view, these conditions would have the
potential to enhance the REIT industry's earnings power. New supply
growth also remains in check and we have been seeing acceleration in
demand. In this environment, we continue to have a positive view of
the potential for REIT stock price performance over the next twelve
months.
Sincerely,
/s/ Steven R. Brown
STEVEN R. BROWN
PORTFOLIO MANAGER
PERFORMANCE HIGHLIGHTS
SIX MONTH AVERAGE ANNUAL
PERIOD ENDED TOTAL RETURN
NEUBERGER BERMAN NAV(1) INCEPTION DATE 4/30/2004 1 YEAR SINCE INCEPTION
REALTY INCOME FUND 04/24/2003 2.74% 24.70% 23.90%
SIX MONTH AVERAGE ANNUAL
PERIOD ENDED TOTAL RETURN
MARKET PRICE(2) INCEPTION DATE 4/30/2004 1 YEAR SINCE INCEPTION
REALTY INCOME FUND 04/24/2003 0.14% 9.01% 10.51%
Closed-end funds, unlike open-end funds, are not continually offered. There is
an initial public offering and once issued, common shares of closed-end funds
are sold in the open market through a stock exchange.
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
2
ENDNOTES
(1) Returns based on Net Asset Value ("NAV") of the Fund.
(2) Returns based on price of Fund shares on the New York Stock
Exchange.
3
GLOSSARY OF INDICES
NAREIT EQUITY REIT INDEX: Tracks the performance of all Equity REITs
currently listed on the New York Stock
Exchange, the NASDAQ National Market System
and the American Stock Exchange. REITs are
classified as Equity if 75% or more of their
gross invested book assets are invested
directly or indirectly in equity of
commercial properties.
Please note that the index does not take into account any fees and expenses of
investing in the individual securities that it tracks, and that investors cannot
invest directly in any index or average. Data about the performance of the index
is prepared or obtained by Management and includes reinvestment of all dividends
and capital gain distributions. The Fund may invest in many securities not
included in its index.
4
SCHEDULE OF INVESTMENTS REALTY INCOME FUND
TOP TEN EQUITY HOLDINGS
HOLDING %
1 Mills Corp. 8.3
2 iStar Financial 7.5
3 Health Care REIT 6.6
4 Ventas, Inc. 6.4
5 Citigroup Global Markets 6.0
6 Maguire Properties 4.7
7 New Plan Excel Realty Trust 4.7
8 Colonial Properties Trust 4.5
9 Camden Property Trust 4.3
10 Pennsylvania REIT 4.3
NUMBER OF SHARES MARKET VALUE +
(000'S OMITTED)
COMMON STOCKS (107.1%)
APARTMENTS (15.9%)
138,200 Amli Residential Properties
Trust $ 3,496
531,400 Apartment Investment &
Management 14,970
430,500 Archstone-Smith Trust 11,809
464,200 Camden Property Trust 19,645
433,500 Gables Residential Trust 13,785
171,100 Home Properties 6,389@@
1,700 Mid-America Apartment
Communities 55
35,300 Post Properties 949
4,400 Town & Country Trust 103
49,100 United Dominion Realty Trust 881
---------------
72,082
COMMUNITY CENTERS (12.8%)
100,000 Chelsea Property Group 5,100
43,400 Developers Diversified Realty 1,421
30,000 Federal Realty Investment
Trust 1,112
221,400 Heritage Property Investment
Trust 5,619
942,400 New Plan Excel Realty Trust 21,148
331,100 Ramco-Gershenson
Properties Trust 7,840
404,700 Tanger Factory Outlet Centers 15,460
---------------
57,700
DIVERSIFIED (13.8%)
575,400 Colonial Properties Trust 20,300
813,100 iStar Financial 28,898^^
219,600 Lexington Corporate
Properties Trust 4,060@@
182,100 Vornado Realty Trust 9,187
---------------
62,445
HEALTH CARE (16.1%)
652,800 Health Care Property Investors 15,602
382,400 Health Care REIT 12,214
157,300 Healthcare Realty Trust 5,639
563,700 Nationwide Health Properties 10,220
1,312,900 Ventas, Inc. 29,002
---------------
72,677
INDUSTRIAL (7.6%)
642,129 EastGroup Properties 18,590
353,000 First Industrial Realty Trust 11,878
201,600 Keystone Property Trust 4,101
---------------
34,569
LODGING (0.4%)
51,000 Hospitality Properties Trust 1,993
OFFICE (22.0%)
100,000 American Financial Realty
Trust $ 1,480
191,000 Arden Realty 5,390
385,400 Brandywine Realty Trust 9,766
290,400 CarrAmerica Realty 8,279
374,300 Equity Office Properties Trust 9,421
217,000 Glenborough Realty Trust 4,078
408,700 Highwoods Properties 9,216
341,000 HRPT Properties Trust 3,257
271,300 Kilroy Realty 8,505
132,200 Mack-Cali Realty 4,938
942,000 Maguire Properties 21,468
323,500 Prentiss Properties Trust 10,365
233,600 Trizec Properties 3,345
---------------
99,508
OFFICE--INDUSTRIAL (7.3%)
149,500 Bedford Property Investors 4,050
332,200 Liberty Property Trust 12,142
704,700 Reckson Associates Realty 16,750
---------------
32,942
REGIONAL MALLS (8.9%)
55,500 CBL & Associates Properties 2,789
452,700 Glimcher Realty Trust 9,575@@
104,700 Macerich Co. 4,384
164,000 Mills Corp. 6,658@@
177,600 Pennsylvania REIT 5,745
230,300 Simon Property Group 11,103
10,400 Taubman Centers 203
---------------
40,457
SELF STORAGE (2.3%)
119,700 Public Storage, Depositary
Shares 3,349
75,700 Shurgard Storage Centers 2,521@@
131,500 Sovran Self Storage 4,441
---------------
10,311
TOTAL COMMON STOCKS
(COST $423,087) 484,684
---------------
PREFERRED STOCKS (40.8%)
APARTMENTS (4.7%)
7,200 Apartment Investment &
Management, Ser. Q 188
8,600 Apartment Investment &
Management, Ser. R 225
138,000 Apartment Investment &
Management, Ser. T 3,381
377,800 Mid-America Apartment
Communities, Ser. H 9,551
151,300 Post Properties, Ser. A 7,830
---------------
21,175
See Notes to Schedule of Investments
5
NUMBER OF SHARES MARKET VALUE +
(000'S OMITTED)
COMMERCIAL SERVICES (0.9%)
156,000 Anthracite Capital, Ser. C $ 3,972
COMMUNITY CENTERS (8.5%)
743,644 Citigroup Global Markets 26,952
66,000 Developers Diversified
Realty, Ser. I 1,634^
49,600 Ramco-Gershenson
Properties Trust, Ser. B 1,374
85,500 Saul Centers, Ser. A 2,214@@
60,000 Urstadt Biddle Properties,
Ser. C 6,523**
---------------
38,697
DIVERSIFIED (6.7%)
398,600 Crescent Real Estate
Equities, Ser. B 10,758
200,000 iStar Financial, Ser. E 5,142
580,000 Lexington Corp. Properties
Trust, Ser. B 14,500
---------------
30,400
HEALTH CARE (3.9%)
685,000 Health Care REIT, Ser. D 17,446
1,000 Nationwide Health Properties 99
---------------
17,545
INDUSTRIAL (0.1%)
20,000 Keystone Property Trust, Ser. D 528
LODGING (0.5%)
81,700 Hospitality Properties
Trust, Ser. B 2,167
5,300 LaSalle Hotel Properties,
Ser. A 142
---------------
2,309
OFFICE (3.7%)
23,200 Highwoods Properties, Ser. B 578
96,400 Highwoods Properties, Ser. D 2,372
50,000 HRPT Properties Trust, Ser. B 1,310
480,000 Parkway Properties, Ser. D 12,288
---------------
16,548
REGIONAL MALLS (11.2%)
40,000 CBL & Associates Properties,
Ser. B 2,092
48,000 Glimcher Realty Trust, Ser. F 1,217
108,500 Glimcher Realty Trust, Ser. G 2,671
31,200 Mills Corp., Ser. B 813
206,200 Mills Corp., Ser. C 5,316
965,900 Mills Corp., Ser. E 24,727
225,300 Pennsylvania REIT, Ser. A 13,518
7,700 Taubman Centers, Ser. A 193^^
---------------
50,547
SPECIALTY (0.6%)
30,000 Capital Automotive REIT,
Ser. B $ 728
76,500 Entertainment Properties
Trust, Ser. A 1,987
---------------
2,715
TOTAL PREFERRED STOCKS
(COST $177,724) 184,436
---------------
PRINCIPAL AMOUNT
SHORT-TERM INVESTMENTS (4.2%)
$ 14,482,000 N&B Securities
Lending Quality
Fund, LLC 14,482~
4,732,160 Neuberger Berman
Institutional Cash
Fund Trust Class 4,732@
---------------
TOTAL SHORT-TERM INVESTMENTS
(COST $19,214) 19,214#
---------------
TOTAL INVESTMENTS (152.1%)
(COST $620,025) 688,334##
Liabilities, less cash, receivables
and other assets [(1.7%)] (7,913)
Liquidation Value of Auction
Preferred Shares [(50.4%)] (228,000)
---------------
TOTAL NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS (100.0%) $ 452,421
---------------
6
NOTES TO SCHEDULE OF INVESTMENTS
+ Investments in securities by the Fund are valued at the latest
sales price where that price is readily available; securities for
which no sales were reported, unless otherwise noted, are valued
at the last available bid price on that day. Securities traded
primarily on the NASDAQ Stock Market are normally valued by the
Fund at the NASDAQ Official Closing Price ("NOCP") provided by
NASDAQ each business day. The NOCP is the most recently reported
price as of 4:00:02 p.m., Eastern time, unless that price is
outside the range of the "inside" bid and asked prices (i.e., the
bid and asked prices that dealers quote to each other when
trading for their own accounts); in that case, NASDAQ will adjust
the price to equal the inside bid or asked price, whichever is
closer. Because of delays in reporting trades, the NOCP may not
be based on the price of the last trade to occur before the
market closes. The Fund values all other securities by a method
the Board of Directors of the Fund (the "Board") believes
accurately reflects fair value. Numerous factors may be
considered when determining the fair value of a security,
including available analyst, media or other reports, trading in
futures or ADRs and whether the issuer of the security being fair
valued has other securities outstanding. Foreign security prices
are furnished by independent quotation services expressed in
local currency values. Foreign security prices are translated
from the local currency into U.S. dollars using the exchange rate
as of 12:00 p.m., Eastern time. The Board has approved the use of
FT Interactive Data Corporation ("FT Interactive") to assist in
determining the fair value of the Fund's foreign equity
securities in the wake of certain significant events.
Specifically, when changes in the value of a certain index
suggest that the closing prices on the foreign exchanges no
longer represent the amount that the Fund could expect to receive
