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: 811-21616
RMR F.I.R.E. FUND
(Exact name of registrant as specified in charter)
400 CENTRE STREET
NEWTON, MASSACHUSETTS 02458
(Address of principal executive offices)(Zip code)
(Name and Address of Agent for Service of Process) |
Copy to: | |
Thomas M. O'Brien, President RMR Real Estate Fund 400 Centre Street Newton, Massachusetts 02458 |
Robert N. Hickey, Esq. Sullivan & Worcester LLP 1666 K Street, NW Washington, DC 20006 |
|
Thomas J. Reyes, Esq. State Street Bank and Trust Company One Federal Street, 9th Floor Boston, Massachusetts 02110 |
Registrant's
telephone number, including area code: (617) 332-9530
Date of fiscal year end: December 31
Date of reporting period: December 31, 2004
Item 1. Reports to Shareholders.
ANNUAL REPORTS DECEMBER 31, 2004 |
RMR Funds December 31, 2004 |
To Our Shareholders,
The RMR Funds family is pleased to present you with our 2004 Annual Report. This booklet contains the annual report for three funds:
During the past year, members of our Board of Trustees and of the management team of RMR Advisors, Inc., our advisor, and its affiliates became fellow shareholders and as of the end of 2004 have investments in the common shares of these funds with a market value in excess of $15 million. We remain steadfast in our belief in each fund's strategy and future prospects.
We invite you to read through the information contained in this report and to view our website, at www.rmrfunds.com.
Sincerely,
Thomas
M. O'Brien
President
1
RMR Real Estate Fund
December 31, 2004
To Our Shareholders,
Two thousand four was the first full year of operations of RMR Real Estate Fund (AMEX: RMR). In the pages that follow, you will find data summarizing our financial results for 2004 and our financial position as of the end of that year.
As a result of our investment activities during 2004, our net asset value increased to $16.61 per common share as of December 31, 2004, a 15.7% increase from $14.35 per common share as of one year earlier. In addition to the $2.26 increase in net asset value per common share, we paid 11 monthly distributions totaling $1.10 per common share during 2004.
At a meeting in early 2005, our board of trustees considered and authorized a change in one of our investment limitations. Before the change, our investments in non-investment grade ratable securities generally were limited to 25% of our assets. After the change, these investments may be up to 45% of our total assets at the time of their purchase. From time to time, we may alter the percentage of common shares, preferred shares or other kinds of securities within this limitation.
During 2005, we will continue to monitor market conditions and position our portfolio according to our view of those conditions. During the year, you are likely to see us increase or decrease allocations to certain of the real estate market subsectors. For example, we think that the share prices for some of the multi-family real estate companies, many of which had stellar returns during 2004, may not be sustainable in the longer term; we may reduce some of our positions in that sub-sector. For further example, we think that the office market subsector, an underperformer during 2004, has the most room for improvement in 2005; we already have a significant position in this sub-sector, but we may increase a few of our positions and/or make new investments as opportunities arise.
Thank you for your continued support, and be sure to view our website, at www.rmrfunds.com.
Sincerely,
Thomas
M. O'Brien
President
2
RMR Real Estate Fund
December 31, 2004
Relevant Market Conditions
Real Estate Industry Fundamentals. We believe the investment environment for most real estate companies at the end of 2004 and into 2005 is generally positive. We believe that environment will include revenue growth and stabilizing to improving occupancy rates. In general, development activities that tend to depress the value of existing properties have been held in check during recent years. We believe that a majority of real estate investment trust's balance sheets reflect modest debt leverage and low floating rate debt.
Real Estate Industry Technicals. We believe demand for real estate securities over the long term will continue to increase. Demographic trends in the U.S. include growth in the over-50 age population; we believe that individuals in that category tend to focus their investments in higher yielding stocks like real estate investments trusts, or REITs. Institutions, too, seem to be increasing their allocations to real estate securities as the market capitalization of REITs has increased. Both of these are positive technical factors affecting the real estate securities market.
Fund Strategies, Techniques and Performance
Our primary objective is to earn and pay our shareholders a high level of current income by investing in real estate companies. Our secondary objective is capital appreciation. There can be no assurance that we will meet our investment objectives.
During 2004, our total return on net asset value, or NAV (including NAV changes and assuming a hypothetical reinvestment of distributions at NAV) was 24.7%. During 2004, the total return for the Morgan Stanley REIT Index was 31.6% and the total return for the Morgan Stanley REIT Preferred Index was 7.3%. The S&P 500 Index (an unmanaged index published as Standard and Poor's Composite Index of 500 Stocks) total return for 2004 was 11.2%.
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RMR Real Estate Fund
Portfolio of Investments December 31, 2004
Company |
Shares |
Value |
||||||
---|---|---|---|---|---|---|---|---|
Real Estate Investment Trusts 142.0% Common Stocks 108.5% |
||||||||
Apartments 24.8% | ||||||||
AMLI Residential Properties Trust | 106,700 | $ | 3,414,400 | |||||
Apartment Investment & Management Co. | 149,100 | 5,746,314 | ||||||
BNP Residential Properties, Inc. | 200,000 | 3,220,000 | ||||||
Cornerstone Realty Income Trust, Inc. | 150,000 | 1,497,000 | ||||||
Home Properties, Inc. | 121,200 | 5,211,600 | ||||||
Post Properties, Inc. | 145,400 | 5,074,460 | ||||||
United Dominion Realty Trust, Inc. | 159,600 | 3,958,080 | ||||||
28,121,854 | ||||||||
Diversified 23.3% | ||||||||
Bedford Property Investors, Inc. | 150,000 | 4,261,500 | ||||||
Colonial Properties Trust | 125,000 | 4,908,750 | ||||||
Commercial Net Lease Realty | 289,600 | 5,965,760 | ||||||
Crescent Real Estate Equities Co. | 324,000 | 5,916,240 | ||||||
Lexington Corporate Properties Trust | 200,000 | 4,516,000 | ||||||
Liberty Property Trust | 20,000 | 864,000 | ||||||
26,432,250 | ||||||||
Health Care 10.9% | ||||||||
Health Care REIT, Inc. | 150,000 | 5,722,500 | ||||||
Healthcare Realty Trust, Inc. | 16,000 | 651,200 | ||||||
Nationwide Health Properties, Inc. | 250,000 | 5,937,500 | ||||||
12,311,200 | ||||||||
Hospitality 0.5% | ||||||||
Eagle Hospitality Properties Trust, Inc. (a) | 60,000 | 618,000 | ||||||
Industrial 5.9% | ||||||||
First Industrial Realty Trust, Inc. | 165,000 | 6,720,450 | ||||||
Office 21.8% | ||||||||
Arden Realty, Inc. | 114,600 | 4,322,712 | ||||||
Equity Office Properties Trust | 225,000 | 6,552,000 | ||||||
Glenborough Realty Trust, Inc. | 285,000 | 6,064,800 | ||||||
Highwoods Properties, Inc. | 85,000 | 2,354,500 | ||||||
Maguire Properties, Inc. | 170,000 | 4,668,200 | ||||||
Reckson Associates Realty Corp. | 21,000 | 689,010 | ||||||
24,651,222 | ||||||||
See notes to financial statements and notes to portfolio of investments. |
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Retail 13.2% | ||||||||
Glimcher Realty Trust | 75,000 | $ | 2,078,250 | |||||
Heritage Property Investment Trust | 200,000 | 6,418,000 | ||||||
New Plan Excel Realty Trust | 156,200 | 4,229,896 | ||||||
The Mills Corp. | 35,000 | 2,231,600 | ||||||
14,957,746 | ||||||||
Specialty 5.2% | ||||||||
Getty Realty Corp. | 28,600 | 821,678 | ||||||
U.S. Restaurant Properties, Inc. | 280,000 | 5,056,800 | ||||||
5,878,478 | ||||||||
Storage 2.9% | ||||||||
Sovran Self Storage, Inc. | 75,000 | 3,160,500 | ||||||
U-Store-It Trust | 10,000 | 173,500 | ||||||
3,334,000 | ||||||||
Total Common Stocks (Cost $108,474,162) | 123,025,200 | |||||||
Preferred Stocks 33.5% | ||||||||
Apartments 1.8% | ||||||||
Apartment Investment & Research Management Co., Series G | 20,000 | 546,800 | ||||||
Apartment Investment & Research Management Co., Series T | 60,000 | 1,524,600 | ||||||
2,071,400 | ||||||||
Health Care 7.4% | ||||||||
LTC Properties, Inc., Series F | 160,000 | 4,216,000 | ||||||
OMEGA Healthcare Investors Inc., Series D | 160,000 | 4,224,000 | ||||||
8,440,000 | ||||||||
Hospitality 11.9% | ||||||||
Ashford Hospitality Trust | 107,900 | 2,794,610 | ||||||
Equity Inns, Inc., Series B | 34,000 | 895,900 | ||||||
FelCor Lodging Trust, Inc., Series A | 83,000 | 2,104,880 | ||||||
FelCor Lodging Trust, Inc., Series B | 18,900 | 484,407 | ||||||
Innkeepers USA Trust, Series C | 120,000 | 3,090,000 | ||||||
Winston Hotels, Inc., Series B | 160,000 | 4,092,800 | ||||||
13,462,597 | ||||||||
See notes to financial statements and notes to portfolio of investments. |
5
Manufactured Homes 6.4% | ||||||||
Affordable Residential Communities, Series A | 280,000 | $ | 7,302,400 | |||||
Office 0.7% | ||||||||
Kilroy Realty Corp., Series F | 30,000 | 759,300 | ||||||
Retail 2.3% | ||||||||
CBL & Associates Properties, Inc., Series B | 20,000 | 1,080,000 | ||||||
Glimcher Realty Trust, Series G | 50,000 | 1,289,500 | ||||||
The Mills Corp., Series E | 7,100 | 201,356 | ||||||
2,570,856 | ||||||||
Specialty 3.0% | ||||||||
Anthracite Capital, Inc., Series C | 10,000 | 273,000 | ||||||
RAIT Investment Trust, Series A | 125,000 | 3,087,500 | ||||||
3,360,500 | ||||||||
Total Preferred Stocks (Cost $36,243,283) | 37,967,053 | |||||||
Total Real Estate Investment Trusts (Cost $144,717,445) | 160,992,253 | |||||||
Short-Term Investment 0.9% | ||||||||
Other Investment Companies 0.9% | ||||||||
SSgA Money Market Fund,1.845%(b) (Cost $962,699) | 962,699 | 962,699 | ||||||
Total Investments 142.9% (Cost $145,680,144) | 161,954,952 | |||||||
Other assets less liabilities 1.2% | 1,401,629 | |||||||
Preferred Shares, at liquidation preference (44.1)% | (50,000,000 | ) | ||||||
Net Assets attributable to common shares 100% | $ | 113,356,581 |
Notes to Portfolio of Investments
See notes to financial statements.
6
RMR Real Estate Fund
Financial Statements continued
Statement of Assets and Liabilities
December 31, 2004 |
|
||||
---|---|---|---|---|---|
Assets | |||||
Investments in securities, at value (cost $145,680,144) | $ | 161,954,952 | |||
Cash | 510 | ||||
Dividends and interest receivable | 1,666,545 | ||||
Total assets | 163,622,007 | ||||
Liabilities | |||||
Advisory fee payable | 82,128 | ||||
Distributions payable preferred shares | 24,600 | ||||
Accrued expenses and other liabilities | 158,698 | ||||
Total liabilities | 265,426 | ||||
Preferred shares, at liquidation preference | |||||
Auction preferred shares, Series T; $.001 par value per share; 2,000 shares issued and outstanding at $25,000 per share liquidation preference |
50,000,000 | ||||
Net assets attributable to common shares | $ | 113,356,581 | |||
Composition of net assets | |||||
Common shares, $.001 par value per share; unlimited number of shares authorized, 6,824,000 shares issued and outstanding |
$ | 6,824 | |||
Additional paid-in capital | 96,710,623 | ||||
Accumulated net realized gain on investments | 364,326 | ||||
Net unrealized appreciation on investments | 16,274,808 | ||||
Net assets attributable to common shares | $ | 113,356,581 | |||
Net asset value per share attributable to common shares (based on 6,824,000 common shares outstanding) |
$ | 16.61 | |||
See notes to financial statements.
7
RMR Real Estate Fund
Financial Statements continued
Statement of Operations
For the Year Ended December 31, 2004 |
|
||||||
---|---|---|---|---|---|---|---|
Investment Income | |||||||
Dividends | $ | 4,851,329 | |||||
Interest | 27,659 | ||||||
Total investment income | 4,878,988 | ||||||
Expenses | |||||||
Advisory | 1,199,120 | ||||||
Audit and legal | 189,547 | ||||||
Administrative | 160,959 | ||||||
Preferred shares remarketing | 111,329 | ||||||
Custodian | 70,522 | ||||||
Trustees' fees and expenses | 52,035 | ||||||
Compliance and internal audit | 45,523 | ||||||
Transfer agency | 41,201 | ||||||
Shareholder reporting | 33,782 | ||||||
Other | 55,477 | ||||||
Total expenses before interest | 1,959,495 | ||||||
Interest expense | 75,390 | ||||||
Total expenses | 2,034,885 | ||||||
Less: expenses waived by the Advisor | (352,682 | ) | |||||
Net expenses | 1,682,203 | ||||||
Net investment income | 3,196,785 | ||||||
Realized and unrealized gain on investments | |||||||
Net realized gains on investments | 4,348,707 | ||||||
Net change in unrealized appreciation/(depreciation) on investments | 16,866,604 | ||||||
Net realized and unrealized appreciation on investments | 21,215,311 | ||||||
Distributions to preferred shareholders from net investment income | (320,690 | ) | |||||
Distributions to preferred shareholders from net realized gains on investments | (343,770 | ) | |||||
Net increase in net assets attributable to common shares resulting from operations | $ | 23,747,636 | |||||
See notes to financial statements.
