As filed with the Securities and Exchange Commission on January 9, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file Number: 811-21315
NEUBERGER BERMAN REALTY INCOME FUND INC.
----------------------------------------
(Exact Name of the Registrant as Specified in Charter)
c/o Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Registrant's Telephone Number, including area code: (212) 476-8800
Peter E. Sundman, Chief Executive Officer
c/o Neuberger Berman Management Inc.
Neuberger Berman Realty Income Fund Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur C. Delibert, Esq. Ellen Metzger, Esq.
Kirkpatrick & Lockhart LLP Neuberger Berman, LLC
1800 Massachusetts Avenue, N.W. 2nd Floor 605 Third Avenue
Washington, DC 20036-1800 New York, New York 10158-3698
(Names addresses of agents for service)
Date of fiscal year end: October 31, 2003
Date of reporting period: October 31, 2003
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS
[NEUBERGER BERMAN A LEHMAN BROTHERS COMPANY LOGO]
ANNUAL REPORT
OCTOBER 31, 2003
NEUBERGER BERMAN
REALTY INCOME
FUND INC.
<Page>
NEUBERGER BERMAN OCTOBER 31, 2003
CONTENTS
<Table>
THE FUND
CHAIRMAN'S LETTER 1
PORTFOLIO COMMENTARY/
PERFORMANCE HIGHLIGHTS 2
SCHEDULE OF INVESTMENTS/
TOP TEN EQUITY HOLDINGS 5
FINANCIAL STATEMENTS 8
FINANCIAL HIGHLIGHTS/
PER SHARE DATA 17
REPORT OF INDEPENDENT AUDITORS 19
DIVIDEND REINVESTMENT PLAN 20
DIRECTORY 22
DIRECTORS AND OFFICERS 23
</Table>
CHAIRMAN'S LETTER
Dear Fellow Shareholder,
I am pleased to present to you this annual report of the Neuberger Berman Realty
Income Fund, for the period ending October 31, 2003. The report includes a
listing of the Fund's investments and its financial statements for the reporting
period.
The Fund's investment objective is to provide high current income, and its
secondary objective is to provide capital appreciation. In seeking to accomplish
both, we have assembled a portfolio with a broad mix of equity securities of
real estate investment trusts (REITs) and other real estate companies.
Portfolio Manager Steven Brown's investment approach combines analysis of
security fundamentals and real estate with property sector diversification. His
disciplined valuation methodology seeks out real estate securities that are
attractively priced relative to their historical growth rates and the valuation
of other property sectors.
We believe our conservative investing philosophy and disciplined investment
process will benefit you with superior returns over the long term.
Thank you for your confidence in Neuberger Berman. We will continue to do our
best to keep earning it.
Sincerely,
/s/ Peter Sundman
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN REALTY
INCOME FUND INC. CLOSED-END FUNDS
"Neuberger Berman" and the Neuberger Berman logo are service marks of Neuberger
Berman, LLC. "Neuberger Berman Management Inc." and the individual fund name in
this shareholder report are either service marks or registered service marks of
Neuberger Berman Management Inc. (C)2003 Neuberger Berman Management Inc. All
rights reserved.
1
<Page>
REALTY INCOME FUND INC. Portfolio Commentary
We are pleased to report that, since inception, for the reporting period ended
October 31, 2003, on a Net Asset Value (NAV) basis, the Neuberger Berman Realty
Income Fund (NYSE: NRI) returned 21.16% versus 19.19% for the NAREIT Equity REIT
Index.
The portfolio's superior relative performance resulted from an overweighting in
regional malls, the best performing property sector in 2003 through October, and
generally good stock selection in most property categories. Our investments in
the hotels/lodging sector also contributed to absolute returns in the second
half of fiscal 2003, as this sector began rebounding. Our relative performance
was dampened by issue-specific weakness in the office and mixed-use sectors,
where several portfolio holdings fell short of consensus earnings expectations.
We believe the U.S. economy is in the early stages of an economic recovery that
will extend through 2004 and into 2005. Consumer spending, which has supported
the economy over the last several years, remains strong. Capital spending
appears to be recovering as the capacity glut recedes. Perhaps most importantly,
corporate America is finally hiring again. More Americans going back to work has
positive implications for consumer confidence and consumer spending. It should
also revive demand in the office sector, fundamentally the weakest property
category. We doubt 2004 Gross Domestic Product (GDP) growth will match the
calendar third quarter's impressive 8.2% growth rate, but expect growth in the
healthy 4% plus range.
We expect commercial real estate fundamentals to improve significantly over the
next 12 months. Supply growth, as measured by new permits and construction
starts as a percentage of existing supply, is decelerating and we expect the
level of supply growth for most property sectors will be below long-term
averages for the next 12-18 months. Demand should improve substantially as the
economy expands. Increasing demand should translate into accelerating earnings
growth for REITs.
We believe hotel/lodging, apartment, and industrial REITs will be among the
first property sectors to benefit. The hotel/lodging sector appears to us
particularly attractive. Construction activity has been at historically low
levels for three years. The significant operating leverage resulting from recent
years' intense cost cutting could be magnified in earnings as the business
traveler takes to the road again and vacancy rates fall. We think the apartment
sector should rebound as rising mortgage rates price more people out of the new
housing market, and we expect industrial REITs
CUMULATIVE TOTAL RETURN (Life of Fund as of October 31, 2003)
<Table>
<Caption>
REALTY INCOME FUND
NYSE TICKER SYMBOL NRI
NAV 21.16%
MARKET PRICE 10.60%
INCEPTION DATE 04/24/2003
</Table>
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
2
<Page>
(warehouses) to benefit as businesses rebuild inventories after an extended
inventory liquidation cycle.
Due to the resilience of the American consumer, the regional mall sector has
performed exceptionally well over the last three years. If consumer spending
remains at or near current levels, regional mall REIT earnings should continue
to grow nicely. Although valuations are not as attractive as other property
sectors, based on above average earnings growth potential, we believe regional
mall REITs are still reasonably valued.
After REITs' exceptional absolute and relative performance in recent years,
valuations are in the mid-to upper-end of historical ranges. While REITs no
longer appear "cheap," we think they are reasonably priced relative to asset
values and improving earnings prospects. We believe that even if the stock
market continues to rally strongly in the year ahead, REITs will retain a loyal
following. An extensive study by the highly respected investment research firm
Ibbotson Associates revealing that historically, equity portfolios with a 20%
allocation to REITs have produced returns with significantly less volatility,
has been widely disseminated in the institutional investment community. We
believe the increased institutional investment in REITs makes a robust stock
market less of a competitive threat than it has been in the past.
Sincerely,
/s/ Steven R Brown
STEVEN BROWN
PORTFOLIO MANAGER
3
<Page>
GLOSSARY OF INDICES
NAREIT EQUITY REIT INDEX: Tracks the performance of all Equity
REITs currently listed on the New York
Stock Exchange, the NASDAQ National
Market System and the American Stock
Exchange. REITs are classified as Equity
if 75% or more of their gross invested
book assets are invested directly or
indirectly in equity of commercial
properties.