for those securities, FT Interactive will provide adjusted prices
for certain foreign equity securities based on an analysis
showing historical correlations between the prices of those
securities and changes in the index. In the absence of precise
information about the market values of these foreign securities
as of the close of the New York Stock Exchange, the Board has
determined on the basis of available data that prices adjusted in
this way are likely to be closer to the prices the Fund could
realize on a current sale than are the prices of those securities
established at the close of the foreign markets in which the
securities primarily trade. However, fair value prices are
necessarily estimates, and there is no assurance that such a
price will be at or close to the price at which the security next
trades. Short-term debt securities with less than 60 days until
maturity may be valued at cost which, when combined with interest
earned, approximates market value.
# At cost, which approximates market value.
## At April 30, 2004, the cost of investments for U.S. Federal
income tax purposes was $620,025,000. Gross unrealized
appreciation of investments was $74,519,000 and gross unrealized
depreciation of investments was $6,210,000, resulting in net
unrealized appreciation of $68,309,000, based on cost for U.S.
Federal income tax purposes.
** Security exempt from registration under the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers under
Rule 144A. At April 30, 2004, these securities amounted to
$6,523,000 or 1.4% of net assets applicable to common
shareholders.
^ Security purchased on a when-issued basis. At April 30, 2004,
these securities amounted to $1,634,000.
^^ Security is segregated as collateral for when-issued purchase
commitments and as collateral for interest rate swap contracts.
@ Neuberger Berman Institutional Cash Fund is also managed by
Neuberger Berman Management Inc. (see Note A of Notes to
Financial Statements).
@@ All or a portion of this security is on loan (see Note A of Notes
to Financial Statements).
~ Affiliated issuer (see Note A of Notes to Financial Statements).
See Notes to Financial Statements
7
STATEMENT OF ASSETS AND LIABILITIES
NEUBERGER BERMAN REALTY INCOME
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) FUND
ASSETS
INVESTMENTS IN SECURITIES, AT MARKET VALUE*+ (NOTE A)--SEE
SCHEDULE OF INVESTMENTS:
Unaffiliated issuers $ 669,120
Non-controlled affiliated issuers 19,214
==========================================================================================
688,334
Interest rate swaps, at market value (Note A) 6,475
------------------------------------------------------------------------------------------
Dividends and interest receivable 2,497
Prepaid expenses and other assets 52
==========================================================================================
TOTAL ASSETS 697,358
==========================================================================================
LIABILITIES
Payable for collateral on securities loaned (Note A) 14,482
Dividends payable--preferred shares 19
------------------------------------------------------------------------------------------
Dividends payable--common shares 366
Payable for securities purchased 1,650
------------------------------------------------------------------------------------------
Payable for offering costs (Note A) 15
Payable to investment manager--net (Note B) 198
------------------------------------------------------------------------------------------
Payable to administrator (Note B) 142
Accrued expenses and other payables 65
==========================================================================================
TOTAL LIABILITIES 16,937
==========================================================================================
AUCTION PREFERRED SHARES SERIES A, B, C & D at liquidation value
14,000 shares authorized; 9,120 shares issued and outstanding
$.0001 par value; $25,000 liquidation value per share (Note A) 228,000
==========================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 452,421
==========================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Paid-in capital--common shares $ 386,016
Distributions in excess of net investment income (11,370)
------------------------------------------------------------------------------------------
Accumulated net realized gains (losses) on investments 2,991
Net unrealized appreciation (depreciation) in value of investments 74,784
==========================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 452,421
==========================================================================================
COMMON SHARES OUTSTANDING ($.0001 PAR VALUE; 999,986,000 SHARES AUTHORIZED) 27,372
==========================================================================================
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 16.53
==========================================================================================
+SECURITIES ON LOAN, AT MARKET VALUE $ 13,762
==========================================================================================
*COST OF INVESTMENTS:
Unaffiliated issuers $ 600,811
Non-controlled affiliated issuers 19,214
==========================================================================================
TOTAL COST OF INVESTMENTS $ 620,025
==========================================================================================
See Notes to Financial Statements
8
NEUBERGER BERMAN FOR THE SIX MONTHS ENDED APRIL 30, 2004 (UNAUDITED)
STATEMENT OF OPERATIONS
NEUBERGER BERMAN REALTY INCOME
(000'S OMITTED) FUND
INVESTMENT INCOME
INCOME:
Dividend income $ 11,457
Income from investments in affiliated issuers (Note A) 30
------------------------------------------------------------------------------------------
Income from securities loaned--net (Note A) 15
==========================================================================================
Total income 11,502
==========================================================================================
EXPENSES:
Investment management fee (Note B) 2,169
Administration fee (Note B) 904
------------------------------------------------------------------------------------------
Auction agent fees (Note B) 288
Audit fees 21
------------------------------------------------------------------------------------------
Basic maintenance expense (Note B) 12
Custodian fees (Note B) 75
------------------------------------------------------------------------------------------
Directors' fees and expenses 13
Insurance expense 3
------------------------------------------------------------------------------------------
Legal fees 23
Shareholder reports 43
------------------------------------------------------------------------------------------
Stock exchange listing fees 17
Stock transfer agent fees 39
------------------------------------------------------------------------------------------
Miscellaneous 11
==========================================================================================
Total expenses 3,618
Investment management fee waived (Note B) (907)
Expenses reduced by custodian fee expense offset and commission recapture
arrangements (Note B) (5)
==========================================================================================
Total net expenses 2,706
==========================================================================================
Net investment income 8,796
==========================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE A)
Net realized gain (loss) on:
Investment securities sold in unaffiliated issuers 4,037
=====================================================================================
Interest rate swap contracts (1,046)
-------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) in value of:
------------------------------------------------------------------------------------------
Investment securities 1,518
Interest rate swap contracts 612
=====================================================================================
Net gain (loss) on investments 5,121
------------------------------------------------------------------------------------------
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
------------------------------------------------------------------------------------------
Net investment income (1,291)
=====================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
RESULTING FROM OPERATIONS $ 12,626
==========================================================================================
See Notes to Financial Statements
9
NEUBERGER BERMAN APRIL 30, 2004 (UNAUDITED)
STATEMENT OF CHANGES IN NET ASSETS
REALTY INCOME FUND
-------------------------------
SIX MONTHS PERIOD FROM
ENDED APRIL 29, 2003
APRIL 30, (COMMENCEMENT
NEUBERGER BERMAN 2004 OF OPERATIONS) TO
(000'S OMITTED) (UNAUDITED) OCTOBER 31, 2003
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $ 8,796 $ 11,641
Net realized gain (loss) on investments 2,991 1,553
--------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) of investments 2,130 72,654
========================================================================================================
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (1,291) (599)
Net realized gain on investments -- (77)
--------------------------------------------------------------------------------------------------------
Tax return of capital -- (130)
========================================================================================================