8
RMR Real Estate Fund
Financial Statements continued
Statement of Changes in Net Assets
|
Year Ended December 31, 2004 |
For the Period December 18, 2003(a) to December 31, 2003 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Increase (decrease) in net assets resulting from operations | ||||||||||
Net investment income | $ | 3,196,785 | $ | 721,883 | ||||||
Net realized gain on investments | 4,348,707 | 235,908 | ||||||||
Net change in unrealized appreciation/(depreciation) on investments | 16,866,604 | (591,796 | ) | |||||||
Distributions to preferred shareholders from: | ||||||||||
Net investment income | (320,690 | ) | | |||||||
Net realized gain on investments | (343,770 | ) | | |||||||
Net increase in net assets attributable to common shares resulting from operations |
23,747,636 | 365,995 | ||||||||
Distributions to common shareholders from: | ||||||||||
Net investment income | (3,622,828 | ) | | |||||||
Net realized gain on investments | (3,883,572 | ) | | |||||||
Capital shares transactions |
||||||||||
Net proceeds from sales of common shares | 2,144,250 | 95,304,765 | ||||||||
Net proceeds from sales of preferred shares | 49,195,335 | | ||||||||
Net increase from capital share transactions | 51,339,585 | 95,304,765 | ||||||||
Less: Liquidation preference of preferred shares issued | (50,000,000 | ) | | |||||||
Total increase in net assets attributable to common shares | 17,580,821 | 95,670,760 | ||||||||
Net assets attributable to common shares |
||||||||||
Beginning of period | 95,775,760 | 105,000 | ||||||||
End of period (including undistributed net investment income of $0 and $721,883, respectively) |
$ | 113,356,581 | $ | 95,775,760 | ||||||
Common shares issued and repurchased | ||||||||||
Shares outstanding, beginning of period | 6,674,000 | 7,000 | ||||||||
Shares sold | 150,000 | 6,667,000 | ||||||||
Shares outstanding, end of period | 6,824,000 | 6,674,000 | ||||||||
(a) Commencement of operations.
See notes to financial statements
9
Financial Highlights RMR Real Estate Fund
Selected Data For A Common Share Outstanding Throughout Each Period
|
Year Ended December 31, 2004 |
For the Period December 18, 2003(a) to December 31, 2003 |
||||||
---|---|---|---|---|---|---|---|---|
Net asset value, beginning of period | $ | 14.35 | $ | 14.33 | (b) | |||
Income from Investment Operations | ||||||||
Net investment income (c)(d) | .47 | 0.10 | ||||||
Net realized and unrealized gain (loss) on investments (d) | 3.11 | (.05 | ) | |||||
Distributions to preferred shareholders (common stock equivalent basis) from: | ||||||||
Net investment income | (.05 | ) | | |||||
Net realized gain on investments | (.05 | ) | | |||||
Net increase in net asset value from operations | 3.48 | .05 | ||||||
Less: Distributions to common shareholders from: | ||||||||
Net investment income | (.53 | ) | | |||||
Net realized gain on investments | (.57 | ) | | |||||
Common shares offering costs charged to paid-in capital | | (.03 | ) | |||||
Preferred shares offering costs charged to paid in capital | (.12 | ) | | |||||
Net asset value, end of period | $ | 16.61 | $ | 14.35 | ||||
Market price, beginning of period | $ | 15.00 | $ | 15.00 | ||||
Market price, end of period | $ | 14.74 | $ | 15.00 | ||||
Total Return (e) | ||||||||
Total investment return based on: | ||||||||
Market price | 6.42% | (f) | 0.00% | (f) | ||||
Net asset value | 24.73% | (f) | 0.14% | (f) | ||||
Ratios/Supplemental Data: | ||||||||
Preferred shares, liquidation preference ($25,000 per share) (000s omitted) |
$ | 50,000 | $ | | ||||
Net assets attributable to common shares, end of period (000) | $ | 113,357 | $ | 95,776 | ||||
Ratio to average net assets attributable to common shares of: | ||||||||
Net investment income, before total preferred share distributions (d) | 3.22 | % | 27.45 | % | ||||
Total preferred share distributions | 0.67 | % | 0.00 | % | ||||
Net investment income, net of total preferred share distributions (d) | 2.55 | % | 27.45% | (h) | ||||
Expenses, net of fee waivers | 1.69% | (g) | 2.40% | (h) | ||||
Expenses, before fee waivers | 2.05% | (g) | 2.65% | (h) | ||||
Portfolio turnover rate | 35.52 | % | 17.49 | % |
10
RMR Real Estate Fund
Notes to Financial Statements
December 31, 2004
Note A
(1) Organization
RMR Real Estate Fund, or the Fund, was organized as a Massachusetts business trust on July 2, 2002, and is registered under the Investment Company Act of 1940, as amended, as a non-diversified closed-end management investment company. The Fund had no operations prior to December 18, 2003, other than matters relating to the Fund's establishment, registration of the Fund's common shares under the Securities Act of 1933, and the sale of a total of 7,000 common shares for $105,000 to RMR Advisors, Inc., or RMR Advisors. On December 18, 2003, the Fund sold 6,667,000 common shares in an initial public offering and 150,000 common shares on February 4, 2004, pursuant to an over allotment agreement with the underwriters. Proceeds to the Fund were $97,449,015 after deducting underwriting commissions and $204,510 of offering expenses.
(2) Use of Estimates
Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Fund's management to make estimates and assumptions that may affect the amounts reported in the financial statements and related notes. The actual results could differ from these estimates.
(3) Reclassifications
Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation.
(4) Portfolio Valuation
Investment securities of the Fund are valued at the latest sales price whenever that price is readily available on that day; securities for which no sales were reported on that day, unless otherwise noted, are valued at the last available bid price on that day. Securities traded primarily on the NASDAQ Stock Market, or NASDAQ, are normally valued by the Fund at the NASDAQ Official Closing Price, or NOCP, provided by NASDAQ each business day. The NOCP is the most recently reported price as of 4:00:06 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. Some fixed income securities may be valued using pricing provided by a pricing service. Any of the Fund's securities which are not readily marketable, which are not traded or which have other characteristics of illiquidity are valued by the Fund at fair value as determined in good faith under the supervision of the Fund's board of trustees. Numerous factors may be considered when determining fair value of a security, including cost at date of purchase, type of security, the nature and duration of restrictions on disposition of the security and whether the issuer of the security being fair valued has other securities of the same class outstanding. Short-term debt securities with less than 60 days until maturity may be valued at cost, which when combined with interest accrued, approximates market value.
11
(5) 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 are recorded on the basis of identified cost.
(6) Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a "regulated investment company" and to comply with the applicable provisions of subchapter M of the Internal Revenue Code of 1986, as amended, so that it will generally not be subject to federal income tax.
(7) Distributable Earnings
The Fund earns income, net of expenses, daily on its investments. The Fund has substantial investments in real estate investment trusts or REITs, which are generally not subject to federal income taxes. Distributions that the Fund receives from REITs can be classified as ordinary income, capital gain income or return of capital by the REITs that make these distributions to the Fund. The Fund has included in its net investment income as "dividends" only that portion of the distributions received from REITs that is classified by those REITs as ordinary income. The Fund has included in its "net realized gain on investments" that portion of the distributions received from REITs that is classified by those REITs as capital gain income. Similarly, the Fund has included in its "net change in unrealized appreciation/(depreciation) on investments" that portion of the distributions from REITs that is classified by those REITs as return of capital. The classification of distributions received from the Fund's REIT investments were as follows:
|
Year ended December 31, 2004 |
Period December 18, 2003 to December 31, 2003 |
||||
---|---|---|---|---|---|---|
Ordinary income | $ | 4,851,329 | $ | 779,460 | ||
Capital gain income | 2,476,465 | 111,155 | ||||
Return of capital | 3,062,460 | 76,225 | ||||
Total distributions received | $ | 10,390,254 | $ | 966,840 | ||
It is the policy of the Fund to pay distributions to common shareholders on a monthly basis. The Fund paid its first monthly distribution to common shareholders on February 27, 2004. The Fund has adopted a policy to pay common shareholders a stable distribution amount. The Fund's distributions may consist of ordinary income (net investment income and short term capital gains), long term capital gains and return of capital. Distributions to shareholders are recorded on the ex-dividend date. To the extent the Fund's net realized capital gains, if any, can be offset by capital loss carry-forwards, it is the policy of the Fund not to distribute such gains. Distributions to preferred shareholders are determined as described in Note D.
The Fund distinguishes between distributions to shareholders on a tax basis and a financial reporting basis. Only distributions in excess of accumulated 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
12
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.
The tax character of distributions paid during the year ended December 31, 2004, were as follows:
Ordinary income | $ | 6,049,765 | |
Net long-term capital gains | 2,121,095 | ||
$ | 8,170,860 | ||
As of December 31, 2004, the components of distributable earnings (accumulated losses) on a federal income tax basis were as follows:
Undistributed ordinary income | $ | | |
Undistributed net long-term capital gains | 366,032 | ||
Net unrealized appreciation | 16,273,102 |
The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation as of December 31, 2004, are as follows:
Cost | $ | 145,681,850 | ||
Gross unrealized appreciation | $ | 16,587,719 | ||
Gross unrealized depreciation | (314,617 | ) | ||
Net unrealized appreciation | $ | 16,273,102 | ||
(8) Concentration of Risk
Under normal market conditions, the Fund's investments will be concentrated in income producing common shares, preferred shares and debt securities, including convertible preferred and debt securities, issued by real estate companies and REITs. The value of Fund shares may fluctuate more than the shares of a fund not concentrated in the real estate industry due to economic, legal, regulatory, technological or other developments affecting the United States real estate industry.
Note B
Advisory and Administration Agreements and Other Transactions with Affiliates
The Fund has an advisory agreement with RMR Advisors to provide the Fund with a continuous investment program, to make day-to-day investment decisions and to generally manage the business affairs of the Fund in accordance with its investment objectives and policies. Pursuant to the agreement, RMR Advisors is compensated at an annual rate of 0.85% of the Fund's average daily managed assets. Managed assets means the total assets of the Fund less liabilities other than any indebtedness entered into for purposes of leverage. For purposes of calculating managed assets, the liquidation preference of preferred shares is not considered a liability.
13
RMR Advisors has contractually agreed to waive a portion of its annual fee equal to 0.25% of the Fund's average daily managed assets until after December 18, 2008.
RMR Advisors, and not the Fund, has agreed to pay the lead underwriter of the Fund's initial public offering an annual fee equal to 0.15% of the Fund's managed assets. This fee is paid quarterly in arrears during the term of RMR Advisors' advisory agreement and is paid by the Advisor, not the Fund. The aggregate fees paid pursuant to the contract plus reimbursement of legal expenses of the underwriters will not exceed 4.5% of the total price of the common shares in the initial public offering.
RMR Advisors also performs administrative functions for the Fund pursuant to an administration agreement with the Fund. RMR Advisors has entered into a sub-administration agreement with State Street Bank and Trust Company ("State Street") to perform substantially all Fund accounting and other administrative services. Under the administration agreement RMR Advisors is entitled to reimbursement of the cost of providing administrative services. In 2004, the Fund reimbursed RMR for $160,959 of sub-administrative fees charged by State Street.
The Fund pays each trustee who is not a director, officer or employee of RMR Advisors (a "disinterested trustee") an annual fee plus a fee for each board of trustees' meeting or committee meeting attended, other than meetings held on days on which there is also a board of trustees' meeting or another committee meeting for which he is paid. In addition, the Fund reimburses all trustees for travel and out-of-pocket expenses incurred in connection with attending board or committee meetings.
The Fund's board of trustees and separately the disinterested trustees authorized the Fund to make reimbursement payments to RMR Advisors for costs related to the Fund's compliance and internal audit programs.
Note C
Securities Transactions
During the year ended December 31, 2004, there were purchases and sales transactions (excluding short-term securities) of $104,128,362 and $49,359,490, respectively. Brokerage commissions on securities transactions amounted to $102,455 during the year ended December 31, 2004.
Note D
Preferred Shares
On March 10, 2004, the Fund issued 2,000 auction preferred shares, Series T, for $50,000,000, or net proceeds of $49,195,335 after deducting underwriting commissions and offering expenses of $804,665. The preferred shares have a liquidation preference of $25,000 per share plus an amount equal to accumulated but unpaid distributions. The preferred shares are senior to the Fund's common shares and will rank on parity with any other class or series of preferred shares of the Fund as to the payment of periodic distributions, including distribution of assets upon liquidation. If the Fund does not timely cure a failure to (1) maintain asset coverage for the preferred shares as required by rating agencies, or (2) maintain asset coverage, as defined in the Investment Company Act of 1940, of at least 200%, the preferred shares will be subject to mandatory redemption at an amount equal to their liquidation preference plus accumulated but unpaid distributions. The holders of the preferred shares have voting rights equal to the holders of the Fund's common shares and will generally vote together with the holders of the common shares as a single class except as otherwise set
14
forth in the Fund's Declaration of Trust. Holders of the preferred shares, voting as a separate class, are entitled to elect two of the Fund's trustees. The Fund pays distributions on the preferred shares at a rate set at auctions held generally every seven days. Distributions are generally payable every seven days, on the first business day following the end of a distribution period. The preferred share distribution rate was 2.53% per annum as of December 31, 2004.
Note E
Use of Debt Leverage
On February 10, 2004, the Fund entered into a revolving credit agreement with Wachovia Bank, N.A. This facility was cancelled after the offering of preferred shares on March 10, 2004. This facility permitted borrowing up to $30,000,000. Funds could be drawn, repaid and redrawn until maturity, and no principal payment was due until maturity. Interest on borrowings under the credit facility was payable at a spread above LIBOR. During the period the credit agreement was in place, the Fund had average daily borrowings of $23,750,000 and outstanding amounts carried a weighted average interest rate of 2.19% per annum.
15
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and
Shareholders of RMR Real Estate Fund
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RMR Real Estate Fund (the "Fund") as of December 31, 2004, and the related statement of operations for the year then ended, and the statements of changes in net assets and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2004, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RMR Real Estate Fund at December 31, 2004, the results of its operations for the year then ended, and the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.