Please note that the index does not take into account any fees and expenses of
investing in individual securities that it tracks, and that investors cannot
invest directly in any index or average. Data about the performance of the index
is prepared or obtained by Management and includes reinvestment of all dividends
and capital gain distributions. The Fund may invest in securities not included
in its index.
4
<Page>
SCHEDULE OF INVESTMENTS Realty Income Fund Inc.
TOP TEN EQUITY HOLDINGS
<Table>
<Caption>
HOLDING %
1 Mills Corp. 8.4
2 iStar Financial 7.9
3 Health Care REIT 6.6
4 Citigroup Global
Makets 5.7
5 Apartment
Investment &
Management 5.6
6 Ventas, Inc. 5.4
7 New Plan Excel
Realty Trust 4.7
8 Colonial
Properties Trust 4.6
9 Maguire
Properties 4.5
10 Lexington
Corporate
Properties Trust 4.2
</Table>
<Table>
<Caption>
MARKET VALUE +
NUMBER OF SHARES (000'S OMITTED)
COMMON STOCKS (104.2%)
APARTMENTS (16.9%)
138,200 Amli Residential Properties
Trust $ 3,516
531,400 Apartment Investment &
Management 21,734*
430,500 Archstone-Smith Trust 11,495
464,200 Camden Property Trust 18,382
433,500 Gables Residential Trust 13,950
171,100 Home Properties 6,587
1,700 Mid-America Apartment
Communities 53
35,300 Post Properties 932
4,400 Town & Country Trust 102
49,100 United Dominion Realty Trust 857
-------------
77,608
COMMUNITY CENTERS (12.6%)
100,000 Chelsea Property Group 4,920
43,400 Developers Diversified Realty 1,254
30,000 Federal Realty Investment
Trust 1,139
221,400 Heritage Property
Investment Trust 6,243
942,400 New Plan Excel Realty Trust 21,392
331,100 Ramco-Gershenson
Properties Trust 7,996
364,700 Tanger Factory Outlet Centers 14,727
-------------
57,671
DIVERSIFIED (15.6%)
565,900 Colonial Properties Trust 20,938
813,100 iStar Financial 30,947^^
219,600 Lexington Corporate
Properties Trust 4,212
177,600 Pennsylvania REIT 5,932
182,100 Vornado Realty Trust 9,205
-------------
71,234
HEALTH CARE (14.4%)
316,400 Health Care Property Investors 14,754
382,400 Health Care REIT 12,677
157,300 Healthcare Realty Trust 5,309
485,000 Nationwide Health Properties 8,875
1,312,900 Ventas, Inc. 24,551
-------------
66,166
INDUSTRIAL (7.0%)
642,129 EastGroup Properties 18,718
353,000 First Industrial Realty Trust 11,402
101,600 Keystone Property Trust 2,032
-------------
32,152
LODGING (0.4%)
51,000 Hospitality Properties Trust 1,870
OFFICE (19.0%)
100,000 American Financial Realty
Trust $ 1,520
191,000 Arden Realty 5,342
365,400 Brandywine Realty Trust 9,259
282,400 CarrAmerica Realty 8,492
250,000 Equity Office Properties Trust 7,002
217,000 Glenborough Realty Trust 4,231
408,700 Highwoods Properties 10,136
341,000 HRPT Properties Trust 3,192
120,200 Mack-Cali Realty 4,530
942,000 Maguire Properties 20,536
323,500 Prentiss Properties Trust 9,783
233,600 Trizec Properties 3,119
-------------
87,142
OFFICE--INDUSTRIAL (8.6%)
149,500 Bedford Property Investors 3,926
271,300 Kilroy Realty 7,841
332,200 Liberty Property Trust 12,085
704,700 Reckson Associates Realty 15,658
-------------
39,510
REGIONAL MALLS (7.4%)
55,500 CBL & Associates Properties 2,958
451,200 Glimcher Realty Trust 9,557
104,700 Macerich Co. 4,209
164,000 Mills Corp. 6,691
230,300 Simon Property Group 10,382
-------------
33,797
SELF STORAGE (2.3%)
119,700 Public Storage, Depositary
Shares 3,436
75,700 Shurgard Storage Centers 2,740*
131,500 Sovran Self Storage 4,451
-------------
10,627
TOTAL COMMON STOCKS
(COST $419,374) 477,777
-------------
PREFERRED STOCKS (40.0%)
APARTMENTS (4.9%)
7,200 Apartment Investment &
Management, Ser. Q 196
8,600 Apartment Investment &
Management, Ser. R 236
138,000 Apartment Investment &
Management, Ser. T 3,436
377,800 Mid-America Apartment
Communities, Ser. H 9,799
151,300 Post Properties, Ser. A 8,852
-------------
22,519
</Table>
See Notes to Schedule of Investments
5
<Page>
<Table>
<Caption>
MARKET VALUE +
NUMBER OF SHARES (000'S OMITTED)
COMMERCIAL FINANCING (0.9%)
156,000 Anthracite Capital, Ser. C $ 4,095
COMMUNITY CENTERS (7.8%)
743,644 Citigroup Global Markets 26,200
49,600 Ramco-Gershenson Properties
Trust, Ser. B 1,389
85,500 Saul Centers, Ser. A 2,138
60,000 Urstadt Biddle Properties,
Ser. C 6,148**
-------------
35,875
DIVERSIFIED (6.8%)
398,600 Crescent Real Estate Equities,
Ser. B 10,710
200,000 iStar Financial, Ser. E 5,230
580,000 Lexington Corp. Properties
Trust, Ser. B 15,138
-------------
31,078
HEALTH CARE (4.1%)
685,000 Health Care REIT, Ser. D 17,746
13,200 LTC Properties, Ser. A 335
27,900 LTC Properties, Ser. B 702
1,000 Nationwide Health Properties 79
-------------
18,862
INDUSTRIAL (0.1%)
20,000 Keystone Property Trust,
Ser. D 533
LODGING (0.5%)
81,700 Hospitality Properties Trust,
Ser. B 2,191
5,300 LaSalle Hotel Properties,
Ser. A 145
-------------
2,336
OFFICE (3.7%)
23,200 Highwoods Properties, Ser. B 584
96,400 Highwoods Properties, Ser. D 2,412
50,000 HRPT Properties Trust, Ser. B 1,350
480,000 Parkway Properties, Ser. D 12,720
-------------
17,066
REGIONAL MALLS (10.7%)
40,000 CBL & Associates Properties,
Ser. B 2,190
225,300 Crown American Realty Trust,
Ser. A 13,239
48,000 Glimcher Realty Trust, Ser. F 1,243
31,200 Mills Corp., Ser. B 842
206,200 Mills Corp., Ser. C 5,535
965,900 Mills Corp., Ser. E 25,596
7,700 Taubman Centers, Ser. A 195
-------------
48,840
SPECIALTY (0.5%)
76,500 Entertainment Properties
Trust, Ser. A $ 2,085
TOTAL PREFERRED STOCKS
(COST $174,901) 183,289
-------------
<Caption>
PRINCIPAL AMOUNT
SHORT-TERM INVESTMENTS (11.4%)
$ 16,189,400 N&B Securities Lending
Quality Fund, LLC 16,189
35,894,615 Neuberger Berman
Institutional Cash Fund
Trust Class 35,895@
-------------
TOTAL SHORT-TERM INVESTMENTS
(COST $52,084) 52,084#
-------------
TOTAL INVESTMENTS (155.6%)
(COST $646,359) 713,150##
Liabilities, less cash, receivables
and other assets [(5.9%)] (26,829)
Liquidation Value of Auction
Preferred Shares [(49.7%)] (228,000)
-------------
TOTAL NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS (100.0%) $ 458,321
-------------
</Table>
6
<Page>
NOTES TO SCHEDULE OF INVESTMENTS
+ Investment securities of the Fund are valued at the latest sales price
where that price is readily available; securities for which no sales were
reported, unless otherwise noted, are valued at the last available bid
price on that day. Securities traded primarily on the NASDAQ Stock Market
are normally valued by the Fund at the NASDAQ Official Closing Price
("NOCP") provided by NASDAQ each business day. The NOCP is the most
recently reported price as of 4:00:02 p.m., Eastern time, unless that price
is outside the range of the "inside" bid and asked prices (i.e., the bid
and asked prices that dealers quote to each other when trading for their
own accounts); in that case, NASDAQ will adjust the price to equal the
inside bid or asked price, whichever is closer. Because of delays in
reporting trades, the NOCP may not be based on the price of the last trade
to occur before the market closes. The Fund values all other securities by
a method the directors of Neuberger Berman Realty Income Fund Inc. believe
accurately reflects fair value. Numerous factors may be considered when
determining the fair value of a security, including available analyst,
media or other reports, trading in futures or ADRs and whether the issuer
of the security being fair valued has other securities outstanding.