Total distributions to preferred shareholders (1,291) (806)
========================================================================================================
Net increase (decrease) in net assets applicable to common shareholders
resulting from operations 12,626 85,042
========================================================================================================
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (18,476) (11,441)
Net realized gain on investments -- (1,476)
--------------------------------------------------------------------------------------------------------
Tax return of capital -- (2,477)
========================================================================================================
Total distributions to common shareholders (18,476) (15,394)
========================================================================================================
FROM CAPITAL SHARE TRANSACTIONS:
Net proceeds from initial capitalization (Note D) -- 100
Net proceeds from issuance of common shares -- 343,080
--------------------------------------------------------------------------------------------------------
Net proceeds from underwriters' over-allotment option exercised -- 47,745
Proceeds from reinvestment of dividends -- 377
--------------------------------------------------------------------------------------------------------
Preferred shares offering costs (50) (2,629)
========================================================================================================
Total net proceeds from capital share transactions (50) 388,673
========================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS (5,900) 458,321
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 458,321 --
========================================================================================================
End of period $ 452,421 $ 458,321
========================================================================================================
Distributions in excess of net investment income at end of period $ (11,370) $ (399)
========================================================================================================
See Notes to Financial Statements
10
NOTES TO FINANCIAL STATEMENTS REALTY INCOME FUND INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Realty Income Fund Inc. (the "Fund")
was organized as a Maryland corporation on March 4, 2003 as a
non-diversified, closed-end management investment company under
the Investment Company Act of 1940, as amended. The Fund had no
operations until April 29, 2003, other than matters relating to
its organization and the sale on April 14, 2003 of 6,981 shares
of common stock for $100,003 ($14.325 per share) to Neuberger
Berman, LLC ("Neuberger"), the Fund's sub-adviser. The Board of
Directors of the Fund may classify or re-classify any unissued
shares of capital stock into one or more classes of preferred
stock without the approval of shareholders.
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires Neuberger Berman Management Inc. ("Management") to make
estimates and assumptions at the date of the financial
statements. Actual results could differ from those estimates.
2 PORTFOLIO VALUATION: Investment securities are valued as
indicated in the notes following the Schedule of Investments.
3 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities
transactions are recorded on a trade date basis. Dividend income
is recorded on the ex-dividend date. Non-cash dividends included
in dividend income, if any, are recorded at the fair market value
of the securities received. Interest income, including accretion
of original issue discount, where applicable, and accretion of
discount on short-term investments, is recorded on the accrual
basis. Realized gains and losses from securities transactions and
foreign currency transactions are recorded on the basis of
identified cost and stated separately in the Statement of
Operations.
4 FEDERAL INCOME TAXES: It is the policy of the Fund to continue to
qualify as a regulated investment company by complying with the
provisions available to certain investment companies, as defined
in applicable sections of the Internal Revenue Code, and to make
distributions of investment company taxable income and net
capital gains (after reduction for any amounts available for U.S.
Federal income tax purposes as capital loss carryforwards)
sufficient to relieve it from all, or substantially all, U.S.
Federal income taxes. Accordingly, the Fund paid no U.S. Federal
income taxes and no provision for U.S. Federal income taxes was
required.
5 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund earns
income, net of expenses, daily on its investments. It is the
policy of the Fund to declare quarterly and pay monthly
distributions to common shareholders. The Fund has adopted a
policy to pay common shareholders a stable distribution. In an
effort to maintain a stable distribution amount, distributions
may consist of net investment income, realized gains and paid-in
capital. The Fund may pay distributions in excess of those
required by its stable distribution policy to avoid excise tax or
to satisfy the requirements of Subchapter M of the Internal
Revenue Code. Income dividends and capital gain distributions to
common shareholders are recorded on the ex-dividend date. Net
realized capital gains, if any, will be offset by capital loss
carryforwards. Any such offset will not reduce the level of the
stable distribution paid by the Fund. Dividends and distributions
to preferred shareholders are accrued and determined as described
in Note A-7.
11
The Fund invests a significant portion of its assets in
securities issued by real estate companies, including real estate
investment trusts. After calendar year-end, real estate companies
often recharacterize the nature of the distributions paid during
that year, frequently with the result that distributions
previously identified as income are recharacterized as return of
capital and/or capital gain. As a result, the composition of the
Fund's distributions as reported herein may differ from the final
composition determined after calendar year-end and reported to
Fund shareholders on Form 1099.
The Fund distinguishes between dividends on a tax basis and a
financial reporting basis and only distributions in excess of tax
basis earnings and profits are reported in the financial
statements as a tax return of capital. Differences in the
recognition or classification of income between the financial
statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes are
classified as distributions in excess of net investment income or
accumulated net realized gains in the components of net assets on
the Statement of Assets and Liabilities.
On March 30, 2004, the Fund declared two monthly dividends to
common shareholders from its net investment income in the amount
of $0.1125 per share per month, payable after this reporting
period on May 28, 2004 and June 30, 2004, to shareholders of
record on May 14, 2004 and June 14, 2004, respectively, with
ex-dividend dates of May 12, 2004 and June 10, 2004,
respectively.
The tax character of distributions paid during the period ended
October 31, 2003 were as follows:
DISTRIBUTIONS PAID FROM:
ORDINARY LONG-TERM TAX RETURN OF
INCOME CAPITAL GAIN CAPITAL TOTAL
$ 12,073,815 $ 1,518,618 $ 2,607,119 $ 16,199,552
As of October 31, 2003, the components of distributable earnings
(accumulated losses) on a U.S. Federal income tax basis were as
follows:
UNDISTRIBUTED UNDISTRIBUTED UNREALIZED LOSS
ORDINARY LONG-TERM APPRECIATION CARRYFORWARDS
INCOME GAIN (DEPRECIATION) AND DEFERRALS TOTAL
$ -- $ -- $ 72,654,395 $ -- $ 72,654,395
The difference between book basis and tax basis is attributable
primarily to timing differences of dividend payments.
6 EXPENSE ALLOCATION: Some bills are applicable to multiple funds.
Expenses directly attributable to the Fund are charged to the
Fund. Expenses borne by the complex of related investment
companies, which includes open-end and closed-end investment
companies for which Management serves as investment manager, that
are not directly attributed to the Fund, are allocated among the
Fund and the other investment companies in the complex or series
thereof, on the basis of relative net assets, except where a more
appropriate allocation of expenses to each investment company in
the complex or series thereof can otherwise be made fairly.
7 REDEEMABLE PREFERRED SHARES: On June 5, 2003, the Fund
re-classified 12,000 unissued shares of capital stock as Series A
Auction Preferred Shares, Series B Auction Preferred Shares,
Series C Auction Preferred Shares and Series D Auction Preferred
Shares ("Preferred Shares"). On June 23, 2003,
12
the Fund issued 1,950 Series A Auction Preferred Shares, 1,950
Series B Auction Preferred Shares, 1,950 Series C Auction
Preferred Shares and 1,950 Series D Auction Preferred Shares. On
September 10, 2003, the Fund re-classified an additional 2,000
unissued shares of capital stock as Preferred Shares. On October
24, 2003, the Fund issued an additional 330 Series A Auction
Preferred Shares, 330 Series B Auction Preferred Shares, 330
Series C Auction Preferred Shares and 330 Series D Auction
Preferred Shares. All Preferred Shares have a liquidation
preference of $25,000 per share plus any accumulated unpaid
dividends, whether or not earned or declared by the Fund, but
excluding interest thereon ("Liquidation Value").