Boston,
Massachusetts
February 10, 2005
16
December 31, 2004
About information contained in this report:
Limited Operating History The Fund began operations in December 2003 and has a limited history of operations.
Limited Experience of Advisor RMR Advisors has limited experience managing registered investment companies like the Fund. RMR Advisors began the substantial part of its current business activities in December 2003.
Concentration of Investments The Fund's investment portfolio is concentrated in the real estate industry. A decline in the market value of real estate generally is likely to cause a decline in the value of the Fund's common shares.
Non-diversification Risk The Fund's investment portfolio is focused upon securities in only one industry. Also, because the Fund is non-diversified under the Investment Company Act of 1940, it can invest a greater percentage of its assets in securities of a single company than can a diversified fund. Accordingly, the market prices of the Fund's common shares may be more volatile than an investment in a diversified fund.
Real Estate Risks The Fund's investment focus on real estate securities creates risks, including the following:
Securities of companies that own office or industrial buildings are vulnerable to changes in office or industrial occupancies and rents; securities of companies that own hotels and resorts are highly sensitive to business and leisure travel and general economic conditions; securities of companies that own healthcare facilities, age restricted apartments, congregate care properties, assisted living facilities and nursing homes may be highly dependent upon Medicare and Medicaid payments which are subject to changes in government policies; securities of companies that own retail properties are vulnerable to changes in consumer spending practices and to bankruptcies of large retail firms; securities of companies that own apartment buildings are affected by changes in housing market conditions; and securities of companies that own other types of real estate are subject to risks associated with the industries which use that real estate.
Many real estate companies in which the Fund invests may be smaller and have more debt than companies traded in the equity markets as a whole. Smaller equity capitalization and more leverage may mean that securities issued by real estate companies may be more volatile than securities issued by larger or less leveraged companies.
Real estate companies in which the Fund invests are susceptible to other special risks. For example: real estate taxes and property insurance costs may increase materially; environmental laws have made real estate owners responsible for clean up costs which can be material; and other laws require real estate owners to incur capital expenditures such as laws that require access for disabled persons.
Leverage Risks The Fund uses leverage to increase its investments. Holders of the Fund's preferred shares have priority claims to the Fund's income and assets over owners of the Fund's common shares. Because the Fund
17
uses leverage, if the value of the Fund's investments declines, the value of the Fund's common shares will decline faster than it would if the Fund had invested without leverage.
Interest Rate Risks The Fund is exposed to two principal types of interest rate risks:
Interest rate risks may be magnified if the Fund hedges interest rates based upon expectations concerning interest rates that prove inaccurate.
Redeemable Securities Risks Most of the preferred securities in which the Fund invests provide their issuers rights of redemption at fixed prices. If the issuers exercise their redemption rights, the Fund may not realize the value for any premium the Fund may have paid for these securities or the Fund may be unable to make new investments which produce equivalent income.
Low Rated Securities Risks The Fund may invest some of its managed assets in ratable securities which are below investment grade. In addition, none of the common equity securities in which the Fund invests are rated. These investments should be considered speculative. Because the Fund invests in speculative securities, an investment in the Fund's common shares involves a greater risk of loss than an investment which is focused only on higher rated securities.
Anti-takeover Provisions The Fund's declaration of trust and bylaws contain provisions which limit the ability of any person to acquire control of the Fund or to convert the Fund to an open end fund. These provisions may deprive common shareholders of the ability to sell their common shares at a premium to their market value.
Market Disruption Risk Volatility in securities markets precipitated by terrorist attacks, war or other world events may have negative effects on those markets. The value of securities in which the Fund invests and the Fund's common shares may be more volatile or decline in the event of future terrorist activity, war or instability.
AN INVESTMENT IN RMR REAL ESTATE FUND IS NOT A DEPOSIT OR OBLIGATION OF, AND IS NOT GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION, AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
18
RMR Hospitality and Real Estate Fund
December 31, 2004
To Our Shareholders,
Two thousand four was the first year of operations of RMR Hospitality and Real Estate Fund (AMEX: RHR). In the pages that follow, you will find data summarizing our financial results for the period from inception in April 2004 through the end of 2004 and our financial position as of the end of that period.
As a result of our investment activities during the 2004 period, our net asset value increased to $22.94 per common share as of December 31, 2004 a 19.0% increase from $19.28 per common share as the date of closing of our initial public offering of common shares. In addition to this increase in net asset value per share, we paid 6 regular monthly distributions totaling $0.75 per common share during the 2004 period.
At a meeting in early 2005, our board of trustees considered an increase in our use of leverage at some point in the future. As shown on the attached statement of assets and liabilities, the liquidation preference of our preferred shares was approximately 22.9% of our total assets as of December 31, 2004. At any time in the future, our board may determine to increase our use of preferred shares to as much as 35% of our managed assets at the time of increase.
During 2005, we will continue to monitor market conditions and position our portfolio according to our view of those conditions. Although our views may change over the next year as the markets change, as of the date of this letter we do not believe that our industry allocation is likely to be revised much between hospitality and real estate during the year; we believe the hospitality industry remains on track for strong continued improvements during 2005 typical of a hospitality cyclical upswing, while the real estate market fundamentals are expected to continue to solidify more slowly.
Thank you for your continued support, and be sure to view our website, at www.rmrfunds.com.
Sincerely,
Thomas
M. O'Brien
President
19
RMR Hospitality and Real Estate Fund
December 31, 2004
Relevant Market Conditions
Hospitality Industry Fundamentals. We believe the favorable operating environment for hospitality companies that existed in 2004 will continue into 2005. In general, we believe that continued growth in the U.S. economy, an anticipated increase in U.S. travel from international travelers due to a weak U.S. dollar and a limited increase in U.S. hotel supply will result in increased hotel occupancy levels and provide hospitality companies the opportunity to increase room rates in 2005. PricewaterhouseCoopers LLP has recently forecast hospitality industry profits of $20.8 billion in 2005, a 25% increase over the 2004 estimated total.
Real Estate Industry Fundamentals. We believe the investment environment for real estate companies at the end of 2004 and into 2005 is generally positive. We believe that environment will include revenue growth from stabilizing and improving occupancy rates. In general, development activities that tend to depress the value of existing properties have been held in check during recent years. We believe that a majority of real estate investment trust's balance sheets reflect modest debt leverage and low floating rate debt.
Real Estate Industry Technicals. We believe demand for real estate securities over the long term will continue to increase. Demographic trends in the U.S. include growth in the over-50 age population; we believe that individuals in this category tend to focus their investments in higher yielding stocks like real estate investments trusts, or REITs. Institutions, too, seem to be increasing their allocations to real estate securities as the market capitalization of REITs has increased. Both of these are positive technical factors affecting real estate securities markets.
Fund Strategies, Techniques and Performance
Our primary objective is to earn and pay our shareholders a high level of current income by investing in hospitality and real estate companies. Our secondary objective is capital appreciation. There can be no assurance that we will meet our investment objectives.
During the period from April 27, 2004, the date we began operations, until December 31, 2004, our total return on net asset value, or NAV, (including NAV changes and assuming a hypothetical reinvestment of distributions at NAV) was 23.2%. During the comparable 2004 period, the total return for the Morgan Stanley REIT Index was 34.2%, and the total return for the Morgan Stanley REIT Preferred Index was 9.0%. The S&P 500 Index (an unmanaged index published as Standard and Poor's Composite Index of 500 Stocks) total return during the comparable 2004 period was 7.7%.
20
RMR Hospitality and Real Estate Fund
Portfolio of Investments December 31, 2004
Company |
Shares |
Value |
|||||
---|---|---|---|---|---|---|---|
Common Stocks 71.6% | |||||||
Apartments 8.5% | |||||||
Apartment Investment & Management Co. * | 10,000 | $ | 385,400 | ||||
BNP Residential Properties, Inc. * | 16,000 | 257,600 | |||||
Cornerstone Realty Income Trust, Inc. * | 55,000 | 548,900 | |||||
Gables Residential Trust * | 65,000 | 2,326,350 | |||||
Home Properties, Inc. * | 9,900 | 425,700 | |||||
Town & Country Trust * | 20,000 | 552,600 | |||||
United Dominion Realty Trust, Inc. * | 15,000 | 372,000 | |||||
4,868,550 | |||||||
Diversified 15.5% | |||||||
Bedford Property Investors, Inc. * | 45,300 | 1,286,973 | |||||
Colonial Properties Trust * | 59,000 | 2,316,930 | |||||
Commercial Net Lease Realty * | 73,400 | 1,512,040 | |||||
Crescent Real Estate Equities Co. * | 95,000 | 1,734,700 | |||||
Lexington Corporate Properties Trust * | 87,000 | 1,964,460 | |||||
8,815,103 | |||||||
Health Care 9.2% | |||||||
Health Care REIT, Inc. * | 47,000 | 1,793,050 | |||||
Healthcare Realty Trust, Inc. * | 21,000 | 854,700 | |||||
Nationwide Health Properties, Inc. * | 91,000 | 2,161,250 | |||||
Windrose Medical Properties Trust * | 30,100 | 433,741 | |||||
5,242,741 | |||||||
Hospitality 1.2% | |||||||
Ashford Hospitality Trust, Inc. * | 28,300 | 307,621 | |||||
Eagle Hospitality Properties Trust, Inc.* (a) | 36,000 | 370,800 | |||||
678,421 | |||||||
Industrial 4.8% | |||||||
First Industrial Realty Trust, Inc. * | 67,000 | 2,728,910 | |||||
Office 17.0% | |||||||
Brandywine Realty Trust * | 32,000 | 940,480 | |||||
Equity Office Properties Trust * | 131,900 | 3,840,928 | |||||
Glenborough Realty Trust, Inc. * | 75,000 | 1,596,000 | |||||
Highwoods Properties, Inc. * | 75,000 | 2,077,500 | |||||
Reckson Associates Realty Corp. * | 38,000 | 1,246,780 | |||||
9,701,688 | |||||||
See notes to financial statements and notes to portfolio of investments. |
21
Retail 8.6% | |||||||
Heritage Property Investment Trust * | 73,900 | $ | 2,371,451 | ||||
Kramont Realty Trust * | 46,500 | 1,088,100 | |||||
New Plan Excel Realty Trust * | 53,000 | 1,435,240 | |||||
4,894,791 | |||||||
Specialty 5.5% | |||||||
Getty Realty Corp. * | 30,000 | 861,900 | |||||
U.S. Restaurant Properties, Inc. * | 124,700 | 2,252,082 | |||||
3,113,982 | |||||||
Storage 1.3% | |||||||
Sovran Self Storage, Inc. * | 18,100 | 762,734 | |||||
Total Common Stocks (Cost $33,901,544) | 40,806,920 | ||||||
Preferred Stocks 30.9% | |||||||
Apartments 2.8% | |||||||
Apartment Investment & Management Co., Series R * | 38,000 | 1,011,940 | |||||
Apartment Investment & Management Co., Series U * | 24,000 | 597,120 | |||||
1,609,060 | |||||||
Health Care 3.6% | |||||||
Health Care REIT, Inc., Series F * | 40,000 | 1,010,000 | |||||
LTC Properties, Inc., Series F * | 40,000 | 1,054,000 | |||||
2,064,000 | |||||||
Hospitality 14.0% | |||||||
Ashford Hospitality Trust * | 46,000 | 1,191,400 | |||||
Boykin Lodging Co., Series A * | 70,000 | 1,967,000 | |||||
Host Marriott Corp., Series E * | 60,000 | 1,666,500 | |||||
Innkeepers USA Trust, Series C * | 27,000 | 695,250 | |||||
Winston Hotels, Inc., Series B * | 95,000 | 2,430,100 | |||||
7,950,250 | |||||||
Manufactured Homes 0.4% | |||||||
Affordable Residential Communities, Series A * | 9,600 | 250,368 | |||||
Office 10.1% | |||||||
Alexandria Real Estate Equities, Inc., Series C * | 120,000 | 3,176,400 | |||||
Bedford Property Investors, Inc., Series B * | 30,000 | 767,700 | |||||
SL Green Realty Corp. * | 70,000 | 1,816,500 | |||||
5,760,600 | |||||||
Total Preferred Stocks (Cost $16,721,476) | 17,634,278 | ||||||
See notes to financial statements and notes to portfolio of investments. |
22
RMR Hospitality and Real Estate Fund
Portfolio of Investments continued
Company |
Shares or Principal Amount |
Value |
|||||||
---|---|---|---|---|---|---|---|---|---|
Debt Securities 25.0% | |||||||||
Hospitality 25.0% | |||||||||
American Real Estate Partners LP, 8.125%, 06/01/2012 | $ | 2,000,000 | $ | 2,132,500 | |||||
Felcor Lodging LP, 9.00%, 06/01/2011 * | 3,200,000 | 3,624,000 | |||||||
Host Marriott LP, 7.125%, 11/01/2013 * | 1,650,000 | 1,763,438 | |||||||
ITT Corp., 7.75%, 11/15/2025 | 3,275,000 | 3,406,000 | |||||||
MeriStar Hospitality Corp., 9.125%, 01/15/2011 * | 1,000,000 | 1,080,000 | |||||||
MeriStar Hospitality Corp., 10.50%, 06/15/2009 * | 2,050,000 | 2,234,500 | |||||||
14,240,438 | |||||||||
Total Debt Securities (Cost $13,301,069) | 14,240,438 | ||||||||
Short-Term Investment 1.1% | |||||||||
Other Investment Companies 1.1% | |||||||||
SSgA Money Market Fund,1.845%(b) (Cost $657,568) | 657,568 | 657,568 | |||||||
Total Investments 128.6% (Cost $64,581,657) | 73,339,204 | ||||||||
Other assets less liabilities 1.2% | 666,114 | ||||||||
Preferred Shares, at liquidation preference (29.8)% | (17,000,000 | ) | |||||||
Net Assets attributable to common shares 100% | $ | 57,005,318 |
Notes to Portfolio of Investments
See notes to financial statements.