Short-term debt securities with less than 60 days until maturity may be
valued at cost which, when combined with interest earned, approximates
market value.
# At cost, which approximates market value.
## At October 31, 2003, the cost of investments for U.S. Federal income tax
purposes was $646,359,000. Gross unrealized appreciation of investments was
$67,525,000 and gross unrealized depreciation of investments was $734,000,
resulting in net unrealized appreciation of $66,791,000, based on cost for
U.S. Federal income tax purposes.
** Security exempt from registration under the Securities Act of 1933. These
securities may be resold in transactions exempt from registration, normally
to qualified institutional buyers under Rule 144A. At October 31, 2003,
these securities amounted to $6,148,000 or 1.3% of net assets applicable to
common shareholders.
^^ Security is segregated as collateral for interest rate swap contracts.
@ Neuberger Berman Institutional Cash Fund is also managed by Neuberger
Berman Management Inc. (see Note A of Notes to Financial Statements).
* All or a portion of this security is on loan (see Note A of Notes to
Financial Statements).
See Notes to Financial Statements
7
<Page>
STATEMENT OF ASSETS AND LIABILITIES
<Table>
<Caption>
NEUBERGER BERMAN REALTY INCOME
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) FUND
ASSETS
INVESTMENTS IN SECURITIES, AT MARKET VALUE*+ (Note A)--see
SCHEDULE OF INVESTMENTS: $ 713,150
Interest rate swaps, at market value (Note A) 5,863
- --------------------------------------------------------------------------------------------------
Dividends and interest receivable 2,825
Prepaid expenses and other assets 37
==================================================================================================
TOTAL ASSETS 721,875
==================================================================================================
LIABILITIES
Payable for collateral on securities loaned (Note A) 16,189
Dividends payable--preferred shares 21
- --------------------------------------------------------------------------------------------------
Dividends payable--common shares 378
Payable for securities purchased 18,358
- --------------------------------------------------------------------------------------------------
Net payable for swap contracts (Note A) 29
Payable for offering costs (Note A) 105
- --------------------------------------------------------------------------------------------------
Payable to investment manager--net (Note B) 189
Payable to administrator (Note B) 135
- --------------------------------------------------------------------------------------------------
Accrued expenses and other payables 150
==================================================================================================
TOTAL LIABILITIES 35,554
==================================================================================================
AUCTION PREFERRED SHARES SERIES A, B, C & D AT LIQUIDATION VALUE
14,000 shares authorized; 9,120 shares issued and outstanding
$.0001 par value; $25,000 liquidation value per share (Note A) 228,000
==================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 458,321
==================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Paid-in capital--common shares $ 386,066
Undistributed (dividends in excess of) net investment income (399)
- --------------------------------------------------------------------------------------------------
Accumulated net realized gains (losses) on investments --
Net unrealized appreciation (depreciation) in value of investments 72,654
==================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 458,321
==================================================================================================
COMMON SHARES OUTSTANDING ($.0001 PAR VALUE; 999,986,000 SHARES AUTHORIZED) 27,372
==================================================================================================
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 16.74
==================================================================================================
+SECURITIES ON LOAN, AT MARKET VALUE 15,766
==================================================================================================
*COST OF INVESTMENTS $ 646,359
==================================================================================================
</Table>
See Notes to Financial Statements
8
<Page>
NEUBERGER BERMAN FOR THE PERIOD FROM APRIL 29, 2003 (COMMENCEMENT OF OPERATIONS)
TO OCTOBER 31, 2003
STATEMENT OF OPERATIONS
<Table>
<Caption>
NEUBERGER BERMAN REALTY INCOME
(000'S OMITTED) FUND
INVESTMENT INCOME
Dividend income $ 14,200
Interest income 321
- --------------------------------------------------------------------------------------------------
Income from investments in affiliated issuers (Note A) 21
Income from securities loaned--net 1
==================================================================================================
Total income 14,543
==================================================================================================
EXPENSES:
Investment management fee (Note B) 1,709
Administration fee (Note B) 713
- --------------------------------------------------------------------------------------------------
Auction agent fees (Note B) 173
Auditing fees 22
- --------------------------------------------------------------------------------------------------
Basic maintenance expense (Note B) 10
Custodian fees (Note B) 73
- --------------------------------------------------------------------------------------------------
Directors' fees and expenses 16
Insurance expense 1
- --------------------------------------------------------------------------------------------------
Legal fees 35
Net interest expense on interest rate swap contracts (Note A) 768
- --------------------------------------------------------------------------------------------------
Shareholder reports 46
Stock exchange listing fees 15
- --------------------------------------------------------------------------------------------------
Stock transfer agent fees 21
Miscellaneous 16
==================================================================================================
Total expenses 3,618
Investment management fee waived (Note B) (713)
Expenses reduced by custodian fee expense offset and commission recapture
arrangements (Note B) (3)
==================================================================================================
Total net expenses 2,902
==================================================================================================
Net investment income 11,641
==================================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investment securities sold 1,553
Change in net unrealized appreciation (depreciation) in value of:
- --------------------------------------------------------------------------------------------------
Investment securities (Note A) 66,791
Interest rate swap contracts (Note A) 5,863
===========================================================================================
Net gain (loss) on investments 74,207
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
- --------------------------------------------------------------------------------------------------
Net investment income (806)
===========================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
RESULTING FROM OPERATIONS $ 85,042
==================================================================================================
</Table>
See Notes to Financial Statements
9
<Page>
NEUBERGER BERMAN OCTOBER 31, 2003
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
NEUBERGER BERMAN REALTY INCOME FUND
PERIOD FROM
APRIL 29, 2003
(COMMENCEMENT
OF OPERATIONS) TO
(000'S OMITTED) OCTOBER 31, 2003
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $ 11,641
Net realized gain (loss) on investments 1,553