Except when the Fund has declared a special rate period,
dividends to preferred shareholders, which are cumulative, are
accrued daily and paid every 7 days. Dividend rates are reset
every 7 days based on the results of an auction, except during
special rate periods. For the six months ended April 30, 2004,
dividend rates ranged from 1.06% to 1.45% for Series A, 1.05% to
1.32% for Series B, 1.05% to 1.45% for Series C, and 1.04% to
1.35% for Series D Preferred Shares. The Fund declared dividends
to preferred shareholders for the period May 1, 2004 to May 31,
2004 of $60,283, $59,225, $60,042, and $60,293 for Series A,
Series B, Series C, and Series D Preferred Shares, respectively.
The Fund may redeem Preferred Shares, in whole or in part, on the
second business day preceding any dividend payment date at
Liquidation Value. The Fund is also subject to certain
restrictions relating to the Preferred Shares. Failure to comply
with these restrictions could preclude the Fund from declaring
any distributions to common shareholders or repurchasing common
shares and/or could trigger the mandatory redemption of Preferred
Shares at Liquidation Value. The holders of Preferred Shares are
entitled to one vote per share and, unless otherwise required by
law, will vote with holders of common stock as a single class,
except that the Preferred Shares will vote separately as a class
on certain matters, as required by law. The holders of the
Preferred Shares, voting as a separate class, are entitled at all
times to elect two Directors of the Fund, and to elect a majority
of the Directors of the Fund if the Fund fails to pay dividends
on Preferred Shares for two consecutive years.
8 INTEREST RATE SWAPS: The Fund may enter into interest rate swap
transactions, with institutions that the Fund's investment
manager has determined are creditworthy, to reduce the risk that
an increase in short-term interest rates could reduce common
share net earnings as a result of leverage. The Fund agrees to
pay the swap counter party a fixed-rate payment in exchange for
the counter party's paying the Fund a variable-rate payment that
is intended to approximate all or a portion of the Fund's
variable-rate payment obligation on the Fund's Preferred Shares.
The payment flows are netted against each other, with the
difference being paid by one party to the other. The Fund will
segregate cash or liquid securities having a value at least equal
to the Fund's net payment obligations under any swap transaction,
marked to market daily.
Risks may arise if the counter party to a swap contract fails to
comply with the terms of its contract. The loss incurred by the
failure of a counter party is generally limited to the net
interest payment to be received by the Fund, and/or the
termination value at the end of the contract. Additionally, risks
may arise from movements in interest rates unanticipated by
Management.
13
As a result of SEC staff guidance relating to the application of
FASB Statement No 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES to registered investment companies, the Fund
has revised its methodology for accounting for interest rate swap
agreements. Previously, the Fund recorded the accrual of the net
interest income or expense expected to be received or paid at
interim settlement dates as a net payable or receivable for swap
contracts and actual amounts paid as net interest income or
expense on swap contracts. Effective November 1, 2003, periodic
expected interim net interest payments or receipts on the swaps
are recorded as an adjustment to unrealized gains/losses, along
with the fair value of the future periodic payment streams on the
swap. The unrealized gains/losses associated with the periodic
interim net interest payments are reclassified to realized
gains/losses in conjunction with the actual net receipt or
payment of such amounts. Upon adoption of this methodology, the
Fund recorded a cumulative effect adjustment to reflect the
reclassification of such amounts. The cumulative effect resulted
in an increase to distributions in excess of net investment
income of $767,939, and a corresponding decrease to accumulated
net realized gains/losses as of November 1, 2003. The current
year impact increased net investment income by $1,076,024,
increased net realized losses by $1,046,258 and decreased
unrealized appreciation (depreciation) in value of investments by
$29,766, and therefore did not impact the Fund's total net assets
or its total net increase (decrease) in net assets applicable to
common shareholders resulting from operations. At April 30, 2004,
the Fund had outstanding interest rate swap contracts as follows:
RATE TYPE
--------------------- ACCRUED
PAYMENTS PAYMENTS NET INTEREST UNREALIZED TOTAL
SWAP NOTIONAL MADEBY RECEIVED BY RECEIVABLE APPRECIATION FAIR
COUNTER PARTY AMOUNT TERMINATION DATE THE FUND THE FUND(1) (PAYABLE) (DEPRECIATION) VALUE
Citibank, N.A. $ 83,000,000 June 26, 2007 2.22% 1.10% $ (12,911) $ 2,768,124 $ 2,755,213
Citibank, N.A. 82,000,000 June 26, 2008 2.58% 1.10% (16,856) 3,736,497 3,719,641
--------- ----------- -----------
(29,767) 6,504,621 6,474,854
(1) 30 day LIBOR (London Interbank Offered Rate)
9 REPURCHASE AGREEMENTS: The Fund may enter into repurchase
agreements with institutions that the Fund's investment manager
has determined are creditworthy. Each repurchase agreement is
recorded at cost. The Fund requires that the securities purchased
in a repurchase agreement be transferred to the custodian in a
manner sufficient to enable the Fund to assert a perfected
security interest in those securities in the event of a default
under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that
their value, including accrued interest, is greater than amounts
owed to the Fund under each such repurchase agreement.
10 SECURITY LENDING: Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund entered into a
Securities Lending Agreement ("Agreement") with Neuberger.
Securities loans involve certain risks in the event a borrower
should fail financially, including delays or inability to recover
the lent securities or foreclose against the collateral. The
investment manager, under the general supervision of the Fund's
Board of Directors, monitors the creditworthiness of the parties
to whom the Fund makes security loans. The Fund will not lend
securities on which covered call options have been written, or
lend securities on terms which would prevent the Fund from
qualifying as a regulated investment company. The Fund receives
cash collateral equal to at least 102% of the current market
value of the loaned securities. The Fund invests the cash
collateral in the N&B Securities Lending Quality Fund, LLC,
14
which is managed by State Street Bank and Trust Company ("State
Street") pursuant to guidelines approved by the Fund's investment
manager. Neuberger guarantees a minimum revenue to the Fund under
the Agreement, and receives a portion of any revenue earned in
excess of the guaranteed amount as a lending agency fee. At April
30, 2004, the Fund did not pay Neuberger any fees under the
Agreement.
Income earned on the securities loaned, if any, is reflected in
the Statement of Operations under the caption Income from
securities loaned-net.
11 TRANSACTIONS WITH OTHER FUNDS MANAGED BY NEUBERGER BERMAN
MANAGEMENT INC.: Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund may invest in the
Neuberger Berman Institutional Cash Fund (the "Cash Fund"), a
fund managed by Management and having the same Board members as
the Fund. The Cash Fund seeks to provide as high a level of
current income as is consistent with the preservation of capital
and the maintenance of liquidity. For any cash that the Fund
invests in the Cash Fund, Management waives a portion of its
management fee equal to the management fee it receives from the
Cash Fund on those assets. For the six months ended April 30,
2004, such waived fees amounted to $3,801. For the six months
ended April 30, 2004, income earned on this investment amounted
to $29,873 and is reflected in the Statement of Operations under
the caption Income from investments in affiliated issuers.
12 ORGANIZATION EXPENSES AND OFFERING COSTS: Management has agreed
to pay all organizational expenses and the amount by which the
Fund's offering costs for common stock (other than sales load)
exceed $0.03 per share. The costs incurred by Management were
$116,384. Offering costs for common stock paid by the Fund were
charged as a reduction of common stock paid-in-capital at the
completion of the Fund's offerings and amounted to $820,409.
Additionally, offering costs of $399,423 and a sales load of
$2,280,000 incurred through the issuance of Preferred Shares were
charged as a reduction of common stock paid-in-capital at the
completion of the Fund's Preferred Shares offerings.
As of April 30, 2004 total offering costs of $14,684 remain
payable by the Fund.