23
RMR Hospitality and Real Estate Fund
Financial Statements
Statement of Assets and Liabilities
December 31, 2004 |
|
||||
---|---|---|---|---|---|
Assets | |||||
Investments in securities, at value (cost $64,581,657) | $ | 73,339,204 | |||
Cash | 306 | ||||
Dividends and interest receivable | 853,175 | ||||
Total assets | 74,192,685 | ||||
Liabilities | |||||
Advisory fee payable | 37,382 | ||||
Distributions payable preferred shares | 8,330 | ||||
Accrued expenses and other liabilities | 141,655 | ||||
Total liabilities | 187,367 | ||||
Preferred shares, at liquidation preference | |||||
Auction preferred shares, Series Th; $.001 par value per share; 680 shares issued and outstanding at $25,000 per share liquidation preference |
17,000,000 | ||||
Net assets attributable to common shares | $ | 57,005,318 | |||
Composition of net assets | |||||
Common shares, $.001 par value per share; unlimited number of shares authorized, 2,485,000 shares issued and outstanding |
$ | 2,485 | |||
Additional paid-in capital | 47,460,854 | ||||
Accumulated net realized gain on investments | 784,432 | ||||
Net unrealized appreciation on investments | 8,757,547 | ||||
Net assets attributable to common shares | $ | 57,005,318 | |||
Net asset value per share attributable to common shares (based on 2,485,000 shares outstanding) |
$ | 22.94 | |||
See notes to financial statements.
24
RMR Hospitality and Real Estate Fund
Financial Statements continued
Statement of Operations
For the Period April 27, 2004(a) to December 31, 2004 |
|
||||||
---|---|---|---|---|---|---|---|
Investment income | |||||||
Dividends | $ | 1,679,812 | |||||
Interest | 726,633 | ||||||
Total investment income | 2,406,445 | ||||||
Expenses | |||||||
Advisory | 378,681 | ||||||
Administrative | 101,942 | ||||||
Audit and legal | 70,915 | ||||||
Custodian | 50,141 | ||||||
Compliance and internal audit | 33,689 | ||||||
Preferred shares remarketing | 32,677 | ||||||
Transfer agency | 27,045 | ||||||
Shareholder reporting | 20,078 | ||||||
Trustees' fees and expenses | 10,785 | ||||||
Other | 41,669 | ||||||
Total expenses | 767,622 | ||||||
Less: expenses waived by the Advisor | (111,377 | ) | |||||
Net expenses | 656,245 | ||||||
Net investment income | 1,750,200 | ||||||
Realized and unrealized gain on investments | |||||||
Net realized gain on investments | 1,055,756 | ||||||
Net change in unrealized appreciation/(depreciation) on investments | 8,757,547 | ||||||
Net realized and unrealized appreciation on investments | 9,813,303 | ||||||
Distributions to preferred shareholders from net investment income | (151,512 | ) | |||||
Distributions to preferred shareholders from net realized gains on investments | (23,262 | ) | |||||
Net increase in net assets attributable to common shares resulting from operations | $ | 11,388,729 | |||||
(a) Commencement of operations.
See notes to financial statements.
25
RMR Hospitality and Real Estate Fund
Financial Statements continued
Statement of Changes in Net Assets
For the Period April 27, 2004(a) to December 31, 2004 |
|
||||||
---|---|---|---|---|---|---|---|
Increase (decrease) in net assets resulting from operations | |||||||
Net investment income | $ | 1,750,200 | |||||
Net realized gain on investments | 1,055,756 | ||||||
Net change in unrealized appreciation/(depreciation) on investments | 8,757,547 | ||||||
Distributions to preferred shareholders from: | |||||||
Net investment income | (151,512 | ) | |||||
Net realized gain on investments | (23,262 | ) | |||||
Net increase in net assets attributable to common shares resulting from operations | 11,388,729 | ||||||
Distributions to common shareholders from | |||||||
Net investment income | (1,615,688 | ) | |||||
Net realized gain on investments | (248,062 | ) | |||||
Capital shares transactions | |||||||
Net proceeds from sales of common shares | 47,720,000 | ||||||
Net proceeds from sales of preferred shares | 16,660,339 | ||||||
Net increase from capital share transactions | 64,380,339 | ||||||
Less: Liquidation preference of preferred shares issued | (17,000,000 | ) | |||||
Total increase in net assets attributable to common shares | 56,905,318 | ||||||
Net assets attributable to common shares | |||||||
Beginning of period | 100,000 | ||||||
End of period (including undistributed net investment income of $0) | $ | 57,005,318 | |||||
Common shares issued and repurchased | |||||||
Shares outstanding, beginning of period | 5,000 | ||||||
Shares sold | 2,480,000 | ||||||
Shares outstanding, end of period | 2,485,000 | ||||||
(a) Commencement of operations.
See notes to financial statements
26
Financial Highlights RMR Hospitality and Real Estate Fund
Selected Data For A Common Share Outstanding Throughout The Period
|
For the Period April 27, 2004(a) to December 31, 2004 |
||||
---|---|---|---|---|---|
Net asset value, beginning of period | $ | 19.28 | (b) | ||
Income from Investment Operations | |||||
Net investment income (c)(d) | .71 | ||||
Net realized and unrealized gain (loss) on investments (d) | 3.95 | ||||
Distributions to preferred shareholders (common stock equivalent basis) | |||||
Net investment income | (.06 | ) | |||
Net realized gain on investments | (.01 | ) | |||
Net increase in net asset value from operations | 4.59 | ||||
Less: Dividends to common shareholders from | |||||
Net investment income | (.65 | ) | |||
Net realized gain on investments | (.10 | ) | |||
Common shares offering costs charged to paid-in capital | (.04 | ) | |||
Preferred shares offering costs charged to paid in capital | (.14 | ) | |||
Net asset value, end of period | $ | 22.94 | |||
Market price, beginning of period | $ | 20.00 | |||
Market price, end of period | $ | 19.98 | |||
Total Return (e) | |||||
Total investment return based on: | |||||
Market price | 3.93 | %(f) | |||
Net asset value | 23.16 | %(f) | |||
Ratios/Supplemental Data: | |||||
Preferred shares, liquidation preference ($25,000 per share) (000s omitted) | $ | 17,000 | |||
Net assets attributable to common shares, end of period (000) | $ | 57,005 | |||
Ratio to average net assets attributable to common shares of: | |||||
Net investment income, before total preferred share distributions (d)(g) | 4.96 | % | |||
Total preferred share distributions (g) | 0.50 | % | |||
Net investment income, net of total preferred share distributions (d)(g) | 4.46 | % | |||
Expenses, net of fee waivers (g)(h) | 1.86 | % | |||
Expenses, before fee waivers (g)(h) | 2.18 | % | |||
Portfolio turnover rate | 20.83 | % |
27
RMR Hospitality and Real Estate Fund
Notes to Financial Statements
December 31, 2004
Note A
(1) Organization
RMR Hospitality & Real Estate Fund, or the Fund, was organized as a Massachusetts business trust on January 27, 2004, and is registered under the Investment Company Act of 1940, as amended, as a non-diversified closed-end management investment company. The Fund had no operations until April 27, 2004, other than matters relating to the Fund's establishment, registration of the Fund's common shares under the Securities Act of 1933, and the sale of 5,000 common shares for $100,000 to RMR Advisors, Inc., or RMR Advisors. On April 27, 2004, the Fund sold 2,480,000 common shares in an initial public offering including 480,000 common shares sold to affiliates of RMR Advisors. Proceeds to the Fund were $47,720,000 after deducting underwriting commissions and $80,000 of offering expenses. There was no underwriting commission or offering expenses paid on common shares sold to the affiliates of RMR Advisors.
(2) Use of Estimates
Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Fund's management to make estimates and assumptions that may affect the amounts reported in the financial statements and related notes. The actual results could differ from these estimates.
(3) Portfolio Valuation
Investment securities of the Fund are valued at the latest sales price whenever that price is readily available on that day; securities for which no sales were reported on that day, unless otherwise noted, are valued at the last available bid price on that day. Securities traded primarily on the NASDAQ Stock Market, or NASDAQ, are normally valued by the Fund at the NASDAQ Official Closing Price, or NOCP, provided by NASDAQ each business day. The NOCP is the most recently reported price as of 4:00:06 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. Some fixed income securities may be valued using pricing provided by a pricing service. Any of the Fund's securities which are not readily marketable, which are not traded or which have other characteristics of illiquidity are valued by the Fund at fair value as determined in good faith under the supervision of the Fund's board of trustees. Numerous factors may be considered when determining fair value of a security, including cost at date of purchase, type of security, the nature and duration of restrictions on disposition of the security and whether the issuer of the security being fair valued has other securities of the same class outstanding. Short-term debt securities with less than 60 days until maturity may be valued at cost, which when combined with interest accrued, approximates market value.
(4) 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 are recorded on the basis of identified cost.
28
(5) Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a "regulated investment company" and to comply with the applicable provisions of subchapter M of the Internal Revenue Code of 1986, as amended, so that it will generally not be subject to federal income tax.
(6) Distributable Earnings
The Fund earns income, net of expenses, daily on its investments. The Fund has substantial investments in real estate investment trusts or REITs, which are generally not subject to federal income taxes. Distributions that the Fund receives from REITs can be classified as ordinary income, capital gain income or return of capital by the REITs that make these distributions to the Fund. The Fund has included in its net investment income as "dividends" only that portion of the distributions received from REITs that is classified by those REITs as ordinary income. The Fund has included in its "net realized gain on investments" that portion of the distributions received from REITs that is classified by those REITs as capital gain income. Similarly, the Fund has included in its "net change in unrealized appreciation/(depreciation) on investments" that portion of the distributions from REITs that is classified by those REITs as return of capital. The classification of distributions received from the Fund's REIT investments for the period ending December 31, 2004, were as follows:
Ordinary income | $ | 1,679,812 | |
Capital gain income | 552,402 | ||
Return of capital | 577,868 | ||
Total distributions received | $ | 2,810,082 | |
It is the policy of the Fund to pay distributions to common shareholders on a monthly basis. The Fund paid its first distribution to common shareholders on July 30, 2004. The Fund has adopted a policy to pay common shareholders a stable distribution amount. The Fund's distributions may consist of ordinary income (net investment income and short term capital gains), long term capital gains and return of capital. Distributions to shareholders are recorded on the ex-dividend date. To the extent the Fund's net realized capital gains, if any, can be offset by capital loss carryforwards, it is the policy of the Fund not to distribute such gains. Distributions to preferred shareholders are determined as described in Note D.
The Fund distinguishes between distributions to shareholders on a tax basis and a financial reporting basis. Only distributions in excess of accumulated 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.
The tax character of distributions paid during the period ending December 31, 2004, was as follows:
Ordinary income | $ | 2,038,524 | |
Net long term capital gains | | ||
$ | 2,038,524 | ||
29
As of December 31, 2004, the components of distributable earnings (accumulated losses) on a federal income tax basis were as follows:
Undistributed ordinary income | $232,030 | |
Undistributed net long-term capital gains | 552,402 | |
Net unrealized appreciation | 8,757,547 |
The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation as of December 31, 2004, are as follows:
Cost | $ | 64,581,657 | |
Gross unrealized appreciation | $ | 8,757,547 | |
Gross unrealized depreciation | | ||
Net unrealized appreciation | $ | 8,757,547 | |
(7) Organization Expenses and Common Offering Costs
RMR Advisors paid all the organizational expenses and offering costs (other than the sales load) of the Fund's initial public offering of common shares which exceeded $0.04 per share. The total amount incurred by RMR Advisors was $452,363. The Fund incurred offering costs of $80,000 which were charged as a reduction of paid in capital.
(8) Concentration of Risk
Under normal market conditions, the Fund's investments will be concentrated in income producing common shares, preferred shares and debt securities, including convertible preferred and debt securities, issued by hospitality and real estate companies and REITs. The value of Fund shares may fluctuate more than the shares of a fund not concentrated in the hospitality and real estate industries due to economic, legal, regulatory, technological or other developments affecting the United States hospitality and real estate industries.
Note B
Advisory and Administration Agreements and Other Transactions with Affiliates
The Fund has an advisory agreement with RMR Advisors to provide the Fund with a continuous investment program, to make day-to-day investment decisions and to generally manage the business affairs of the Fund in accordance with its investment objectives and policies. Pursuant to the agreement, RMR Advisors is compensated at an annual rate of 0.85% of the Fund's average daily managed assets. Managed assets means the total assets of the Fund less liabilities other than any indebtedness entered into for purposes of leverage. For purposes of calculating managed assets, the liquidation preference of preferred shares is not considered a liability.
RMR Advisors has contractually agreed to waive a portion of its annual fee equal to 0.25% of the Fund's average daily managed assets, until after April 27, 2009.
RMR Advisors, and not the Fund, has agreed to pay the lead underwriters of the Fund's initial public offering an annual fee equal to 0.15% in the aggregate of the Fund's managed assets. This fee is paid quarterly in
30
arrears during the term of RMR Advisors' advisory agreement and is paid by the Advisor, not the Fund. The aggregate fees paid pursuant to the contract plus reimbursement of legal expenses of the underwriters will not exceed 4.5% of the total price of the common shares sold to non-affiliates in the initial public offering.
RMR Advisors also performs administrative functions for the Fund pursuant to an administration agreement with the Fund. RMR Advisors has entered into a sub-administration agreement with State Street Bank and Trust Company ("State Street") to perform substantially all Fund accounting and other administrative services. Under the administration agreement RMR Advisors is entitled to reimbursement of the cost of providing administrative services. In the period ending December 31, 2004, the Fund reimbursed RMR for $101,942 of sub-administrative fees charged by State Street.
The Fund pays each trustee who is not a director, officer or employee of RMR Advisors (a "disinterested trustee") an annual fee plus a fee for each board of trustees' meeting or committee meeting attended, other than meetings held on days on which there is also a board of trustees' meeting or another committee meeting for which he is paid. In addition, the Fund reimburses all trustees for travel and out-of-pocket expenses incurred in connection with attending board or committee meetings.
The Fund's board of trustees and separately the disinterested trustees authorized the Fund to make reimbursement payments to RMR Advisors for costs related to the Fund's compliance and internal audit programs.