- --------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) of investments 72,654
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (599)
Net realized gain on investments (77)
- --------------------------------------------------------------------------------------------------
Tax return of capital (130)
==================================================================================================
Total distributions to preferred shareholders (806)
==================================================================================================
Net increase (decrease) in net assets applicable to common shareholders
resulting from operations 85,042
==================================================================================================
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (11,441)
Net realized gain on investments (1,476)
- --------------------------------------------------------------------------------------------------
Tax return of capital (2,477)
==================================================================================================
Total distributions to common shareholders (15,394)
==================================================================================================
FROM CAPITAL SHARE TRANSACTIONS:
Net proceeds from initial capitalization 100
Net proceeds from issuance of common shares 343,080
- --------------------------------------------------------------------------------------------------
Net proceeds from underwriters' over-allotment option exercised 47,745
Proceeds from reinvestment of dividends 377
- --------------------------------------------------------------------------------------------------
Payments for preferred shares offering costs (2,629)
==================================================================================================
Total net proceeds from capital share transactions 388,673
==================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 458,321
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period --
==================================================================================================
End of period $ 458,321
==================================================================================================
Accumulated undistributed (dividends in excess of) net investment income at
end of period $ (399)
==================================================================================================
</Table>
See Notes to Financial Statements
10
<Page>
NOTES TO FINANCIAL STATEMENTS Realty Income Fund Inc.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Realty Income Fund Inc. (the "Fund") was organized
as a Maryland corporation on March 4, 2003 as a non-diversified, closed-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund had no operations until April 29, 2003,
other than matters relating to its organization and the sale on April 14,
2003 of 6,981 shares of common stock for $100,003 ($14.325 per share) to
Neuberger Berman, LLC ("Neuberger"), the Fund's sub-adviser. The Board of
Directors of the Fund may classify or re-classify any unissued shares of
capital stock into one or more classes of preferred stock without the
approval of shareholders.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires Neuberger Berman
Management Inc. ("Management") to make estimates and assumptions at the date
of the financial statements. Actual results could differ from those
estimates.
2 PORTFOLIO VALUATION: Investment securities are valued as indicated in the
notes following the Schedule of Investments.
3 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date. Non-cash dividends included in dividend income, if any, are
recorded at the fair market value of the securities received. Interest
income, including accretion of original issue discount, where applicable, and
accretion of discount on short-term investments, is recorded on the accrual
basis. Realized gains and losses from securities transactions are recorded on
the basis of identified cost.
4 FEDERAL INCOME TAXES: It is the intention of the Fund to qualify as a
regulated investment company by complying with the provisions available to
certain investment companies, as defined in applicable sections of the
Internal Revenue Code, and to make distributions of investment company
taxable income and net capital gains (after reduction for any amounts
available for U.S. Federal income tax purposes as capital loss carryforwards)
sufficient to relieve it from all, or substantially all, U.S. Federal income
taxes. Accordingly, the Fund paid no U.S. Federal income taxes and no
provision for U.S. Federal income taxes was required.
5 DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund earns income, net of
expenses, daily on its investments. It is the policy of the Fund to declare
quarterly and pay dividends to common shareholders from net investment income
on a monthly basis. Distributions from net realized capital gains, if any,
are normally distributed in December. Income dividends and capital gain
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. Dividends and distributions to preferred shareholders are accrued
and determined as described in Note A-7.
The Fund distinguishes between dividends on a tax basis and a financial
reporting basis and only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of capital.
Differences in the recognition or classification of income between the
financial
11
<Page>
statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains in the components of net assets on the Statement of Assets and
Liabilities.
On September 29, 2003, the Fund declared two monthly dividends to common
shareholders from its net investment income in the amount of $0.1125 per
share per month, payable after the fiscal year-end, on November 28, 2003 and
December 30, 2003, to shareholders of record on November 14, 2003 and
December 12, 2003, respectively, with ex-dividend dates of November 12, 2003
and December 10, 2003, respectively.
The tax character of distributions paid during the period ended October 31,
2003 were as follows:
<Table>
<Caption>
DISTRIBUTIONS PAID FROM: LONG-TERM TAX RETURN
ORDINARY INCOME CAPITAL GAIN OF CAPITAL TOTAL
2003 2003 2003 2003
$ 12,073,815 $ 1,518,618 $ 2,607,119 $ 16,199,552
</Table>
As of October 31, 2003, the components of distributable earnings (accumulated
losses) on a U.S. Federal income tax basis were as follows:
<Table>
<Caption>
UNDISTRIBUTED UNDISTRIBUTED UNREALIZED LOSS
ORDINARY LONG-TERM APPRECIATION CARRYFORWARDS
INCOME GAIN (DEPRECIATION) AND DEFERRALS TOTAL
$ -- $ -- $ 72,654,395 $ -- $ 72,654,395
</Table>
The difference between book basis and tax basis is attributable primarily to
timing differences of dividend payments.
6 EXPENSE ALLOCATION: Some bills are applicable to multiple funds. Expenses
directly attributable to a Fund are charged to that Fund. Expenses not
directly attributed to a Fund are allocated, on the basis of relative net
assets, except where a more appropriate allocation of expenses can otherwise
be made fairly.
7 REDEEMABLE PREFERRED SHARES: On June 5, 2003, the Fund re-classified 12,000
unissued shares of capital stock as Series A Auction Preferred Shares, Series
B Auction Preferred Shares, Series C Auction Preferred Shares and Series D
Auction Preferred Shares ("Preferred Shares"). On June 23, 2003, the Fund
issued 1,950 Series A Auction Preferred Shares, 1,950 Series B Auction
Preferred Shares, 1,950 Series C Auction Preferred Shares and 1,950 Series D
Auction Preferred Shares. On October 24, 2003, the Fund issued an additional
330 Series A Auction Preferred Shares, 330 Series B Auction Preferred Shares,
330 Series C Auction Preferred Shares and 330 Series D Auction Preferred
Shares. All Preferred Shares have a liquidation preference of $25,000 per
share plus any accumulated unpaid dividends, whether or not earned or
declared by the Fund, but excluding interest thereon ("Liquidation Value").