13 CONCENTRATION OF RISK: Under normal market conditions, the Fund's
investments will be concentrated in income-producing common
equity securities, preferred securities, convertible securities
and non-convertible debt securities issued by companies deriving
the majority of their revenue from the ownership, construction,
financing, management and/or sale of commercial, industrial,
and/or residential real estate. Values of the securities of such
companies may fluctuate more due to economic, legal, cultural,
geopolitical or technological developments affecting the United
States real estate industry or a segment of the real estate
industry in which the Fund owns a substantial position, than
would the shares of a fund not concentrated in the real estate
industry.
NOTE B--MANAGEMENT FEES, ADMINISTRATION FEES, AND OTHER
TRANSACTIONS WITH AFFILIATES:
The Fund retains Management as its investment manager under a
Management Agreement. For such investment management services,
the Fund pays Management a fee at the annual rate of 0.60% of its
15
average daily Managed Assets. Managed Assets equal the total
assets of the Fund, less liabilities other than the aggregate
indebtedness entered into for purposes of leverage. For purposes
of calculating Managed Assets, the Liquidation Value of any
Preferred Shares outstanding is not considered a liability.
Management has contractually agreed to waive a portion of the
management fees it is entitled to receive from the Fund at the
following annual rates:
YEAR ENDED % OF AVERAGE
OCTOBER 31, DAILY MANAGED ASSETS
-----------------------------------------------------------
2004 - 2007 0.25
2008 0.20
2009 0.15
2010 0.10
2011 0.05
Management has not agreed to waive any portion of its fees beyond
October 31, 2011.
For the six months ended April 30, 2004, such waived fees
amounted to $903,618.
The Fund retains Management as its administrator under an
Administration Agreement. The Fund pays Management an
administration fee at the annual rate of 0.25% of its average
daily Managed Assets under this agreement. Additionally,
Management retains State Street as its sub-administrator under a
Sub-Administration Agreement. Management pays State Street a fee
for all services received under the agreement.
On October 31, 2003, Management and Neuberger, a member firm of
the New York Stock Exchange and sub-adviser to the Fund, became
indirect wholly owned subsidiaries of Lehman Brothers Holdings
Inc. ("Lehman"), a publicly-owned holding company ("the
Transaction"). Upon completion of the Transaction, the Fund's
management and sub-advisory agreements automatically terminated.
To provide for continuity of management, the shareholders of the
Fund voted on September 23, 2003, to approve new management and
sub-advisory agreements, which took effect upon closing of the
Transaction. Neuberger is retained by Management to furnish it
with investment recommendations and research information without
added cost to the Fund. Several individuals who are officers
and/or Directors of the Fund are also employees of Neuberger
and/or Management.
On July 1, 2003, the Fund entered into a commission recapture
program, which enables it to pay some of its operational expenses
by recouping a portion of the commissions it pays to a broker
that is not a related party of the Fund. Expenses paid through
this program may include costs of custodial, transfer agency or
accounting services. For the six months ended April 30, 2004, the
impact of this arrangement was a reduction of $4,757.
The Fund has an expense offset arrangement in connection with its
custodian contract. The impact of this arrangement, reflected in
the Statement of Operations under the caption Custodian fees, was
a reduction of $35.
16
In connection with the settlement of each Preferred Share
auction, the Fund pays, through the auction agent, a service fee
to each participating broker-dealer based upon the aggregate
liquidation preference of the Preferred Shares held by the
broker-dealer's customers. For any auction preceding a rate
period of less than one year, the service fee is paid at the
annual rate of 1/4 of 1%; for any auction preceding a rate period
of one year or more, the service fee is paid at a rate agreed to
by the Fund and the broker-dealer.
In order to satisfy ratings agency requirements, the Fund is
required to provide each rating agency a report on a monthly
basis verifying that the Fund is maintaining eligible assets
having a discounted value equal to or greater than the Preferred
Shares Basic Maintenance Amount, which is a minimum level set by
each rating agency as one of the conditions to maintain the AAA
rating on the Preferred Shares. 'Discounted Value' refers to the
fact that the rating agencies require the Fund, in performing
this calculation, to discount portfolio securities below their
face value, at a rate depending on their rating. The Fund pays a
fee to State Street, as Fund sub-administrator, for the
preparation of this report.
NOTE C--SECURITIES TRANSACTIONS:
During the six months ended April 30, 2004, there were purchase
and sale transactions (excluding short-term securities and
interest rate swap contracts) of $15,997,000 and $1,028,000,
respectively.
During the six months ended April 30, 2004, brokerage commissions
on securities transactions amounted to $15,573, of which
Neuberger received $1,321, Lehman received $1,072, and other
brokers received $13,180.
NOTE D--CAPITAL:
At April 30, 2004, the common shares outstanding and the common
shares owned by Neuberger for the Fund were as follows:
COMMON SHARES COMMON SHARES
OUTSTANDING OWNED BY NEUBERGER
27,372,139 6,981
Transactions in common shares for the six months ended April 30,
2004 and period ended October 31, 2003 were as follows:
COMMON SHARES ISSUED IN CONNECTION WITH:
UNDERWRITERS' REINVESTMENT OF NET INCREASE IN
INITIAL INITIAL PUBLIC EXERCISE OF OVER- DIVIDENDS AND COMMON SHARES
CAPITALIZATION OFFERING ALLOTMENT OPTION DISTRIBUTIONS OUTSTANDING
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
-- 6,981 -- 24,000,000 -- 3,340,000 -- 25,158 -- 27,372,139
NOTE E--UNAUDITED FINANCIAL INFORMATION:
The financial information included in this interim report is
taken from the records of the Fund without audit by independent
auditors. Annual reports contain audited financial statements.
17
FINANCIAL HIGHLIGHTS REALTY INCOME FUND INC.
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.
SIX MONTHS PERIOD FROM
ENDED APRIL 29, 2003^
APRIL 30, TO OCTOBER 31,
----------- -----------------
2004 2003
(UNAUDITED)
COMMON SHARE NET ASSET VALUE, BEGINNING OF PERIOD $ 16.74 $ 14.33
----------- -----------------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS:
NET INVESTMENT INCOME (LOSS) .32Y .43
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND UNREALIZED) .19Y 2.70
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.04) (.02)
NET CAPITAL GAINS -- (.00)
TAX RETURN OF CAPITAL -- (.01)
----------- -----------------
TOTAL DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (.04) (.03)
----------- -----------------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS .47 3.10
----------- -----------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.68) (.42)
NET CAPITAL GAINS -- (.05)
TAX RETURN OF CAPITAL -- (.09)
----------- -----------------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (.68) (.56)
----------- -----------------
LESS CAPITAL CHARGES:
ISSUANCE OF COMMON SHARES -- (.03)
ISSUANCE OF PREFERRED SHARES (.00) (.10)
----------- -----------------
TOTAL CAPITAL CHARGES (.00) (.13)
----------- -----------------
COMMON SHARE NET ASSET VALUE, END OF PERIOD $ 16.53 $ 16.74
----------- -----------------
COMMON SHARE MARKET VALUE, END OF PERIOD $ 15.40 $ 16.00
----------- -----------------
TOTAL RETURN, COMMON SHARE NET ASSET VALUE+ +2.74%** +21.16%**
TOTAL RETURN, COMMON SHARE MARKET VALUE+ +0.14%** +10.60%**
RATIOS/SUPPLEMENTAL DATA++
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS, END OF PERIOD (IN MILLIONS) $ 452.4 $ 458.3
PREFERRED STOCK, AT LIQUIDATION VALUE ($25,000 PER SHARE LIQUIDATION PREFERENCE)
(IN MILLIONS) $ 228.0 $ 228.0
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS# 1.09%*Y 1.35%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS~ 1.09%*Y 1.35%*
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING PREFERRED STOCK DIVIDENDS TO AVERAGE
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 3.55%*Y 5.42%*
RATIO OF PREFERRED STOCK DIVIDENDS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS .52%* .37%*
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING PREFERRED STOCK DIVIDENDS TO
AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS 3.03%*Y 5.05%*
PORTFOLIO TURNOVER RATE 0% 1%
ASSET COVERAGE PER SHARE OF PREFERRED STOCK, END OF PERIOD@ $ 74,610 $ 75,257
See Notes to Financial Highlights
18
NOTES TO FINANCIAL HIGHLIGHTS REALTY INCOME FUND INC.
+ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during each
fiscal period. Total return based on per share market value assumes the
purchase of common shares at the market price on the first day and sales of
common shares at the market price on the last day of the period indicated.
Dividends and distributions, if any, are assumed to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. Results represent
past performance and do not guarantee future results. Current returns may
be lower or higher than the performance data quoted. Total return would
have been lower if Management had not waived a portion of the investment
management fee. Performance data current to the most recent month-end are
available at www.nb.com.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
~ After waiver of a portion of the investment management fee. Had Management
not undertaken such action, the annualized ratios of net expenses to
average daily net assets applicable to common shareholders would have been:
SIX MONTHS ENDED PERIOD ENDED
APRIL 30, OCTOBER 31,
2004 2003(1)
1.46% 1.68%
(1) Period from April 29, 2003 to October 31, 2003.
^ The date investment operations commenced.
* Annualized.
** Not annualized.
@ Calculated by subtracting the Fund's total liabilities (excluding
accumulated unpaid dividends on Preferred Shares) from the Fund's total
assets and dividing by the number of Preferred Shares outstanding.
++ Expense ratios do not include the effect of dividend payments to preferred
shareholders. Income ratios include income earned on assets attributable to
Preferred Shares.
Y As a result of SEC staff guidance relating to the application of FASB
Statement No 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES to registered investment companies, the Fund has revised its
methodology for accounting for interest rate swap agreements. Effective
November 1, 2003, the Fund reclassified periodic interim payments on swaps
from net investment income to net gains or losses on securities.
Accordingly, for the six months ended April 30, 2004, the per share amounts
and ratios shown decreased or increased as follows:
SIX MONTHS ENDED
APRIL 30,
2004
Net Investment Income .04
Net Gains or Losses in Securities (both realized and unrealized) (.04)
Ratio of Gross Expenses to Average Net Assets Applicable to
Common Shareholders (.43)%
Ratio of Net Expenses to Average Net Assets Applicable to
Common Shareholders (.43)%
Ratio of Net Investment Income (Loss) Excluding Preferred Stock
Dividends to Average Net Assets Applicable to Common Shareholders .43%
Ratio of Net Investment Income (Loss) Including Preferred Stock
Dividends to Average Net Assets Applicable to Common Shareholders .43%
19
DIVIDEND REINVESTMENT PLAN
The Bank of New York ("Plan Agent") will act as Plan Agent for shareholders who
have not elected in writing to receive dividends and distributions in cash (each
a "Participant"), will open an account for each Participant under the Dividend
Reinvestment Plan ("Plan") in the same name as their then current Shares are
registered, and will put the Plan into effect for each Participant as of the
first record date for a dividend or capital gains distribution.
Whenever the Fund declares a dividend or distribution with respect to the common
stock of the Fund ("Shares"), each Participant will receive such dividends and
distributions in additional Shares, including fractional Shares acquired by the
Plan Agent and credited to each Participant's account. If on the payment date
for a cash dividend or distribution, the net asset value is equal to or less
than the market price per Share plus estimated brokerage commissions, the Plan
Agent shall automatically receive such Shares, including fractions, for each
Participant's account. Except in the circumstances described in the next
paragraph, the number of additional Shares to be credited to each Participant's
account shall be determined by dividing the dollar amount of the dividend or
distribution payable on their Shares by the greater of the net asset value per
Share determined as of the date of purchase or 95% of the then current market
price per Share on the payment date.
Should the net asset value per Share exceed the market price per Share plus
estimated brokerage commissions on the payment date for a cash dividend or
distribution, the Plan Agent or a broker-dealer selected by the Plan Agent shall
endeavor, for a purchase period lasting until the last business day before the
next date on which the Shares trade on an "ex-dividend" basis, but in no event,
except as provided below, more than 30 days after the dividend payment date, to
apply the amount of such dividend or distribution on each Participant's Shares
(less their PRO RATA share of brokerage commissions incurred with respect to the
Plan Agent's open-market purchases in connection with the reinvestment of such
dividend or distribution) to purchase Shares on the open market for each
Participant's account. No such purchases may be made more than 30 days after the
payment date for such dividend except where temporary curtailment or suspension
of purchase is necessary to comply with applicable provisions of federal
securities laws. If, at the close of business on any day during the purchase
period the net asset value per Share equals or is less than the market price per
Share plus estimated brokerage commissions, the Plan Agent will not make any
further open-market purchases in connection with the reinvestment of such
dividend or distribution. If the Plan Agent is unable to invest the full
dividend or distribution amount through open-market purchases during the
purchase period, the Plan Agent shall request that, with respect to the
uninvested portion of such dividend or distribution amount, the Fund issue new
Shares at the close of business on the earlier of the last day of the purchase
period or the first day during the purchase period on which the net asset value
per Share equals or is less than the market price per Share, plus estimated
brokerage commissions, such Shares to be issued in accordance with the terms
specified in the third paragraph hereof. These newly issued Shares will be
valued at the then-current market price per Share at the time such Shares are to
be issued.
For purposes of making the dividend reinvestment purchase comparison under the
Plan, (a) the market price of the Shares on a particular date shall be the last
sales price on the New York Stock Exchange (or if the Shares are not listed on
the New York Stock Exchange, such other exchange on which the Shares are
principally traded) on that date, or, if there is no sale on such Exchange (or
if not so listed, in the over-the-counter market) on that date, then the mean
between the closing bid and asked quotations for such Shares on such Exchange on
such date and (b) the net asset value per Share on a particular date shall be
the net asset value per Share most recently calculated by or on behalf of the
Fund. All dividends, distributions and other payments (whether made in cash or
Shares) shall be made net of any applicable withholding tax.
Open-market purchases provided for above may be made on any securities exchange
where the Fund's Shares are traded, in the over-the-counter market or in
negotiated transactions and may be on such terms as to price, delivery and
otherwise as the Plan Agent shall determine. Each Participant's uninvested funds
held by the Plan Agent will not bear interest, and it is understood that, in any
event, the Plan Agent shall have no liability in connection with any inability
to purchase Shares within 30 days after the initial date of such purchase as
herein provided, or with the timing of any purchases effected. The Plan Agent
shall have no responsibility as to the value of the Shares acquired for each
Participant's account. For the purpose of cash investments, the Plan Agent may
commingle each Participant's funds with those of other shareholders of the Fund
for whom the Plan Agent similarly acts as agent, and the average price
(including brokerage commissions) of all Shares purchased by the Plan Agent as
Plan Agent shall be the price per Share allocable to each Participant in
connection therewith.
20
The Plan Agent may hold each Participant's Shares acquired pursuant to the Plan
together with the Shares of other shareholders of the Fund acquired pursuant to
the Plan in noncertificated form in the Plan Agent's name or that of the Plan
Agent's nominee. The Plan Agent will forward to each Participant any proxy
solicitation material and will vote any Shares so held for each Participant only
in accordance with the instructions set forth on proxies returned by the
participant to the Fund.
The Plan Agent will confirm to each Participant each acquisition made for their
account as soon as practicable but not later than 60 days after the date
thereof. Although each Participant may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share, no
certificates for a fractional Share will be issued. However, dividends and
distributions on fractional Shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Plan Agent will adjust for any such undivided fractional interest in cash at
the market value of the Shares at the time of termination, less the PRO RATA
expense of any sale required to make such an adjustment.
Any Share dividends or split Shares distributed by the Fund on Shares held by
the Plan Agent for Participants will be credited to their accounts. In the event
that the Fund makes available to its shareholders rights to purchase additional
Shares or other securities, the Shares held for each Participant under the Plan
will be added to other Shares held by the Participant in calculating the number
of rights to be issued to each Participant.
The Plan Agent's service fee for handling capital gains distributions or income
dividends will be paid by the Fund. Participants will be charged their PRO RATA
share of brokerage commissions on all open-market purchases.
Each Participant may terminate their account under the Plan by notifying the
Plan Agent in writing. Such termination will be effective immediately if the
Participant's notice is received by the Plan Agent not less than ten days prior
to any dividend or distribution record date, otherwise such termination will be
effective the first trading day after the payment date for such dividend or
distribution with respect to any subsequent dividend or distribution. The Plan
may be terminated by the Plan Agent or the Fund upon notice in writing mailed to
each Participant at least 30 days prior to any record date for the payment of
any dividend or distribution by the Fund.