Note C
Securities Transactions
During the period ended December 31, 2004, there were purchases and sales transactions (excluding short-term securities) of $75,373,834 and $11,349,881 respectively. Brokerage commissions on securities transactions amounted to $52,246 during the period ended December 31, 2004.
Note D
Preferred Shares
On June 14, 2004, the Fund issued 680 auction preferred shares, Series Th, for $17,000,000, or net proceeds of $16,660,339 after deducting underwriting commissions and offering expenses of $339,661. The preferred shares have a liquidation preference of $25,000 per share plus an amount equal to accumulated but unpaid distributions. The preferred shares are senior to the Fund's common shares and will rank on parity with any other class or series of preferred shares of the Fund as to the payment of periodic distributions, including distribution of assets upon liquidation. If the Fund does not timely cure a failure to (1) maintain asset coverage for the preferred shares as required by rating agencies, or (2) maintain asset coverage, as defined in the Investment Company Act of 1940, of at least 200%, the preferred shares will be subject to mandatory redemption at an amount equal to their liquidation preference plus accumulated but unpaid distributions. The holders of the preferred shares have voting rights equal to the holders of the Fund's common shares and will generally vote together with the holders of the common shares as a single class except as otherwise set forth in the Fund's Declaration of Trust. Holders of the preferred shares, voting as a separate class, are entitled to elect two of the Fund's trustees. The Fund pays distributions on the preferred shares at a rate set at auctions held generally every seven days. Distributions are generally payable every seven days, on the first business day following the end of a distribution period. The preferred share distribution rate was 2.52% per annum as of December 31, 2004.
31
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and
Shareholders of RMR Hospitality and Real Estate Fund
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RMR Hospitality and Real Estate Fund (the "Fund") as of December 31, 2004, and the related statement of operations, the statement of changes in net assets and the financial highlights for the period from April 27, 2004 (commencement of operations) to December 31, 2004. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2004, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RMR Hospitality and Real Estate Fund at December 31, 2004, the results of its operations, the changes in its net assets and the financial highlights for the period from April 27, 2004 (commencement of operations) to December 31, 2004, in conformity with U.S. generally accepted accounting principles.
Boston,
Massachusetts
February 10, 2005
32
RMR Hospitality and Real Estate Fund
December 31, 2004
About information contained in this report:
Limited Operating History The Fund began operations in April 2004 and has a limited history of operations.
Limited Experience of Advisor RMR Advisors has limited experience managing registered investment companies like the Fund. RMR Advisors began the substantial part of its current business activities in December 2003.
Concentration of Investments The Fund's investment portfolio is concentrated in the hospitality and real estate industries. A decline in the market value of hospitality businesses and/or real estate generally is likely to cause a decline in the value of the Fund's common shares.
Non-diversification Risk The Fund's investment portfolio is focused upon securities in only two industries. Also, because the Fund is non-diversified under the Investment Company Act of 1940, it can invest a greater percentage of its assets in securities of a single company than can a diversified fund. Accordingly, the market prices of the Fund's common shares may be more volatile than an investment in a diversified fund.
Hospitality Industry Risks The Fund's investment focus on hospitality securities creates risks, including the following:
Real Estate Risks The Fund's investment focus on real estate securities creates risks, including the following:
33
apartments, congregate care properties, assisted living facilities and nursing homes may be highly dependent upon Medicare and Medicaid payments which are subject to changes in government policies; securities of companies that own retail properties are vulnerable to changes in consumer spending practices and to bankruptcies of large retail firms; securities of companies that own apartment buildings are affected by changes in housing market conditions; and securities of companies that own other types of real estate are subject to risks associated with the industries that use that type of real estate.
Leverage Risks The Fund uses leverage to increase its investments. Holders of the Fund's preferred shares or debt will have priority claims to the Fund's income and assets over owners of the Fund's common shares. Because the Fund uses leverage, if the value of the Fund's investments declines, the value of the Fund's common shares will decline faster than it would if the Fund had invested without leverage.
Interest Rate Risks The Fund is exposed to two principal types of interest rate risks:
Interest rate risks may be magnified if the Fund hedges interest rates based upon expectations concerning interest rates that prove inaccurate.
Small Company Risks Many companies in which the Fund invests may be smaller and have more debt than companies traded in the equity markets as a whole. Smaller equity capitalization and more leverage may mean that securities issued by companies in which the Fund invests may be more volatile than securities issued by larger or less leveraged companies.
Redeemable Securities Risks Most of the preferred securities in which the Fund invests provide their issuers rights of redemption at fixed prices. Some of the debt securities in which the Fund invests permit prepayment. If the issuers exercise their redemption or prepayment rights, the Fund may not realize the value for any premium the Fund may have paid for these securities and may be unable to make new investments which produce equivalent income.
Low Rated Securities Risks The Fund may invest some of its managed assets in ratable securities which are below investment grade. In addition, none of the common equity securities in which the Fund invests are rated. These investments should be considered speculative. Because the Fund invests in speculative securities, an investment in the Fund's common shares involves a greater risk of loss than an investment which is focused only on higher rated securities.
34
Anti-takeover Provisions The Fund's declaration of trust and bylaws contain provisions which limit the ability of any person to acquire control of the Fund or to convert the Fund to an open end fund. These provisions may deprive common shareholders of the ability to sell their common shares at a premium to their market value.
Market Disruption Risk Volatility in securities markets precipitated by terrorist attacks, war or other world events may have negative effects on those markets. The value of securities in which the Fund invests and the Fund's common shares may be more volatile or decline in the event of future terrorist activity, war or instability.
AN INVESTMENT IN RMR HOSPITALITY AND REAL ESTATE FUND IS NOT A DEPOSIT OR OBLIGATION OF, AND IS NOT GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION, AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR BY ANY OTHER GOVERNMENTAL AGENCY.
35
RMR F.I.R.E. Fund
December 31, 2004
To our shareholders,
Two thousand four was the first year of operations of RMR F.I.R.E. Fund (AMEX: RFR). In November and December of 2004, we completed our initial public offering of common shares and an initial offering of our preferred shares. These offerings combined raised $55.1 million of net proceeds. Since that time, we have been busy positioning our portfolio by investing in securities issued by financial, insurance and real estate companies, or F.I.R.E. companies. "F.I.R.E." is a commonly used acronym for the combined financial services, insurance and real estate industries. In the pages that follow, you will find data summarizing our financial results for the period from inception in November 2004 through the end of 2004 and our financial position as of the end of that period.
As a result of our investment activities during the 2004 period, our net asset value was $23.99 per common share as of December 31, 2004, a 0.2% decrease from $24.03 per common share as at the date of closing of our initial public offering of common shares. Because we began operations late in 2004, our first distributions of $0.146 per share per month were declared in early January 2005.
During 2005, we will continue to monitor market conditions and position our portfolio according to our view of those conditions. Although our views may change over the next year as the markets change, as of the date of this letter we do not believe that our industry allocation is likely to be revised much between the financial services, insurance and real estate industries during 2005. The insurance sector, one we have largely avoided during the 2004 period, is likely to continue to be mired in industrywide investigations; we intend to continue to avoid most of the stocks in this sector until much more is known about the extent of the problems involved. We believe the financial services industry will continue to reflect the positive aspects of investing in a sector that is consolidating and that real estate market fundamentals will continue to improve.
Thank you for your continued support and be sure to view our website at www.rmrfunds.com.
Sincerely,
Thomas
M. B'Brien
President
36
RMR F.I.R.E. Fund
December 31, 2004
Relevant Market Conditions
Financial Services Industry Fundamentals. Over 90% of the largest 50 banks raised their dividends by about 10% on average during 2004. As U.S. economic expansion continues, we expect to see banks benefit from higher commercial and consumer loan growth. We believe more loan growth coupled with lower charge offs should lead to earnings and dividend growth in 2005.
The Federal Reserve Bank began to increase its federal funds lending target rate in 2004. However, we believe many banks have been expecting interest rates to increase and have hedged their exposure to these increases by focusing on floating rate investments or through other means; these banks are now either rate neutral, or, in some cases, may benefit from rising rates. Insurance companies have not been a significant part of our investing activity to date; we expect that the impact of lawsuits arising from investigations of various insurance firms conducted by the New York Attorney General to become more quantifiable during 2005. If this happens, we may find insurance companies valuations more attractive.
Consolidation in these industries continued throughout 2004, with over $150 billion in transactions. We believe consolidation will continue and will in some cases be a significant factor in the total returns we realize from our investments in financial services securities.
Real Estate Industry Fundamentals. We believe the investment environment for real estate companies at the end of 2004 and into 2005 is generally positive. We believe that environment will include revenue growth from stabilizing and improving occupancy rates. In general, development activities that tend to depress the value of existing properties have been held in check during recent years. We believe that a majority of real estate investment trust's balance sheets reflect modest debt leverage and low floating rate debt.
Fund Strategies, Techniques and Performance
Our investment objective is to provide high total returns to shareholders through a combination of current income and capital appreciation. We attempt to achieve this objective by investing in securities issued by F.I.R.E. companies. There can be no assurance that we will meet our investment objective.
During the period from November 22, 2004, the date we began operations, until December 31, 2004, our total return on net asset value was (0.2)%. During the comparable 2004 period, the total return for the the S&P 500 Financial Sector Index total return was 4.3%. The S&P 500 Index (an unmanaged index published as Standard and Poor's Composite Index of 500 Stocks) total return was 3.1%.
37
RMR F.I.R.E. Fund
Portfolio of Investments December 31, 2004
Company |
Shares |
Value |
|||||
---|---|---|---|---|---|---|---|
Common Stocks 97.7% | |||||||
Financial Services 42.0% | |||||||
Banks 25.6% | |||||||
AmSouth Bancorp | 27,400 | $ | 709,660 | ||||
Citigroup, Inc. | 12,100 | 582,978 | |||||
Comerica, Inc. | 14,800 | 903,096 | |||||
F.N.B. Corp. | 28,500 | 580,260 | |||||
Farmers Capital Bank Corp. | 3,035 | 125,042 | |||||
First Commonwealth Financial Corp. | 28,000 | 430,920 | |||||
First Horizon National Corp. | 11,400 | 491,454 | |||||
FirstMerit Corp. | 22,800 | 649,572 | |||||
Hudson United Bancorp | 17,100 | 673,398 | |||||
JPMorgan Chase & Co. | 7,500 | 292,575 | |||||
KeyCorp | 17,100 | 579,690 | |||||
National City Corp. | 27,400 | 1,028,870 | |||||
PNC Financial Services Group, Inc. | 13,400 | 769,696 | |||||
Regions Financial Corp. | 18,200 | 647,738 | |||||
Susquehanna Bancshares, Inc. | 12,600 | 314,370 | |||||
Trustco Bank Corp. NY | 23,400 | 322,686 | |||||
9,102,005 | |||||||
Thrifts 9.6% | |||||||
Beverly Hills Bancorp, Inc. | 10,100 | 102,010 | |||||
Capitol Federal Financial | 17,400 | 626,400 | |||||
Flagstar Bancorp, Inc. | 25,000 | 565,000 | |||||
New York Community Bancorp, Inc. | 61,200 | 1,258,884 | |||||
Washington Mutual, Inc. | 20,500 | 866,740 | |||||
3,419,034 | |||||||
Other Financial Services 6.8% | |||||||
American Capital Strategies, Ltd. | 17,000 | 566,950 | |||||
CharterMac | 21,200 | 518,128 | |||||
Deluxe Corp. | 11,400 | 425,562 | |||||
Friedman, Billings, Ramsey Group, Inc. * | 29,000 | 562,310 | |||||
MCG Capital Corp. | 21,500 | 368,295 | |||||
2,441,245 | |||||||
Total Financial Services (Cost $14,897,964) | 14,962,284 | ||||||
See notes to financial statements and notes to portfolio of investments. |
38
Real Estate 55.7% | |||||||
Apartments 8.2% | |||||||
AMLI Residential Properties Trust * | 10,800 | $ | 345,600 | ||||
Apartment Investment & Management Co. * | 13,000 | 501,020 | |||||
BNP Residential Properties, Inc. * | 21,100 | 339,710 | |||||
Home Properties, Inc. * | 16,200 | 443,880 | |||||
Post Properties, Inc. * | 22,800 | 795,720 | |||||
United Dominion Realty Trust, Inc. * | 19,200 | 476,160 | |||||
2,902,090 | |||||||
Diversified 14.6% | |||||||
American Financial Realty Trust * | 62,800 | 1,016,104 | |||||
Bedford Property Investors, Inc. * | 19,000 | 539,790 | |||||
Colonial Properties Trust * | 8,400 | 329,868 | |||||
Commercial Net Lease Realty * | 34,200 | 704,520 | |||||
Crescent Real Estate Equities Co. * | 62,400 | 1,139,424 | |||||
Lexington Corporate Properties Trust * | 31,000 | 699,980 | |||||
Liberty Property Trust * | 18,000 | 777,600 | |||||
5,207,286 | |||||||