Except when the Fund has declared a special rate period, dividends to
preferred shareholders, which are cumulative, are accrued daily and paid
every 7 days. Dividend rates are reset every 7 days based on the results of
an auction, except during special rate periods. For the period from June 23,
2003 to October 31, 2003, dividend rates ranged from 1.05% to 1.33% for
Series A, 1.05% to 1.27% for Series B, 1.00% to
12
<Page>
1.27% for Series C, and 1.07% to 1.26% for Series D Auction Preferred Shares.
The Fund declared dividends to preferred shareholders for the period November
1, 2003 to November 30, 2003 of $53,150, $51,691, $52,767, and $51,603 for
Series A, Series B, Series C, and Series D Auction Preferred Shares,
respectively.
The Fund may redeem Preferred Shares, in whole or in part, on the second
business day preceding any dividend payment date at Liquidation Value. The
Fund is also subject to certain restrictions relating to the Preferred
Shares. Failure to comply with these restrictions could preclude the Fund
from declaring any distributions to common shareholders or repurchasing
common shares and/or could trigger the mandatory redemption of Preferred
Shares at Liquidation Value. The holders of Preferred Shares are entitled to
one vote per share and, unless otherwise required by law, will vote with
holders of common stock as a single class, except that the Preferred Shares
will vote separately as a class on certain matters, as required by law. The
holders of the Preferred Shares, voting as a separate class, are entitled at
all times to elect two Directors of the Fund, and to elect a majority of the
Directors of the Fund if the Fund failed to pay dividends on Preferred Shares
for two consecutive years.
8 INTEREST RATE SWAPS: The Fund may enter into interest rate swap transactions,
with institutions that the Fund's investment manager has determined are
creditworthy, to reduce the risk that an increase in short-term interest
rates could reduce common share net earnings as a result of leverage. The
Fund agrees to pay the swap counter party a fixed-rate payment in exchange
for the counter party's paying the Fund a variable-rate payment that is
intended to approximate all or a portion of the Fund's variable-rate payment
obligation on the Fund's Preferred Shares. The payment flows are netted
against each other, with the difference being paid by one party to the other.
The Fund will segregate cash or liquid securities having a value at least
equal to the Fund's net payment obligations under any swap transaction,
marked to market daily.
Risks may arise if the counter party to a swap contract fails to comply with
the terms of its contract. The loss incurred by the failure of a counter
party is generally limited to the net interest payment to be received by the
Fund, and/or the termination value at the end of the contract. Additionally,
risks may arise from movements in interest rates unanticipated by Management.
The Fund records a net receivable or payable on a daily basis for the net
interest income or expense expected to be received or paid in the interest
period. Net interest received or paid on these contracts is recorded as net
interest income or net interest expense on interest rate swap contracts.
Realized gains and losses from terminated swaps are included in net realized
gains or losses in the Statement of Operations. At October 31, 2003, the Fund
had outstanding interest rate swap contracts as follows:
<Table>
<Caption>
RATE TYPE
--------------------------------
PAYMENTS MADE PAYMENTS RECEIVED UNREALIZED
SWAP COUNTER PARTY NOTIONAL AMOUNT TERMINATION DATE BY THE FUND BY THE FUND(1) APPRECIATION
Citibank, N.A. $ 83,000,000 June 26, 2007 2.22% 1.12% $ 2,532,985
Citibank, N.A. $ 82,000,000 June 26, 2008 2.58% 1.12% 3,330,365
-------------
5,863,350
</Table>
(1) 30 day LIBOR (London Interbank Offered Rate)
13
<Page>
9 REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default under the repurchase
agreement. The Fund monitors, on a daily basis, the value of the securities
transferred to ensure that their value, including accrued interest, is
greater than amounts owed to the Fund under each such repurchase agreement.
10 SECURITY LENDING: Pursuant to an Exemptive Order issued by the Securities and
Exchange Commission, the Fund entered into a Securities Lending Agreement
with Neuberger Berman, LLC ("Neuberger") on April 17, 2003. Securities loans
involve certain risks in the event a borrower should fail financially,
including delays or inability to recover the lent securities or foreclose
against the collateral. The investment manager, under the general supervision
of the Fund's Board of Directors, monitors the creditworthiness of the
parties to whom the Fund makes security loans. The Fund will not lend
securities on which covered call options have been written, or lend
securities on terms which would prevent the Fund from qualifying as a
regulated investment company. The Fund receives cash collateral equal to at
least 102% of the current market value of the loaned securities. The Fund
invests the cash collateral in the N&B Securities Lending Quality Fund, LLC
("investment vehicle"), which is managed by State Street Bank and Trust
Company ("State Street") pursuant to guidelines approved by the Fund's
investment manager. Neuberger guarantees a minimum revenue to the Fund under
the Agreement, and receives a portion of any revenue earned in excess of the
guaranteed amount as a lending agency fee. At October 31, 2003, the Fund had
not paid Management any fees under the Agreement.
11 TRANSACTIONS WITH OTHER FUNDS MANAGED BY NEUBERGER BERMAN MANAGEMENT INC.:
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Fund may invest in the Neuberger Berman Institutional Cash
Fund (the "Cash Fund"), a fund managed by Management and having the same
directors and trustees as the Fund. The Cash Fund seeks to provide as high a
level of current income as is consistent with the preservation of capital and
the maintenance of liquidity. For any cash that the Fund invests in the Cash
Fund, management waives a portion of its management fee equal to the
management fee it receives from the Cash Fund on those assets. For the period
ended October 31, 2003, income earned on this investment amounted to $21,067
and is reflected in the Statement of Operations under the caption Income from
investments in affiliated issuers.
12 ORGANIZATION EXPENSES AND OFFERING COSTS: Management has agreed to pay all
organizational expenses and the amount by which the Fund's offering costs for
common stock (other than sales load) exceed $0.03 per share. The costs
incurred by Management were approximately $116,384. Offering costs for common
stock paid by the Fund were charged as a reduction of common stock
paid-in-capital at the completion of the Fund's offerings and amounted to
$820,409.
Additionally, estimated offering costs of $625,000 and a sales load of
$2,280,000 incurred through the issuance of Preferred Shares were charged as
a reduction of common stock paid-in-capital at the completion of the Fund's
Preferred Shares offerings.
As of October 31, 2003, total offering costs of $105,136 remain payable by
the Fund.
14
<Page>
13 CONCENTRATION OF RISK: Under normal market conditions, the Fund's investments
will be concentrated in income-producing common equity securities, preferred
securities, convertible securities and non-convertible debt securities issued
by companies deriving the majority of their revenue from the ownership,
construction, financing, management and/or sale of commercial, industrial,
and/or residential real estate. Values of the securities of such companies
may fluctuate due to economic, legal, cultural, geopolitical or technological
developments affecting the United States real estate industry.
NOTE B--MANAGEMENT FEES, ADMINISTRATION FEES, AND OTHER TRANSACTIONS WITH
AFFILIATES:
The Fund retains Management as its investment manager under a Management
Agreement. For such investment management services, the Fund pays Management
a fee at the annual rate of 0.60% of its average daily Managed Assets.