These terms and conditions may be amended or supplemented by the Plan Agent or
the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 30 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by each
Participant unless, prior to the effective date thereof, the Plan Agent receives
written notice of the termination of their account under the Plan. Any such
amendment may include an appointment by the Plan Agent in its place and stead of
a successor Plan Agent under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Plan Agent
under these terms and conditions. Upon any such appointment of any Plan Agent
for the purpose of receiving dividends and distributions, the Fund will be
authorized to pay to such successor Plan Agent, for each Participant's account,
all dividends and distributions payable on Shares held in their name or under
the Plan for retention or application by such successor Plan Agent as provided
in these terms and conditions.
The Plan Agent shall at all times act in good faith and agrees to use its best
efforts within reasonable limits to ensure the accuracy of all services
performed under this Agreement and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by the Plan Agent's negligence, bad faith, or willful
misconduct or that of its employees.
These terms and conditions shall be governed by the laws of the State of
Maryland.
21
DIRECTORY
INVESTMENT MANAGER AND ADMINISTRATOR
Neuberger Berman Management Inc.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
877.461.1899 or 212.476.8800
SUB-ADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158-3698
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
STOCK TRANSFER AGENT
Bank of New York
101 Barclay Street, 11-E
New York, NY 10286
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
2nd Floor
Washington, DC 20036-1221
22
DIRECTORS AND OFFICERS (UNAUDITED)
The following tables set forth information concerning the directors and officers
of the Fund. All persons named as directors and officers also serve in similar
capacities for other funds administered or managed by NB Management and
Neuberger Berman, LLC. The Statement of Additional Information for each Fund
includes additional information about fund directors and is available upon
request, without charge, by calling (877) 461-1899.
THE BOARD OF DIRECTORS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
--------------------------------------------------------------------------------------------------------------------------------
CLASS I
INDEPENDENT FUND DIRECTORS*
Faith Colish (68) Counsel, Carter Ledyard & Milburn LLP 38 Director, American Bar Retirement
Director (law firm) since October 2002; formerly, Association (ABRA) since 1997 (not-for-
Attorney at Law and President, Faith profit membership association).
Colish, A Professional Corporation, 1980
to 2002.
C. Anne Harvey (66) Consultant, C. A. Harvey Associates, 38 Formerly, Member, Individual Investors
Director since June 2001; formerly, Director, Advisory Committee to the New York Stock
AARP, 1978 to December 2001. Exchange Board of Directors, 1998 to
June 2002; President, Board of
Associates to The National
Rehabilitation Hospital's Board of
Directors, since 2002; Member, American
Savings Education Council's Policy Board
(ASEC), 1998-2000; Member, Executive
Committee, Crime Prevention Coalition of
America, 1997-2000.
Cornelius T. Ryan (72) Founding General Partner, Oxford 38 Director, Capital Cash Management Trust
Director Partners and Oxford Bioscience Partners (money market fund), Naragansett Insured
(venture capital partnerships) and Tax-Free Income Fund, Rocky Mountain
President, Oxford Venture Corporation. Equity Fund, Prime Cash Fund, several
private companies and QuadraMed
Corporation (NASDAQ).
Peter P. Trapp (59) Regional Manager for Atlanta Region, 38 None.
Director Ford Motor Credit Company since August
1997; formerly, President, Ford Life
Insurance Company, April 1995 until
August 1997.
23
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
--------------------------------------------------------------------------------------------------------------------------------
DIRECTOR WHO IS AN "INTERESTED PERSON"
Peter E. Sundman* (44) Executive Vice President, Neuberger 38 Director, Neuberger Berman Inc. (holding
Chief Executive Officer, Berman Inc. (holding company) since company) from October 1999 through March
Director and Chairman of 1999; Head of Neuberger Berman Inc.'s 2003; President and Director, NB
the Board Mutual Funds and Institutional Business Management since 1999; Director and Vice
since 1999; Executive Vice President, President, Neuberger & Berman Agency,
Neuberger Berman since 1999; Principal, Inc. since 2000.
Neuberger Berman from 1997 until 1999;
Senior Vice President, NB Management
from 1996 until 1999.
CLASS II
INDEPENDENT FUND DIRECTORS*
John Cannon (74) Consultant. Formerly, Chairman and Chief 38 Independent Trustee or Director of three
Director Investment Officer, CDC Investment series of OppenheimerFunds: Limited Term
Advisors (registered investment New York Municipal Fund, Rochester Fund
adviser), 1993-January 1999; prior Municipals, and Oppenheimer Convertible
thereto, President and Chief Executive Securities Fund, since 1992.
Officer, AMA Investment Advisors, an
affiliate of the American Medical
Association.
Barry Hirsch (71) Attorney at Law. Formerly, Senior 38 None.
Director Counsel, Loews Corporation (diversified
financial corporation) May 2002 until
April 2003; formerly, Senior Vice
President, Secretary and General
Counsel, Loews Corporation.
24
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
--------------------------------------------------------------------------------------------------------------------------------
Tom Decker Seip (54) General Partner, Seip Investments LP (a 38 Director, H&R Block, Inc. (financial
Director private investment partnership); services company) since May 2001;
formerly, President and CEO, Westaff, Director, Forward Management, Inc.
Inc. (temporary staffing), May 2001 to (asset management) since 2001; formerly,
January 2002; Senior Executive at the Director, General Magic (voice
Charles Schwab Corporation from 1983 to recognition software) November 2001
1999, including Chief Executive Officer, until 2002; Director, E-Finance
Charles Schwab Investment Management, Corporation (credit decisioning
Inc. and Trustee, Schwab Family of Funds services) 1999-2003; Director,
and Schwab Investments from 1997 to 1998 Save-Daily.com (micro investing
and Executive Vice President-Retail services) 1999-2003; Director, Offroad
Brokerage, Charles Schwab Investment Capital Inc. (pre-public internet
Management from 1994 to 1997. commerce company).
DIRECTORS WHO IS AN "INTERESTED PERSON"
Jack L. Rivkin* (63) Executive Vice President and Chief 38 Director, Dale Carnegie and Associates,
President and Director Investment Officer, Neuberger Berman Inc. (private company) since 1998;
Inc. (holding company) since 2002 and Director, Emagin Corp. (public company)
2003, respectively; Executive Vice since 1997; Director, Solbright, Inc.
President and Chief Investment Officer, (private company) since 1998; Director,
Neuberger Berman since 2002 and 2003, Infogate, Inc. (private company) since
respectively; Director and Chairman, NB 1997.
Management since December 2002;
formerly, Executive Vice President,
Citigroup Investments, Inc. from
September 1995 to February 2002;
Executive Vice President, Citigroup Inc.
from September 1995 to February 2002.
CLASS III
INDEPENDENT FUND DIRECTORS*
Walter G. Ehlers (71) Consultant; Retired President and 38 None.
Director Trustee, Teachers Insurance & Annuity
(TIAA) and College Retirement Equities
Fund (CREF).
Robert A. Kavesh (76) Marcus Nadler Professor of Finance and 38 Director, DEL Laboratories, Inc.
Director Economics Emeritus, New York University (cosmetics and pharmaceuticals) since
Stern School of Business. 1978; Director, The Caring Community
(not-for-profit).
25
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
--------------------------------------------------------------------------------------------------------------------------------
Howard A. Mileaf (67) Retired. Formerly, Vice President and 38 Director, WHX Corporation (holding
Director Special Counsel, WHX Corporation company) since August 2002; Director,
(holding company) 1993-2001. Webfinancial Corporation (holding
company) since December 2002; Director,
State Theatre of New Jersey
(not-for-profit theater) since 2000;
formerly, Director, Kevlin Corporation
(manufacturer of microwave and other
products).
William E. Rulon (71) Retired. Senior Vice President, 38 Director, Pro-Kids Golf and Learning
Director Foodmaker, Inc. (operator and franchiser Academy (teach golf and computer usage
of restaurants) until January 1997. to "at risk" children) since 1998;
formerly, Director, Prandium, Inc.
(restaurants) from March 2001 until July
2002.