Health Care 5.2% | |||||||
Health Care REIT, Inc. * | 17,900 | 682,885 | |||||
Healthcare Realty Trust, Inc. * | 12,000 | 488,400 | |||||
Nationwide Health Properties, Inc. * | 26,000 | 617,500 | |||||
Windrose Medical Properties Trust * | 5,000 | 72,050 | |||||
1,860,835 | |||||||
Hospitality 1.2% | |||||||
Eagle Hospitality Properties Trust, Inc. *(a) | 36,500 | 375,950 | |||||
Winston Hotels, Inc. * | 2,700 | 31,887 | |||||
407,837 | |||||||
Industrial 2.5% | |||||||
First Industrial Realty Trust, Inc. * | 21,900 | 891,987 | |||||
Office 8.5% | |||||||
Arden Realty, Inc. * | 9,600 | 362,112 | |||||
Equity Office Properties Trust * | 33,050 | 962,416 | |||||
Glenborough Realty Trust, Inc. * | 44,400 | 944,832 | |||||
Maguire Properties, Inc. * | 18,000 | 494,280 | |||||
Reckson Associates Realty Corp. * | 8,400 | 275,604 | |||||
3,039,244 | |||||||
See notes to financial statements and notes to portfolio of investments. |
39
Retail 6.5% | |||||||
Glimcher Realty Trust * | 44,000 | $ | 1,219,240 | ||||
Heritage Property Investment Trust * | 16,800 | 539,112 | |||||
New Plan Excel Realty Trust * | 16,800 | 454,944 | |||||
The Mills Corp. * | 1,600 | 102,016 | |||||
2,315,312 | |||||||
Specialty 6.2% | |||||||
Capital Trust, Inc. * | 15,000 | 460,650 | |||||
iStar Financial, Inc. * | 14,000 | 633,640 | |||||
U.S. Restaurant Properties, Inc. * | 61,000 | 1,101,660 | |||||
2,195,950 | |||||||
Storage 2.8% | |||||||
Sovran Self Storage, Inc. * | 13,200 | 556,248 | |||||
U-Store-It Trust * | 25,200 | 437,220 | |||||
993,468 | |||||||
Total Real Estate (Cost $19,749,432) | 19,814,009 | ||||||
Total Common Stocks (Cost $34,647,396) | 34,776,293 | ||||||
Preferred Stocks 27.5% | |||||||
Apartments 6.4% | |||||||
Apartment Investment & Management Co., Series U * | 32,500 | 808,600 | |||||
Apartment Investment & Management Co., Series V * | 27,700 | 702,749 | |||||
Apartment Investment & Management Co., Series Y * | 30,000 | 750,000 | |||||
2,261,349 | |||||||
Diversified 2.8% | |||||||
Cousins Properties, Inc., Series B * | 20,000 | 502,400 | |||||
PS Business Parks, Inc. * | 20,000 | 495,800 | |||||
998,200 | |||||||
Health Care 1.2% | |||||||
Health Care REIT, Inc., Series F * | 16,900 | 426,725 | |||||
Hospitality 2.5% | |||||||
Winston Hotels, Inc., Series B * | 35,000 | 895,300 | |||||
Office 4.5% | |||||||
Alexandria Real Estate Equities, Inc., Series C * | 31,600 | 836,452 | |||||
Bedford Property Investors, Inc., Series B * | 30,000 | 767,700 | |||||
1,604,152 | |||||||
See notes to financial statements and notes to portfolio of investments. |
40
RMR F.I.R.E. Fund
Portfolio of Investments December 31, 2004
Company |
Shares or Principal Amount |
Value |
||||||
---|---|---|---|---|---|---|---|---|
Preferred Stocks continued | ||||||||
Retail 4.9% | ||||||||
Glimcher Realty Trust, Series F * | 26,500 | $ | 690,325 | |||||
Glimcher Realty Trust, Series G * | 15,900 | 410,061 | ||||||
Taubman Centers, Inc., Series G * | 15,000 | 389,250 | ||||||
The Mills Corp., Series E * | 9,500 | 269,420 | ||||||
1,759,056 | ||||||||
Specialty 5.2% | ||||||||
MFA Mortgage Investments, Inc., Series A * | 13,800 | 350,244 | ||||||
RAIT Investment Trust, Series B * | 59,000 | 1,489,750 | ||||||
1,839,994 | ||||||||
Total Preferred Stocks (Cost $9,772,257) | 9,784,776 | |||||||
Short-Term Investments 28.1% | ||||||||
Commercial Paper 28.1% | ||||||||
American Express Credit Corp.,1.70%, 01/03/05 | 2,000,000 | 1,999,811 | ||||||
General Electric Capital Corp.,1.70%, 01/03/05 | 2,000,000 | 1,999,811 | ||||||
LaSalle Bank Corp.,1.70%, 01/03/05 | 2,000,000 | 1,999,811 | ||||||
San Paolo U.S. Finance Co.,1.70%, 01/03/05 | 2,000,000 | 1,999,811 | ||||||
State Street Boston Corp.,1.70%, 01/03/05 | 2,002,000 | 2,001,811 | ||||||
10,001,055 | ||||||||
Other Investment Companies 2.4% | ||||||||
SSgA Money Market Fund, (b)1.85% | 853,050 | 853,050 | ||||||
Total Short-Term Investments (Cost $10,854,105) | 10,854,105 | |||||||
Total Investments 155.7% (Cost $55,273,758) | 55,415,174 | |||||||
Other assets less liabilities 0.5% | 178,590 | |||||||
Preferred Shares, at liquidation preference (56.2)% | (20,000,000 | ) | ||||||
Net Assets attributable to common shares 100% | $ | 35,593,764 |
Notes to Portfolio of Investments
See notes to financial statements.
41
RMR F.I.R.E. Fund
Financial Statements continued
Statement of Assets and Liabilities
December 31, 2004 |
|
||||
---|---|---|---|---|---|
Assets | |||||
Investments in securities, at value (cost $55,273,758) | $ | 55,415,174 | |||
Cash | 109,968 | ||||
Dividends and interest receivable | 362,414 | ||||
Other assets | 8,430 | ||||
Total assets | 55,895,986 | ||||
Liabilities | |||||
Payable for offering costs | 176,089 | ||||
Advisory fee payable | 21,627 | ||||
Distributions payable preferred shares | 9,800 | ||||
Accrued expenses and other liabilities | 94,706 | ||||
Total liabilities | 302,222 | ||||
Preferred shares, at liquidation preference | |||||
Auction preferred shares, Series W; $.001 par value per share; 800 shares issued and outstanding at $25,000 per share liquidation preference | 20,000,000 | ||||
Net assets attributable to common shares | $ | 35,593,764 | |||
Composition of net assets | |||||
Common shares, $.001 par value per share; unlimited number of shares authorized, 1,484,000 shares issued and outstanding | $ | 1,484 | |||
Additional paid-in capital | 35,212,862 | ||||
Undistributed net investment income | 133,312 | ||||
Accumulated net realized gain on investments | 104,690 | ||||
Net unrealized appreciation on investments | 141,416 | ||||
Net assets attributable to common shares | $ | 35,593,764 | |||
Net asset value per share attributable to common shares (based on 1,484,000 common shares outstanding) | $ | 23.99 | |||
See notes to financial statements.
42
Statement of Operations
For the Period November 22, 2004(a) to December 31, 2004 |
|
||||||
---|---|---|---|---|---|---|---|
Investment Income | |||||||
Dividends | $ | 258,342 | |||||
Interest | 27,315 | ||||||
Total investment income | 285,657 | ||||||
Expenses | |||||||
Audit and legal | 53,326 | ||||||
Advisory | 37,251 | ||||||
Administrative | 14,923 | ||||||
Custodian | 10,725 | ||||||
Shareholder reporting | 8,250 | ||||||
Compliance and internal audit | 6,074 | ||||||
Transfer agency | 4,388 | ||||||
Trustees' fees and expenses | 2,681 | ||||||
Preferred shares remarketing | 976 | ||||||
Other | 6,019 | ||||||
Total expenses | 144,613 | ||||||
Less: expenses waived by the Advisor | (10,956 | ) | |||||
Net expenses | 133,657 | ||||||
Net investment income | 152,000 | ||||||
Realized and unrealized gain on investments | |||||||
Net realized gain on investments | 104,690 | ||||||
Net change in unrealized appreciation/(depreciation) on investments | 141,416 | ||||||
Distributions to preferred shareholders from net investment income | (22,688 | ) | |||||
Net increase in net assets attributable to common shares resulting from operations | $ | 375,418 | |||||
See notes to financial statements
43
Statement of Changes in Net Assets
|
For the Period November 22, 2004(a) to December 31, 2004 |
|||||
---|---|---|---|---|---|---|
Increase (decrease) in net assets resulting from operations | ||||||
Net investment income | $ | 152,000 | ||||
Net realized gain on investments | 104,690 | |||||
Net change in unrealized appreciation/(depreciation) on investments | 141,416 | |||||
Distributions to preferred shareholders from net investment income | (22,688 | ) | ||||
Net increase in net assets attributable to common shares resulting from operations | 375,418 | |||||
Capital shares transactions | ||||||
Net proceeds from sales of common shares | 35,496,000 | |||||
Net proceeds from sales of preferred shares | 19,622,346 | |||||
Net increase from capital share transactions | 55,118,346 | |||||
Less: Liquidation preference of preferred shares issued | (20,000,000 | ) | ||||
Total increase in net assets attributable to common shares | 35,493,764 | |||||
Net assets attributable to common shares | ||||||
Beginning of period | 100,000 | |||||
End of period (including undistributed net investment income of $133,312) | $ | 35,593,764 | ||||
Common shares issued and repurchased | ||||||
Shares outstanding, beginning of period | 4,000 | |||||
Shares sold | 1,480,000 | |||||
Shares outstanding, end of period | 1,484,000 | |||||
See notes to financial statements.
44
Financial Highlights RMR F.I.R.E. Fund.
Selected Data For A Common Share Outstanding Throughout Each Period
|
For the Period November 22, 2004(a) to December 31, 2004 |
||||
---|---|---|---|---|---|
Net asset value, beginning of period | $ | 24.03 | (b) | ||
Income from Investment Operations | |||||
Net investment income(c)(d) | .10 | ||||
Net realized and unrealized gain on investments (d) | .17 | ||||
Distributions to preferred shareholders (common stock equivalent basis) from net investment income | (.02 | ) | |||
Net increase in net asset value from operations | .25 | ||||
Common shares offering costs charged to paid-in capital | (.04 | ) | |||
Preferred shares offering costs charged to paid in capital | (.25 | ) | |||
Net asset value, end of period | $ | 23.99 | |||
Market price, beginning of period | $ | 25.00 | |||
Market price, end of period | $ | 24.05 | |||
Total Return(e) | |||||
Total investment return based on: | |||||
Market price | (3.80 | )%(f) | |||
Net asset value | (0.17 | )%(f) | |||
Ratios/Supplemental Data: | |||||
Preferred shares, liquidation preference ($25,000 per share) (000's omitted) | $ | 20,000 | |||
Net assets attributable to common shares, end of period (000) | $ | 35,594 | |||
Ratio to average net assets attributable to common shares of: | |||||
Net investment income, before preferred share distributions(d)(g) | 3.92 | % | |||
Preferred share distributions(g) | 0.58 | % | |||
Net investment income, net of preferred share distributions(d)(g) | 3.34 | % | |||
Expenses, net of fee waivers(g)(h) | 3.45 | % | |||
Expenses, before fee waivers(g)(h) | 3.73 | % | |||
Portfolio turnover rate | 0.00 | % |
45
RMR F.I.R.E. Fund
Notes to Financial Statements
December 31, 2004
Note A
(1) Organization
RMR F.I.R.E. Fund, or the Fund, was organized as a Massachusetts business trust on August 6, 2004, and is registered under the Investment Company Act of 1940, as amended, as a non-diversified closed-end management investment company. The Fund had no operations until November 22, 2004, other than matters relating to the Fund's establishment, registration of the Fund's common shares under the Securities Act of 1933, and the sale of 4,000 common shares for $100,000 to RMR Advisors, Inc., or RMR Advisors. On November 22, 2004, the Fund sold 1,480,000 common shares in an initial public offering including 200,000 common shares sold to affiliates of RMR Advisors. Proceeds to the Fund were $35,496,000 after deducting underwriting commissions and $64,000 of offering expenses. There was no underwriting commission or offering expenses paid on common shares sold to the affiliates of RMR Advisors.
(2) Use of Estimates
Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Fund's management to make estimates and assumptions that may affect the amounts reported in the financial statements and related notes. The actual results could differ from these estimates.
(3) Portfolio Valuation
Investment securities of the Fund are valued at the latest sales price whenever that price is readily available on that day; securities for which no sales were reported on that day, unless otherwise noted, are valued at the last available bid price on that day. Securities traded primarily on the NASDAQ Stock Market, or NASDAQ, are normally valued by the Fund at the NASDAQ Official Closing Price, or NOCP, provided by NASDAQ each business day. The NOCP is the most recently reported price as of 4:00:06 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. Some fixed income securities may be valued using pricing provided by a pricing service. Any of the Fund's securities which are not readily marketable, which are not traded or which have other characteristics of illiquidity are valued by the Fund at fair value as determined in good faith under the supervision of the Fund's board of trustees. Numerous factors may be considered when determining fair value of a security, including cost at date of purchase, type of security, the nature and duration of restrictions on disposition of the security and whether the issuer of the security being fair valued has other securities of the same class outstanding. Short-term debt securities with less than 60 days until maturity may be valued at cost, which when combined with interest accrued, approximates market value.
(4) 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 are recorded on the basis of identified cost.
46
(5) Federal Income Taxes
The Fund has qualified and intends to qualify in the future as a "regulated investment company" and to comply with the applicable provisions of subchapter M of the Internal Revenue Code of 1986, as amended, so that it will generally not be subject to federal income tax.
(6) Distributable Earnings
The Fund earns income, net of expenses, daily on its investments. The Fund has substantial investments in real estate investment trusts or REITs, which are generally not subject to federal income taxes. Distributions that the Fund receives from REITs can be classified as ordinary income, capital gain income or return of capital by the REITs that make these distributions to the Fund. The Fund has included in its net investment income as "dividends" only that portion of the distributions received from REITS that is classified by those REITs as ordinary income. The Fund has included in its "net realized gain on investments" that portion of the distributions received from REITs that is classified by those REITs as capital gain income. Similarly, the Fund has included in its "net change in unrealized appreciation/(depreciation) on investments" that portion of the distributions received from REITs that is classified by those REITs as return of capital. The classification of distributions received from the Fund's REIT investments for the period ending December 31, 2004, were as follows:
Ordinary income | $ | 258,342 | |
Capital gain income | 104,690 | ||
Return of capital | 30,854 | ||
Total distributions received | $ | 393,886 | |
It is the policy of the Fund to pay distributions to common shareholders on a monthly basis. As of December 31, 2004, the Fund had not declared or paid distributions to common shareholders. On January 11, 2005, the Fund announced monthly distributions payable to common shareholders in February, March and April 2005. The Fund has adopted a policy to pay common shareholders a stable distribution amount. The Fund's distributions may consist of ordinary income (net investment income and short term capital gains), long term capital gains and return of capital. Distributions to common shareholders are recorded on the ex-dividend date. To the extent the Fund's net realized capital gains, if any, can be offset by capital loss carryforwards, it is the policy of the Fund not to distribute such gains. Distributions to preferred shareholders are determined as described in Note D.