Managed Assets equal the total assets of the Fund, less liabilities other
than the aggregate indebtedness entered into for purposes of leverage. For
purposes of calculating Managed Assets, the Liquidation Value of any
Preferred Shares outstanding is not considered a liability.
Management has contractually agreed to waive a portion of the management fees
it is entitled to receive from the Fund at the following annual rates:
<Table>
<Caption>
FISCAL PERIOD OR YEAR ENDED % OF AVERAGE
OCTOBER 31, DAILY MANAGED ASSETS
--------------------------------------------------------------------------
2003 - 2007 0.25
2008 0.20
2009 0.15
2010 0.10
2011 0.05
</Table>
Management has not agreed to waive any portion of its fees beyond October 31,
2011.
For the period ended October 31, 2003, such waived fees amounted to $713,117.
The Fund retains Management as its administrator under an Administration
Agreement ("Agreement"). Pursuant to this Agreement the Fund pays Management
an administration fee at the annual rate of 0.25% of its average daily
Managed Assets. Additionally, Management retains State Street as its
sub-administrator under a Sub-Administration Agreement. Management pays State
Street a fee for all services received under the agreement.
On October 31, 2003, Management and Neuberger, a member firm of The New York
Stock Exchange and sub-adviser to the Fund, became indirect wholly owned
subsidiaries of Lehman Brothers Holdings Inc. ("Lehman"), a publicly held
company ("the Transaction"). Upon completion of the Transaction, the Fund's
management and sub-advisory agreements automatically terminated. To provide
for continuity of management, the shareholders of the Fund voted on September
23, 2003, to approve new management and sub-advisory agreements, which took
effect upon closing of the Transaction (see Report of Votes of Shareholders).
Neuberger is retained by Management to furnish it with investment
recommendations and research information without added cost to the Fund.
Several individuals who are officers and/or Directors of the Fund are also
employees of Neuberger and/or Management.
15
<Page>
On July 1, 2003, the Fund entered into a commission recapture program, which
enables it to pay some of its operational expenses by recouping a portion of
the commissions it paid to a broker that is not a related party of the Fund.
Expenses paid through this program may include costs of custodial, transfer
agency or accounting services. The impact of this arrangement was a reduction
of $1,307.
The Fund has an expense offset arrangement in connection with its custodian
contract. The impact of this arrangement, reflected in the Statement of
Operations under the caption Custodian fees, was a reduction of $1,981.
In connection with the settlement of each Preferred Share auction, the Fund
pays, through the auction agent, a service fee to each participating
broker-dealer based upon the aggregate liquidation preference of the
Preferred Shares held by the broker-dealer's customers. For any auction
preceding a rate period of less than one year, the service fee is paid at the
annual rate of 1/4 of 1%; for any auction preceding a rate period of one year
or more, the service fee is paid at a rate agreed to by the Fund and the
broker-dealer.
In order to satisfy ratings agency requirements, the Fund is required to
provide each rating agency a report on a monthly basis verifying that it is
maintaining eligible assets having a discounted value equal to or greater
than the Preferred Shares Basic Maintenance Amount, which is a minimum level
set by each rating agency as one of the conditions to maintain the AAA rating
on the Preferred Shares. 'Discounted value' refers to the fact that the
rating agencies require the Fund, in performing this calculation, to discount
portfolio securities below their face value, at a rate depending on their
rating. The Fund pays a fee to State Street, as Fund sub-administrator, for
the preparation of this report.
NOTE C--SECURITIES TRANSACTIONS:
During the period ended October 31, 2003, there were purchase and sale
transactions (excluding short-term securities and interest rate swap
contracts) of $600,183,000 and $2,580,000, respectively.
During the period ended October 31, 2003, brokerage commissions on securities
transactions amounted to $734,103, of which Neuberger received $304,323,
Lehman received $56,240, and other brokers received $373,540.
NOTE D--CAPITAL:
At October 31, 2003, the common shares outstanding and the common shares
owned by Neuberger for the Fund were as follows:
<Table>
<Caption>
COMMON SHARES COMMON SHARES
OUTSTANDING OWNED BY NEUBERGER
27,372,139 6,981
</Table>
Transactions in common shares of capital stock for the period ended October
31, 2003 were as follows:
<Table>
<Caption>
COMMON SHARES ISSUED IN CONNECTION WITH:
UNDERWRITERS' REINVESTMENT OF NET INCREASE IN
INITIAL INITIAL PUBLIC EXERCISE OF OVER- DIVIDENDS AND COMMON SHARES
CAPITALIZATION OFFERING ALLOTMENT OPTION DISTRIBUTIONS OUTSTANDING
6,981 24,000,000 3,340,000 25,158 27,372,139
</Table>
16
<Page>
FINANCIAL HIGHLIGHTS Realty Income Fund Inc.
The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the Financial
Statements.
<Table>
<Caption>
PERIOD FROM
APRIL 29, 2003^
TO OCTOBER 31,
------------------
2003
COMMON SHARE NET ASSET VALUE, BEGINNING OF PERIOD $ 14.33
------------------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS:
NET INVESTMENT INCOME (Loss) .43
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND UNREALIZED) 2.70
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.02)
NET CAPITAL GAINS (.00)
TAX RETURN OF CAPITAL (.01)
------------------
TOTAL DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (.03)
------------------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS 3.10
------------------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
NET INVESTMENT INCOME (0.42)
NET CAPITAL GAINS (0.05)
TAX RETURN OF CAPITAL (0.09)
------------------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (0.56)
------------------
LESS CAPITAL CHARGES:
ISSUANCE OF COMMON SHARES (.03)
ISSUANCE OF PREFERRED SHARES (.10)
------------------
TOTAL CAPITAL CHARGES (.13)
------------------
COMMON SHARE NET ASSET VALUE, END OF PERIOD $ 16.74
------------------
COMMON SHARE MARKET VALUE, END OF PERIOD $ 16.00
------------------
TOTAL RETURN, COMMON SHARE NET ASSET VALUE+ +21.16%**
TOTAL RETURN, COMMON SHARE MARKET VALUE+ +10.60%**
RATIOS/SUPPLEMENTAL DATA++
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS, END OF PERIOD (IN MILLIONS) $ 458.3
PREFERRED STOCK, AT LIQUIDATION VALUE ($25,000 PER SHARE LIQUIDATION PREFERENCE) (IN MILLIONS) $ 228.0
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS# 1.35%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS++ 1.35%*
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING PREFERRED STOCK DIVIDENDS TO AVERAGE
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 5.42%*
RATIO OF PREFERRED STOCK DIVIDENDS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS .37%*
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING PREFERRED STOCK DIVIDENDS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS 5.05%*
PORTFOLIO TURNOVER RATE 1%
ASSET COVERAGE PER SHARE OF PREFERRED STOCK, END OF PERIOD@ $ 75,257
</Table>
See Notes to Financial Highlights
17
<Page>
NOTES TO FINANCIAL HIGHLIGHTS Realty Income Fund Inc.
+ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during the fiscal
period. Total return based on per share market value assumes the purchase
of common shares at the market price on the first day and sales of common
shares at the market price on the last day of the period indicated.