Candace L. Straight (56) Private investor and consultant 38 Director, The Proformance Insurance
Director specializing in the insurance industry; Company (personal lines property and
formerly, Advisory Director, Securitas casualty insurance company) since March
Capital LLC (a global private equity 2004; Director, Providence Washington
investment firm dedicated to making (property and casualty insurance
investments in the insurance sector) company) since December 1998; Director,
1998 until December 2002. Summit Global Partners (insurance
brokerage firm) since October 2000.
26
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
--------------------------------------------------------------------------------------------------------------------------------
DIRECTOR WHO IS AN "INTERESTED PERSON"
Edward I. O'Brien* (75) Formerly, Member, Investment Policy 38 Director, Legg Mason, Inc. (financial
Director Committee, Edward Jones 1993-2001; services holding company) since 1993;
President, Securities Industry formerly, Director, Boston Financial
Association ("SIA") (securities Group (real estate and tax shelters)
industry's representative in government 1993-1999.
relations and regulatory matters at the
federal and state levels) 1974-1992;
Adviser to SIA, November 1992-November
1993.
* Indicates a director who is an "interested person" within the meaning of
the 1940 Act. Mr. Sundman and Mr. Rivkin are interested persons of the Fund
by virtue of the fact that each is an officer and/or director of NB
Management and Executive Vice President of Neuberger Berman. Mr. O'Brien is
an interested person of the Fund by virtue of the fact that he is a
director of Legg Mason, Inc., a wholly owned subsidiary of which, from time
to time, serves as a broker or dealer to the Fund and other funds or
accounts for which NB Management serves as investment manager.
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Except as otherwise indicated, each person has held the positions shown for
at least the last five years. The Board of Directors shall at all times be
divided as equally as possible into three classes of Directors designated
Class I, Class II, and Class III. The terms of office of Class I, Class II,
and Class III Directors shall expire at the annual meetings of stockholders
held in 2006, 2004, and 2005 respectively, and at each third annual meeting
of stockholders thereafter.
27
INFORMATION ABOUT THE OFFICERS OF THE FUND (OTHER THAN THOSE LISTED ABOVE)
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S)
--------------------------------------------------------------------------------------------------------------------------------
Claudia A. Brandon (47) Secretary since 2002 Vice President-Mutual Fund Board Relations, NB
Management since 2000; Vice President, Neuberger Berman
since 2002 and employee since 1999; Vice President, NB
Management from 1986 to 1999; Secretary, eleven
registered investment companies for which NB Management
acts as investment manager and administrator (four
since 2002, three since 2003, and one since 2004).
Robert Conti (47) Vice President since 2002 Senior Vice President, Neuberger Berman since 2003;
Vice President, Neuberger Berman from 1999 until 2003;
Senior Vice President, NB Management since 2000;
Controller, NB Management until 1996; Treasurer, NB
Management from 1996 until 1999; Vice President, eleven
registered investment companies for which NB Management
acts as investment manager and administrator (three
since 2000, four since 2002, three since 2003, and one
since 2004).
Brian P. Gaffney (50) Vice President since 2002 Managing Director, Neuberger Berman since 1999; Senior
Vice President, NB Management since 2000; Vice
President, NB Management from 1997 until 1999; Vice
President, eleven registered investment companies for
which NB Management acts as investment manager and
administrator (three since 2000, four since 2002, three
since 2003, and one since 2004).
Sheila R. James (38) Assistant Secretary since 2002 Employee, Neuberger Berman since 1999; Employee, NB
Management from 1991 to 1999; Assistant Secretary,
eleven registered investment companies for which NB
Management acts as investment manager and administrator
(seven since 2002, three since 2003, and one since
2004).
Kevin Lyons (48) Assistant Secretary since 2003 Employee, Neuberger Berman since 1999; Employee, NB
Management from 1993 to 1999; Assistant Secretary,
eleven registered investment companies for which NB
Management acts as investment manager and administrator
(ten since 2003 and one since 2004).
28
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S)
--------------------------------------------------------------------------------------------------------------------------------
John M. McGovern (34) Assistant Treasurer since 2002 Vice President, Neuberger Berman since 2004; Employee,
NB Management since 1993; Assistant Treasurer, eleven
registered investment companies for which NB Management
acts as investment manager and administrator (seven
since 2002, three since 2003, and one since 2004).
Barbara Muinos (45) Treasurer and Principal Financial Vice President, Neuberger Berman since 1999; Assistant
and Accounting Officer since Vice President, NB Management from 1993 to 1999;
2002 Treasurer and Principal Financial and Accounting
Officer, eleven registered investment companies for
which NB Management acts as investment manager and
administrator (seven since 2002, three since 2003, and
one since 2004); Assistant Treasurer, three registered
investment companies for which NB Management acts as
investment manager and administrator from 1996 until
2002.
Frederic B. Soule (57) Vice President since 2002 Senior Vice President, Neuberger Berman since 2003;
Vice President, Neuberger Berman from 1999 until 2003;
Vice President, NB Management from 1995 until 1999;
Vice President, eleven registered investment companies
for which NB Management acts as investment manager and
administrator (three since 2000, four since 2002, three
since 2003, and one since 2004).
Trani Jo Wyman (34) Assistant Treasurer since 2002 Employee, NB Management since 1991; Assistant
Treasurer, eleven registered investment companies for
which NB Management acts as investment manager and
administrator (seven since 2002, three since 2003, and
one since 2004).
----------
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
29
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available, without charge,
by calling 1-800-877-9700 (toll-free) and on the website of the Securities and
Exchange Commission, at www.sec.gov. Beginning September 2004, information
regarding how the Fund voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30 will also be available without charge,
by calling 1-800-877-9700 (toll-free), on the website of the Securities and
Exchange Commission, at www.sec.gov, and on the Fund's website at www.nb.com
[http://www.nb.com].
30
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[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN MANAGEMENT INC.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
INTERNAL SALES & SERVICES
877.461.1899
www.nb.com
Statistics and projections in this report are derived from sources deemed to be
reliable but cannot be regarded as a representation of future results of the
Fund. This report is prepared for the general information of shareholders and is
not an offer of shares of the Fund.
[RECYCLED SYMBOL] D0305 06/04
ITEM 2. CODE OF ETHICS
Not Applicable. Only required in an annual report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
Not Applicable. Only required in an annual report.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not Applicable. Only required in an annual report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not Applicable. Only required in an annual report.
ITEM 6. SCHEDULE OF INVESTMENTS
Not Yet Applicable. Item applies to periods ending on or after July 9, 2004.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable. Only required in an annual report.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Yet Applicable. Item applies to periods ending on or after June 15, 2004.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the disclosure controls and procedures (as
defined in rule 30a-2(c) under the Act) as of a date within 90 days of the
filing date of this document, the Chief Executive Officer and Treasurer and
Principal Financial and Accounting Officer of the Registrant have concluded
that such disclosure controls and procedures are effectively designed to
ensure that information required to be disclosed by the Registrant is
accumulated and communicated to the Registrant's management to allow timely
decisions regarding required disclosure.
(b) There were no significant changes in the Registrant's internal controls
over financial reporting (as defined in rule 30a-3(d) under the Act) that
occurred during the Registrant's second fiscal half-year that have
materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 10. EXHIBITS
(a)(1) Not Applicable. Only required in an annual report.
(a)(2) The certifications required by Rule 30a-2(a) of the Act and Section
302 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") are
attached hereto
(b) The certification required by Rule 30a-2(b) of the Act and Section 906
of the Sarbanes-Oxley Act is attached hereto.
The certification provided pursuant to Section 906 of the Sarbanes-Oxley Act is
not deemed "filed" for purposes of Section 18 of the Securities Exchange Act of
1934 ("Exchange Act"), or otherwise subject to the liability of that section.
Such certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Exchange Act, except to the
extent that the Registrant specifically incorporates them by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Neuberger Berman Realty Income Fund Inc.
By: /s/ Peter E. Sundman
------------------------------------
Peter E. Sundman
Chief Executive Officer
Date: June 28, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Peter E. Sundman
------------------------------------
Peter E. Sundman
Chief Executive Officer
Date: June 28, 2004
By: /s/ Barbara Muinos
------------------------------------
Barbara Muinos
Treasurer and Principal Financial
and Accounting Officer
Date: June 28, 2004