The Fund distinguishes between distributions to shareholders on a tax basis and a financial reporting basis. Only distributions in excess of accumulated 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.
47
As of December 31, 2004, the components of distributable earnings (accumulated losses) on a federal income tax basis were as follows:
Undistributed ordinary income | $ | 133,312 | |
Undistributed net long-term capital gains | 104,690 | ||
Net unrealized appreciation | 141,416 |
The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation as of December 31, 2004, are as follows:
Cost | $ | 55,273,758 | ||
Gross unrealized appreciation | $ | 509,261 | ||
Gross unrealized depreciation | (367,845 | ) | ||
Net unrealized appreciation | $ | 141,416 | ||
(7) Organization Expenses and Common Offering Costs
RMR Advisors paid all the organizational expenses and offering costs (other than the sales load) of the Fund's initial public offering of common shares which exceeded $0.05 per share. The total amount incurred by RMR Advisors was approximately $545,000. The Fund incurred offering costs of $64,000 which were charged as a reduction of paid in capital.
(8) Concentration of Risk
Under normal market conditions, the Fund's investments will be concentrated in common and preferred shares issued by F.I.R.E companies. "F.I.R.E." is a commonly used acronym for the combined financial services, insurance and real estate industries. The value of Fund shares may fluctuate more than the shares of a fund not concentrated in the F.I.R.E. industries due to economic, legal, regulatory, technological or other developments.
Note B
Advisory and Administration Agreements and Other Transactions with Affiliates
The Fund has an advisory agreement with RMR Advisors to provide the Fund with a continuous investment program, to make day to day investment decisions and to generally manage the business affairs of the Fund in accordance with its investment objectives and policies. Pursuant to the agreement, RMR Advisors is compensated at an annual rate of 0.85% of the Fund's average daily managed assets. Managed assets means the total assets of the Fund less liabilities other than any indebtedness entered into for purposes of leverage. For purposes of calculating managed assets, the liquidation preference of preferred shares is not considered a liability.
RMR Advisors has contractually agreed to waive a portion of its annual fee equal to 0.25% of the Fund's average daily managed assets, until after November 22, 2009.
RMR Advisors, and not the Fund, has agreed to pay the lead underwriters of the Fund's initial public offering an annual fee equal to 0.15% in the aggregate of the Fund's managed assets. This fee is paid quarterly in
48
arrears during the term of RMR Advisors' advisory agreement and is paid by the Advisor, not the Fund. The aggregate fees paid during the term of the contract plus reimbursement of legal expenses of the underwriters will not exceed 4.5% of the total price of the common shares sold to non-affiliates in the initial public offering.
RMR Advisors also performs administrative functions for the Fund pursuant to an administration agreement with the Fund. RMR Advisors has entered into a sub-administration agreement with State Street Bank and Trust Company ("State Street") to perform substantially all Fund accounting and other administrative services. Under the administration agreement RMR Advisors is entitled to reimbursement of the cost of providing administrative services. In the period ending December 31, 2004, the Fund reimbursed RMR for $14,923 of sub-administrative fees charged by State Street.
The Fund pays each trustee who is not a director, officer or employee of RMR Advisors (a "disinterested trustee") an annual fee plus a fee for each board of trustees' meeting or committee meeting attended, other than meetings held on days on which there is also a board of trustees' meeting or another committee meeting for which he is paid. In addition, the Fund reimburses all trustees for travel and out of pocket expenses incurred in connection with attending board or committee meetings.
The Fund's board of trustees and separately the disinterested trustees authorized the Fund to make reimbursement payments to RMR Advisors for costs related to the Fund's compliance and internal audit programs.
Note C
Securities Transactions
During the period ended December 31, 2004, there were purchases and sales transactions (excluding short-term securities) of $44,450,507 and $0, respectively. Brokerage commissions on securities transactions amounted to $37,601 during the period ended December 31, 2004.
Note D
Preferred Shares
On December 20, 2004, the Fund issued 800 auction preferred shares, Series W, for $20,000,000, or net proceeds of $19,622,346 after deducting underwriting commissions and offering expenses of $377,654. The preferred shares have a liquidation preference of $25,000 per share plus an amount equal to accumulated but unpaid distributions. The preferred shares are senior to the Fund's common shares and will rank on parity with any other class or series of preferred shares of the Fund as to the payment of periodic distributions, including distribution of assets upon liquidation. If the Fund does not timely cure a failure to (1) maintain asset coverage for the preferred shares as required by rating agencies, or (2) maintain asset coverage, as defined in the Investment Company Act of 1940, of at least 200%, the preferred shares will be subject to mandatory redemption at an amount equal to their liquidation preference plus accumulated but unpaid distributions. The holders of the preferred shares have voting rights equal to the holders of the Fund's common shares and will generally vote together with the holders of the common shares as a single class except as otherwise set forth in the Fund's Declaration of Trust. Holders of the preferred shares, voting as a separate class, are entitled to elect two of the Fund's trustees. The Fund pays distributions on the preferred shares at a rate set at auctions held generally every seven days. Distributions are generally payable every seven days, on the first business day following the end of a distribution period. The preferred share distribution rate was 2.52% per annum as of December 31, 2004.
49
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and
Shareholders of RMR F.I.R.E. Fund
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RMR F.I.R.E. Fund (the "Fund") as of December 31, 2004, and the related statement of operations, the statement of changes in net assets and the financial highlights for the period from November 22, 2004 (commencement of operations) to December 31, 2004. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2004, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RMR F.I.R.E. Fund at December 31, 2004, the results of its operations, the changes in its net assets and the financial highlights for the period from November 22, 2004 (commencement of operations) to December 31, 2004, in conformity with U.S. generally accepted accounting principles.
Boston,
Massachusetts
February 10, 2005
50
December 31, 2004
About information contained in this report:
Limited Operating History The Fund began operations in November 2004 and has a limited history.
Limited Experience of Advisor RMR Advisors has limited experience managing registered investment companies like the Fund. RMR Advisors began the substantial part of its current business activities in December 2003.
Non-Diversification Risk Because the Fund is non-diversified, it can invest a greater percentage of its assets in securities of a single company than can a diversified fund under the Investment Company Act of 1940. Accordingly, the value of your investment in the Fund's common shares may be more volatile than an investment in a diversified fund.
Concentration of Investments The Fund's investment portfolio is concentrated in F.I.R.E. companies. These companies incorporate risks, some of which may be more significant than others, including the following:
Bank Consolidation Risks The Fund expect that many of its investments in bank stocks will be made in anticipation of the acquisition of one bank by another bank. There is no assurance that acquisitions will occur or that acquisitions will enhance the value of the companies in which the Fund's invest.
Investment Risks Many banks and insurance companies own and trade substantial portfolios of investments for their own account and are exposed to credit risk and trading losses.
Lending Risks Commercial loans made by banks often involve a higher degree of credit risk than other types of loans because they depend on the cash flow of the borrower's business to service the debt rather than value of pledged collateral.
Insurance Company Risks Severe weather conditions and other catastrophes may result in an increase in claims experienced by an insurer, particularly property and casualty insurers. A downgrade of an insurer's financial strength ratings could cause its customers to choose other, more highly rated competitors, and its revenue may decrease. Several recent investigations have questioned the legality of long standing insurance industry practices. These investigations are likely to result in fines or other penalties to certain insurance companies. Also, the impact upon future insurance industry profits which may result from the cessation of these past practices is impossible to predict.
Brokerage, Investment Banking and Other Transaction Based Services Risks Declines in the volume of securities trading and in market liquidity will generally result in lower revenues and lower profits
51
at stock brokerages, investment banks and other financial services firms which are engaged in transaction based services.
Money Management Risks Earnings of most mutual fund operators and other money management businesses are dependent upon the value of assets under management. Declines in stock market values generally reduce earnings of money management businesses.
Real Estate Company Risks There are many factors that may negatively affect the values of securities issued by real estate companies. For example: new development in excess of increased demand lowers real estate values; occupancies or rents of office buildings and industrial properties usually rise more slowly than general improvements in the economy; retail properties are vulnerable to changes in consumer spending practices and to bankruptcies of large tenants; and apartment buildings can be negatively affected when housing ownership becomes more affordable.
Interest Rate Risks Many F.I.R.E. companies experience reduced profits or losses when interest rates change.
Risks of Competition Most segments of the F.I.R.E. industries are highly competitive.
Regulatory Risks Many companies in F.I.R.E. industries are subject to extensive regulations which may adversely affect their ability to achieve business objectives.
Leverage Risks. Because the Fund will use leverage to increase its investments, if the value of its investments declines, the value of the Fund's common shares will decline faster than it would if the Fund had invested without leverage. Holders of the Fund's preferred shares or debt have priority claims to the Fund's income and assets over the owners of the Fund's common shares.
Interest Rate Risks The Fund is exposed to two principal types of interest rate risks:
Below Investment Grade Securities Risks. None of the common shares in which the Fund invests are rated. In addition, some of the Fund's investments are in ratable securities which are below investment grade. Because the Fund invests in unrated or below investment grade rated securities, an investment in the Fund common shares involves a greater risk of loss than an investment which is focused only on higher rated securities.
Anti-takeover Provisions The Fund's declaration of trust and bylaws contain provisions which limit the ability of any person to acquire control of the Fund or to convert the Fund to an open end fund. These provisions may deprive common shareholders of the ability to sell their common shares at a premium to their market value.
Financial Market Risk An investment in the Fund's common shares represents an indirect investment in the securities owned by the Fund. Some of the securities the Fund owns are traded on a national securities exchange or in the over the counter markets. The prices of these shares and other securities in which the Fund
52
invests will fluctuate from day to day and may decline in value. The net asset value of the Fund may be affected by a decline in financial markets in general. The Fund's use of preferred shares is leverage which magnifies financial market risk.
Market Disruption Risk Volatility in securities markets precipitated by terrorist attacks, war or other world events may have negative effects on those markets. The value of securities in which the Fund invests and the Fund's common shares may be more volatile or decline in the event of future terrorist activity, war or instability.
Small Company Risks Many F.I.R.E. companies in which the Fund invests may be small or medium sized companies compared to companies that are traded in capital markets generally, and many F.I.R.E. companies use debt leverage to finance their businesses. This combination of smaller equity capitalization and debt leverage may mean that securities issued by some F.I.R.E. companies in which the Fund invests may be more volatile than securities issued by larger, less leveraged companies.
Redeemable Securities Risks Some of the preferred securities in which the Fund invests provide their issuers rights of redemption at fixed prices. If the issuers exercise their redemption rights, the Fund may not realize the value for any premium the Fund may have paid for these securities or the Fund may be unable to make new investments which produce equivalent income.
Convertible Securities Risks Some of the Fund's investments may be in convertible securities. Generally, upon issuance, convertible securities offer lower yields than non-convertible securities. A convertible security grants the holder an option to either hold the security and collect contractual interest and principal payments from the issuer or exchange the security for different securities, typically common shares of the issuer. As a result of this option, convertible securities have risk characteristics of both equity and debt securities
AN INVESTMENT IN RMR F.I.R.E FUND IS NOT A DEPOSIT OR OBLIGATION OF, AND IS NOT GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION, AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR BY ANY OTHER GOVERNMENTAL AGENCY.
53
RMR Real Estate Fund
RMR Hospitality and Real Estate Fund
RMR F.I.R.E. Fund
Dividend Reinvestment Plan
The board of trustees of each of RMR Real Estate Fund, RMR Hospitality and Real Estate Fund and RMR F.I.R.E. Fund, Massachusetts business trusts (each a "Fund" and collectively "the Funds"), have adopted a Dividend Reinvestment and Cash Purchase Plan (each, a "Plan"), sometimes referred to as an opt-out plan. You will have all your cash distributions invested in common shares automatically unless you elect to receive cash. As part of each Plan, you will have the opportunity to purchase additional common shares by submitting a cash payment for the purchase of such shares (the "Cash Purchase Option"). Your cash payment, if any, for the additional shares may not exceed $10,000 per quarter, per Plan and must be for a minimum of $100 per quarter. Wells Fargo Bank N.A. is the plan and paying agent for each plan. The plan agent will receive your distributions and additional cash payments under the Cash Purchase Option and either purchase common shares in the open market for your account or directly from the applicable Fund. If you elect not to participate in a Plan, you will receive all cash distributions in cash paid by check mailed to you (or, generally, if your shares are held in street name, to your broker) by the paying agent.
The number of common shares of each Fund you will receive if you do not opt out of a Plan will be determined as follows:
54
You may withdraw from any Plan at any time by giving written notice to the plan agent*. If you withdraw or a Plan is terminated, the plan agent* will transfer the shares in your account to you (which may include a cash payment for any fraction of a share in your account). If you wish, the plan agent* will sell your shares and send you the proceeds, minus brokerage commissions to be paid by you.
The plan agent's administrative fees will be paid by the Funds. There will be no brokerage commission charged with respect to common shares issued directly by any Fund. Each participant will pay a pro rata share of brokerage commissions incurred by the plan agent when it makes open market purchases of a Fund's shares pursuant to a Plan including the Cash Purchase Option.
Any Fund may amend or terminate its Plan or the Cash Purchase Option if its board of trustees determines the change is appropriate. However, no additional charges will be imposed upon participants by amendment to a Plan except after prior notice to participants.
Participation in a Plan will not relieve you of any federal, state or local income tax that may be payable (or required to be withheld) as a result of distributions you receive which are credited to your account under a Plan rather than paid in cash. Automatic reinvestment of distributions in a Fund's common shares will not relieve you of tax obligations arising from your receipt of that Fund's distributions even though you do not receive any cash.
All correspondence* about any Plan should be directed to Wells Fargo Shareowner Services, P.O. Box 64856, St. Paul, MN 55164-0856 or by telephone at 1-866-877-6331 and by overnight mail to Wells Fargo Bank N.A., 161 North Concord Exchange, South St. Paul, MN 55075.