Dividends and distributions, if any, are assumed to be reinvested at prices
obtained under the Fund's dividend reinvestment plan. Results represent
past performance and do not guarantee future results. Total return would
have been lower if Management had not waived a portion of the investment
management fee.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
++ After waiver of a portion of the investment management fee. Had Management
not undertaken such action the annualized ratio of net expenses to average
daily net assets applicable to common shareholders would have been:
<Table>
<Caption>
PERIOD ENDED
OCTOBER 31,
2003(1)
1.68%
</Table>
(1) Period from April 29, 2003 to October 31, 2003.
^ The date investment operations commenced.
* Annualized.
** Not annualized.
@ Calculated by subtracting the Fund's total liabilities (excluding
accumulated unpaid dividends on Preferred Shares) from the Fund's total
assets and dividing by the number of Preferred Shares outstanding.
++ Expense ratios do not include the effect of dividend payments to preferred
shareholders. Income ratios include income earned on assets attributable to
Preferred Shares. Each ratio of expenses to average net assets applicable
to common shareholders and each ratio of net investment income (loss) to
average net assets applicable to common shareholders includes the effect of
the net interest expense paid on interest rate swap contracts of 0.36%.
18
<Page>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Neuberger Berman Realty Income Fund Inc.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Neuberger Berman Realty Income Fund Inc., (the
"Fund") as of October 31, 2003, and the related statement of operations,
statement of changes in net assets and financial highlights for the period from
April 29, 2003 (commencement of operations) to October 31, 2003. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the 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
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of October 31, 2003, by correspondence with
the custodian and brokers or other appropriate auditing procedures where replies
from brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides 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
Neuberger Berman Realty Income Fund Inc., at October 31, 2003, the results of
its operations, changes in its net assets, and its financial highlights for the
period from April 29, 2003 (commencement of operations) to October 31, 2003, in
conformity with accounting principles generally accepted in the United States.
Ernst & young LLP
Boston, Massachusetts
December 5, 2003
19
<Page>
DIVIDEND REINVESTMENT PLAN (Unaudited)
The Bank of New York ("Plan Agent") will act as Plan Agent for shareholders who
have not elected in writing to receive dividends and distributions in cash (each
a "Participant"), will open an account for each Participant under the Dividend
Reinvestment Plan ("Plan") in the same name as their then current Shares are
registered, and will put the Plan into effect for each Participant as of the
first record date for a dividend or capital gains distribution.
Whenever the Fund declares a dividend or distribution with respect to the common
stock of the Fund ("Shares"), each Participant will receive such dividends and
distributions in additional Shares, including fractional Shares acquired by the
Plan Agent and credited to each Participant's account. If on the payment date
for a cash dividend or distribution, the net asset value is equal to or less
than the market price per Share plus estimated brokerage commissions, the Plan
Agent shall automatically receive such Shares, including fractions, for each
Participant's account. Except in the circumstances described in the next
paragraph, the number of additional Shares to be credited to each Participant's
account shall be determined by dividing the dollar amount of the dividend or
distribution payable on their Shares by the greater of the net asset value per
Share determined as of the date of purchase or 95% of the then current market
price per Share on the payment date.
Should the net asset value per Share exceed the market price per Share plus
estimated brokerage commissions on the payment date for a cash dividend or
distribution, the Plan Agent or a broker-dealer selected by the Plan Agent shall
endeavor, for a purchase period lasting until the last business day before the
next date on which the Shares trade on an "ex-dividend" basis, but in no event,
except as provided below, more than 30 days after the dividend payment date, to
apply the amount of such dividend or distribution on each Participant's Shares
(less their PRO RATA share of brokerage commissions incurred with respect to the
Plan Agent's open-market purchases in connection with the reinvestment of such
dividend or distribution) to purchase Shares on the open market for each
Participant's account. No such purchases may be made more than 30 days after the
payment date for such dividend except where temporary curtailment or suspension
of purchase is necessary to comply with applicable provisions of federal
securities laws. If, at the close of business on any day during the purchase
period the net asset value per Share equals or is less than the market price per
Share plus estimated brokerage commissions, the Plan Agent will not make any
further open-market purchases in connection with the reinvestment of such
dividend or distribution. If the Plan Agent is unable to invest the full
dividend or distribution amount through open-market purchases during the
purchase period, the Plan Agent shall request that, with respect to the
uninvested portion of such dividend or distribution amount, the Fund issue new
Shares at the close of business on the earlier of the last day of the purchase
period or the first day during the purchase period on which the net asset value
per Share equals or is less than the market price per Share, plus estimated
brokerage commissions, such Shares to be issued in accordance with the terms
specified in the third paragraph hereof. These newly issued Shares will be
valued at the then-current market price per Share at the time such Shares are to
be issued.
For purposes of making the dividend reinvestment purchase comparison under the
Plan, (a) the market price of the Shares on a particular date shall be the last
sales price on the New York Stock Exchange (or if the Shares are not listed on
the New York Stock Exchange, such other exchange on which the Shares are
principally traded) on that date, or, if there is no sale on such Exchange (or
if not so listed, in the over-the-counter market) on that date, then the mean
between the closing bid and asked quotations for such Shares on such Exchange on
such date and (b) the net asset value per Share on a particular date shall be
the net asset value per Share most recently calculated by or on behalf of the
Fund. All dividends, distributions and other payments (whether made in cash or
Shares) shall be made net of any applicable withholding tax.
Open-market purchases provided for above may be made on any securities exchange
where the Fund's Shares are traded, in the over-the-counter market or in
negotiated transactions and may be on such terms as to price, delivery and
otherwise as the Plan Agent shall determine. Each Participant's uninvested funds
held by the Plan Agent will not bear interest, and it is understood that, in any
event, the Plan Agent shall have no liability in connection with any inability
to purchase Shares within 30 days after the initial date of such purchase as
herein provided, or with the timing of any purchases effected. The Plan Agent
shall have no responsibility as to the value of the Shares acquired for each
Participant's account. For the purpose of cash investments, the Plan Agent may
commingle each Participant's funds with those of other shareholders of the Fund
for whom the Plan Agent similarly acts as agent, and the average price
(including brokerage commissions) of all Shares purchased by the Plan Agent as
Plan Agent shall be the price per Share allocable to each Participant in
connection therewith.
20
<Page>
The Plan Agent may hold each Participant's Shares acquired pursuant to the Plan
together with the Shares of other shareholders of the Fund acquired pursuant to
the Plan in noncertificated form in the Plan Agent's name or that of the Plan
Agent's nominee. The Plan Agent will forward to each Participant any proxy
solicitation material and will vote any Shares so held for each Participant only
in accordance with the instructions set forth on proxies returned by the
participant to the Fund.
The Plan Agent will confirm to each Participant each acquisition made for their
account as soon as practicable but not later than 60 days after the date
thereof. Although each Participant may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share, no
certificates for a fractional Share will be issued. However, dividends and
distributions on fractional Shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Plan Agent will adjust for any such undivided fractional interest in cash at
the market value of the Shares at the time of termination, less the PRO RATA
expense of any sale required to make such an adjustment.