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RMR Real Estate Fund
RMR Hospitality and Real Estate Fund
RMR F.I.R.E. Fund
Trustees
December 31, 2004
Name, address* (age) |
Position(s) held with funds and term of office** (length of time served in years) |
Principal occupation(s) during past five years and other public company directorships held by trustees |
Number of portfolios in fund complex overseen by trustees |
|||
---|---|---|---|---|---|---|
Interested Trustees*** | ||||||
Barry M. Portnoy (59) |
Class III trustee to serve until 2007: RMR (3); RHR (1); RFR (1). |
Chairman of Reit Management & Research LLC 1986 to present; director and vice president of RMR Advisors July 2002 to present; portfolio manager of RMR December 2003 to present; portfolio manager of RHR April 2004 to present; portfolio manager of RFR November 2004 to present; managing director of Five Star Quality Care, Inc. 2001 to present; managing trustee of Senior Housing Properties Trust 1999 to present; managing trustee of Hospitality Properties Trust 1995 to present; managing trustee of HRPT Properties Trust 1986 to present. | 3 | |||
Gerard M. Martin (70) |
Class II trustee to serve until 2006: RMR (3); RHR (1); RFR (1). |
Director of Reit Management & Research LLC 1986 to present; director and vice president of RMR Advisors July 2002 to present; managing director of Five Star Quality Care, Inc. 2001 to present; managing trustee of Senior Housing Properties Trust 1999 to present; managing trustee of Hospitality Properties Trust 1995 to present; Managing trustee of HRPT Properties Trust 1986 to present. |
3 |
|||
Disinterested Trustees | ||||||
John L. Harrington (68) |
Class I trustee to serve until 2005: RMR (2); RHR (1); RFR (1). |
Executive Director and trustee of the Yawkey Foundation (a charitable trust) and a trustee of the JRY Trust (a charitable trust) 1982 to present; Chief Executive Officer of the Boston Red Sox Baseball Club 1982 to 2002; trustee of Hospitality Properties Trust 1995 to present; director of Five Star Quality Care, Inc. 2001 to January 2004; trustee of Senior Housing Properties Trust 1999 to present. | 3 | |||
Frank J. Bailey (49) |
Class II trustee to serve until 2006: RMR (2); RHR (1); RFR (1). |
Partner in the Boston law firm of Sherin and Lodgen LLP; trustee of Hospitality Properties Trust 2003 to present; trustee of Senior Housing Properties Trust 2002 to present. |
3 |
|||
Arthur G. Koumantzelis (74) |
Class III trustee to serve until 2007: RMR (2); RHR (1); RFR (1). |
President and Chief Executive Officer of Gainesborough Investments LLC June 1998 to present; trustee of Hospitality Properties Trust- 1995 to present; director of Five Star Quality Care, Inc. 2001 to present; trustee of Senior Housing Properties Trust 1999 to 2003. |
3 |
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RMR Real Estate Fund
RMR Hospitality and Real Estate Fund
RMR F.I.R.E. Fund
Executive Officers
December 31, 2004
Name, address* (age) |
Position(s) held with funds and term of office (length of time served in years) |
Principal occupation(s) during past five years |
||
---|---|---|---|---|
Executive Officers | ||||
Thomas M. O'Brien (38) |
President: RMR (3); RHR (1); RFR (1). |
President and director of RMR Advisors July 2002 to present; portfolio manager of RMR, RHR and RFR inception to present; Vice President of Reit Management & Research LLC April 1996 to present; Treasurer and Chief Financial Officer, Hospitality Properties Trust April 1996 to October 2002; Executive Vice President, Hospitality Properties Trust October 2002 to December 2003. | ||
Mark L. Kleifges (44) |
Treasurer: RMR (1); RHR (1); RFR (1). |
Vice President of Reit Management & Research LLC 2002 to present; Vice President of RMR Advisors December 2003 to September 2004; Treasurer of RMR Advisors September 2004 to present; Treasurer and Chief Financial Officer, Hospitality Properties Trust 2002 to present; Partner, Arthur Andersen LLP 1993 to 2002. |
||
James J. McKelvey (45) |
Vice President: RMR (1); RHR (1); RFR (1). |
Vice President of RMR Advisors July 2004 to present; portfolio manager of RMR and RHR June 2004 to present; portfolio manager of RFR inception to present; portfolio manager and senior research officer for John Hancock Funds May 1997 to April 2004. |
||
John C. Popeo (44) |
Vice President: RMR (2); RHR (1); RFR (1). |
Treasurer of Reit Management & Research LLC 1997 to present; Treasurer of RMR Real Estate Fund July 2002 to November 2003; Treasurer of RMR Advisors July 2002 to September 2004; Vice President of RMR Advisors September 2004 to present; Treasurer and Chief Financial Officer of HRPT Properties Trust 1997 to present. |
||
Adam D. Portnoy (34) |
Vice President: RMR (1); RHR (1); RFR (1). |
Vice President of Reit Management & Research LLC September 2003 to present; Vice President of RMR Advisors December 2003 to present; Executive Vice President of HRPT Properties Trust December 2003 to present; Senior Investment Officer, International Finance Corporation of World Bank Group June 2001 to July 2003; Vice President, ABN AMRO Investment Banking January 2001 May 2001; President and CEO, Surfree.com, Inc. June 1997 to June 2000. |
57
Jennifer B. Clark (43) |
Secretary: RMR (3); RHR (1); RFR (1). | Vice President of Reit Management & Research LLC 1999 to present; Secretary of RMR Advisors July 2002 to present; Senior Vice President of HRPT Properties Trust 1999 to present. | ||
William J. Sheehan (60) |
Chief Compliance Officer and Director of Internal Audit: RMR (1); RHR (1); RFR (1). |
Chief Compliance Officer of RMR Advisors September 2004 to present; Director of Internal Audit of HRPT Properties Trust; Hospitality Properties Trust, Senior Housing Properties Trust and Five Star Quality Care, Inc. September 2003 to present; trustee of Hospitality Properties Trust 1995 to August 2003; Executive Vice President, Ian Schrager Hotels LLC 1999 to February 2003. |
The Statement of Additional Information ("SAI") for each of RMR Real Estate Fund, RMR Hospitality and Real Estate Fund and RMR F.I.R.E. Fund (each a "Fund" and collectively "the Funds") includes additional information about the trustees of the Funds. The SAI for each Fund is available, without charge, upon request by calling us at 1-866-790-8165.
58
RMR Real Estate Fund
RMR Hospitality and Real Estate Fund
RMR F.I.R.E. Fund
December 31, 2004
For the purposes of the following, RMR Real Estate Fund, RMR Hospitality and Real Estate Fund and RMR F.I.R.E. Fund are each referred to as a "Fund" or collectively as "the Funds".
Privacy Policy
Each of the Funds are committed to maintain shareholder privacy and to safeguard shareholder nonpublic personal information.
The Funds do not receive any nonpublic personal information relating to shareholders who purchase Fund shares through an intermediary that acts as the record owner of the shares. If a shareholder is the record owner of any Fund's shares, that Fund may receive nonpublic personal information on shareholder account documents or otherwise and also have access to specific information regarding shareholder Fund share transactions, either directly or through the Fund's transfer agent.
The Funds do not disclose any nonpublic personal information about shareholders or any former shareholders to anyone, except as permitted by law or as is necessary to service shareholder accounts. The Funds restrict access to nonpublic personal information about shareholders to employees of the Funds and its Advisor with a legitimate business need for the information.
Proxy Voting Policies and Procedures
A description of the policies and procedures that are used by the investment advisor of the Funds to vote proxies relating to each Fund's portfolio securities is available: (1) without charge, upon request, by calling us at 1-866-790-8165; and (2) as an exhibit to each Fund's annual report on Form N-CSR, which is available on the website of the U.S. Securities and Exchange Commission (the "Commission") at http://www.sec.gov. Information regarding how the investment advisor has voted the proxies of each Fund during the most recent 12 month period ended June 30, 2004, is available (1) without charge, on request, by calling us at 1-866-790-3165, or (2) by visiting the Commission's website at http://www.sec.gov.
Procedures for the Submission of Confidential and Anonymous Concerns or Complaints about Accounting, Internal Accounting Controls or Auditing Matters
The Funds are committed to compliance with all applicable securities laws and regulations, accounting standards, accounting controls and audit practices and has established procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters. Shareholders may use the Funds' website (http://www.rmrfunds.com) to communicate concerns or complaints about accounting, internal accounting controls or auditing matters.
Portfolio Holdings Reports
Each Fund files its schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q, which are available on the Commission's website at http://www.sec.gov. The Funds' Forms N-Q may also be reviewed and copied at the Commission's public reference room in Washington, D.C. Information on the operation of the public reference room may be obtained by calling the Commission at 1-800-SEC-0330. Each Fund provides additional data at its website at www.rmrfunds.com.
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Required Disclosure of Certain Federal Income Tax Information (unaudited)
For federal income tax purposes, the following information is furnished with respect to the distributions paid by the Funds during the year ended December 31, 2004.
Shareholders of the Funds will be advised on Internal Revenue Service Form 1099 DIV as to the federal tax status of the distributions received from each Fund during calendar year 2004. Shareholders are advised to consult with their own tax advisors as to the federal, state and local tax status of the distributions received from the Funds.
Annual Meeting
An annual meeting of shareholders of each Fund will be held on Wednesday, May 11, 2005, at 10:00 A.M. at 400 Centre Street, Newton, Massachusetts. A joint proxy statement related to these meetings will be mailed to shareholders of record as of March 14, 2005, each of whom is invited to attend.
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WARNING REGARDING FORWARD LOOKING STATEMENTS
THESE ANNUAL REPORTS INCLUDE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON THE BELIEFS AND EXPECTATIONS OF EACH OF RMR REAL ESTATE FUND, RMR HOSPITALITY AND REAL ESTATE FUND AND RMR F.I.R.E. FUND (EACH A "FUND" OR COLLECTIVELY "THE FUNDS"), THEIR TRUSTEES, THEIR OFFICERS, OR THEIR INVESTMENT ADVISOR, BUT THEY ARE NOT GUARANTEED TO OCCUR. FOR EXAMPLE, MR. O'BRIEN'S LETTERS STATE THE BELIEF THAT OFFICE MARKET SUBSECTOR FUNDAMENTALS ARE IMPROVING AND COULD SUGGEST THAT THE MARKET PRICES OF REAL ESTATE SECURITIES IN WHICH THE FUNDS INVESTS AS WELL AS THE MARKET PRICE OF THE FUNDS' SHARES COULD INCREASE. IN FACT, OFFICE MARKET SUBSECTOR MARKET FUNDAMENTALS MAY NOT IMPROVE AND THE MARKET PRICES OF REAL ESTATE SECURITIES AND OF THE FUNDS' SHARES MAY NOT INCREASE BUT MAY DECLINE. SIMILARLY, MR. O'BRIEN'S REFERENCES TO THE FINANCIAL SERVICES SECTOR CONSOLIDATING AND THE REAL ESTATE SECTOR CONTINUING TO IMPROVE MIGHT NOT HAPPEN. THESE UNEXPECTED RESULTS MAY OCCUR FOR MANY DIFFERENT REASONS, SOME OF WHICH, SUCH AS A GENERAL DECLINE IN ECONOMIC ACTIVITY, ARE BEYOND THE FUNDS' CONTROL. INVESTORS ARE URGED TO CAREFULLY READ AND CONSIDER THE RISK FACTORS WHICH ARE APPENDED TO THE FINANCIAL STATEMENTS OF EACH FUND FOR A LISTING OF SOME OF THE IMPORTANT REASONS WHY THESE FORWARD LOOKING STATEMENTS MAY NOT OCCUR; AND INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS.
NOTICE CONCERNING LIMITED LIABILITY
THE DECLARATIONS OF TRUST OF RMR REAL ESTATE FUND, RMR HOSPITALITY AND REAL ESTATE FUND AND RMR F.I.R.E. FUND, COPIES OF WHICH, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, ARE DULY FILED IN THE OFFICE OF THE SECRETARY, CORPORATIONS DIVISION OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDES THAT THE NAMES "RMR REAL ESTATE FUND", "RMR HOSPITALITY AND REAL ESTATE FUND" AND "RMR F.I.R.E. FUND" REFERS TO THE TRUSTEES UNDER THE DECLARATIONS COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF ANY OF THE FUNDS SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, RMR REAL ESTATE FUND OR RMR HOSPITALITY AND REAL ESTATE FUND OR RMR F.I.R.E. FUND. ALL PERSONS DEALING WITH ANY OF THE FUNDS IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THAT FUND WITH WHICH HE MAY DEAL FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
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Item 2. Code of Ethics.
Item 3. Audit Committee Financial Expert.
Item 4. Principal Accountant Fees and Services.
Item 5. Disclosure of Audit Committees for Listed Companies.
the registrant's Audit Committee are Frank J. Bailey, John L. Harrington and Arthur G. Koumantzelis.
Item 6. Schedule of Investments
The information required under Item 6 is included as part of the report to shareholders filed under Item 1 of this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Attached to this Form N-CSR as Exhibit 12(d) is a copy of the proxy voting policies and procedures for the registrant.
Item 8. Reserved
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
During the period ended December 31, 2004, there were no purchases made by or on behalf of the registrant or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the Exchange Act (17 CFR 240.10b-18(a)(3)), of shares of the registrant's equity securities that are registered by the registrant pursuant to Section 12 of the Exchange Act.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders many recommend nominees to the registrant's board of trustees.
Item 11. Controls and Procedures.
Item 12. Exhibits.
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.
RMR F.I.R.E. FUND | |
By: |
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/s/ THOMAS M. O'BRIEN Thomas M. O'Brien President Date: March 7, 2005 |
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/ THOMAS M. O'BRIEN Thomas M. O'Brien President Date: March 7, 2005 |
|
By: |
|
/s/ MARK L. KLEIFGES Mark L. Kleifges Treasurer Date: March 7, 2005 |