Any Share dividends or split Shares distributed by the Fund on Shares held by
the Plan Agent for Participants will be credited to their accounts. In the event
that the Fund makes available to its shareholders rights to purchase additional
Shares or other securities, the Shares held for each Participant under the Plan
will be added to other Shares held by the Participant in calculating the number
of rights to be issued to each Participant.
The Plan Agent's service fee for handling capital gains distributions or income
dividends will be paid by the Fund. Participants will be charged their PRO RATA
share of brokerage commissions on all open-market purchases.
Each Participant may terminate their account under the Plan by notifying the
Plan Agent in writing. Such termination will be effective immediately if the
Participant's notice is received by the Plan Agent not less than ten days prior
to any dividend or distribution record date, otherwise such termination will be
effective the first trading day after the payment date for such dividend or
distribution with respect to any subsequent dividend or distribution. The Plan
may be terminated by the Plan Agent or the Fund upon notice in writing mailed to
each Participant at least 30 days prior to any record date for the payment of
any dividend or distribution by the Fund.
These terms and conditions may be amended or supplemented by the Plan Agent or
the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 30 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by each
Participant unless, prior to the effective date thereof, the Plan Agent receives
written notice of the termination of their account under the Plan. Any such
amendment may include an appointment by the Plan Agent in its place and stead of
a successor Plan Agent under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Plan Agent
under these terms and conditions. Upon any such appointment of any Plan Agent
for the purpose of receiving dividends and distributions, the Fund will be
authorized to pay to such successor Plan Agent, for each Participant's account,
all dividends and distributions payable on Shares held in their name or under
the Plan for retention or application by such successor Plan Agent as provided
in these terms and conditions.
The Plan Agent shall at all times act in good faith and agrees to use its best
efforts within reasonable limits to ensure the accuracy of all services
performed under this Agreement and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by the Plan Agent's negligence, bad faith, or willful
misconduct or that of its employees.
These terms and conditions shall be governed by the laws of the State of
Maryland.
21
<Page>
DIRECTORY
INVESTMENT MANAGER AND ADMINISTRATOR
Neuberger Berman Management Inc.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
877.461.1899 or 212.476.8800
SUB-ADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158-3698
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
STOCK TRANSFER AGENT
Bank of New York
101 Barclay Street, 11-E
New York, NY 10286
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
2nd Floor
Washington, DC 20036-1800
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
22
<Page>
DIRECTORS AND OFFICERS (Unaudited)
The following tables set forth information concerning the directors and officers
of the Funds. All persons named as directors and officers also serve in similar
capacities for other funds administered or managed by NB Management and
Neuberger Berman, LLC. The Statement of Additional Information for each Fund
includes additional information about fund directors and is available upon
request, without charge, by calling (877) 461-1899.
THE BOARD OF DIRECTORS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS I
INDEPENDENT FUND DIRECTORS*
Faith Colish (68) Counsel, Carter Ledyard & Milburn LLP 37 Director, American Bar
Director (law firm) since October 2002; Formerly, Retirement Association (ABRA)
Attorney at Law and President, Faith since 1997 (not-for-profit
Colish, A Professional Corporation, 1980 to membership association).
2002.
C. Anne Harvey (66) Consultant, C. A. Harvey Associates, since 37 Member, Individual Investors
Director June 2001; Director, AARP, 1978 to December Advisory Committee to the
2000. New York Stock Exchange
Board of Directors, 1998
to June 2002; President,
Board of Associates to
The National
Rehabilitation Hospital's
Board of Directors, since
2002; Member, American
Savings Education
Council's Policy Board
(ASEC), 1998-2000;
Member, Executive
Committee, Crime
Prevention Coalition of
America, 1997-2000.
Cornelius T. Ryan (71) Founding General Partner, Oxford Partners 37 Director, Capital Cash
Director and Oxford Bioscience Partners (venture Management Trust (money market
capital partnerships) and President, Oxford fund), Naragansett
Venture Corporation. Insured Tax-Free Income
Fund, Rocky Mountain
Equity Fund, Prime Cash
Fund, several private
companies and QuadraMed
Corporation (NASDAQ).
Peter P. Trapp (58) Regional Manager for Atlanta Region, Ford 37
Director Motor Credit Company since August 1997;
prior thereto, President, Ford Life
Insurance Company, April 1995 until August
1997.
</Table>
23
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- -----------------------------------------------------------------------------------------------------------------------------------
DIRECTOR WHO IS AN "INTERESTED PERSON"
Peter E. Sundman* (44) Executive Vice President, Neuberger Berman 37 Executive Vice President,
Chief Executive Officer, since 1999; Principal, Neuberger Berman Neuberger Berman Inc. (holding
Director and Chairman from 1997 until 1999; Senior Vice company) since 1999 and
of the Board President, NB Management from 1996 until Director from October 1999
1999. through March 2003; President
and Director, NB Management
since 1999; Head of Neuberger
Berman Inc.'s Mutual Funds and
Institutional Business since
1999; Director and Vice
President, Neuberger & Berman
Agency, Inc. since 2000.
CLASS II
INDEPENDENT FUND DIRECTORS*
John Cannon (73) Consultant. Formerly, Chairman and Chief 37 Independent Trustee or
Director Investment Officer, CDC Capital Management Director of three series of
(registered investment adviser), Oppenheimer Funds: Limited
1993-January 1999; prior thereto, President Term New York Municipal Fund,
and Chief Executive Officer, AMA Investment Rochester Fund Municipals, and
Advisors, an affiliate of the American Oppenheimer Convertible
Medical Association. Securities Fund, since 1992.
Barry Hirsch (70) Attorney at Law. Senior Counsel, Loews 37
Director Corporation (diversified financial
corporation) May 2002 until April 2003;
prior thereto, Senior Vice President,
Secretary and General Counsel, Loews
Corporation.
John P. Rosenthal (70) Senior Vice President of Burnham Securities 37 Director, 92nd Street Y
Director Inc. (a registered broker-dealer) since (non-profit) since 1967;
1991. Formerly, Director, Cancer
Treatment Holdings, Inc.
</Table>
24
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- -----------------------------------------------------------------------------------------------------------------------------------
Tom Decker Seip (53) General Partner, Seip Investments LP 37 Director, H&R Block, Inc.
Director (a private investment partnership); (financial services company)
President and CEO, Westaff, Inc. since May 2001; Director,
(temporary staffing), May 2001 to General Magic (voice
January 2002; Senior Executive at the recognition software) since
Charles Schwab Corporation from 1983 November 2001; Director,
to 1999, including Chief Executive Forward Management, Inc.
Officer, Charles Schwab Investment (asset management), since
Management, Inc. and Trustee, Schwab 2001; Director, E-Finance
Family of Funds and Schwab Investments Corporation (credit
from 1997 to 1998 and Executive Vice decisioning services) since
President-Retail Brokerage, Charles 1999; Director, Save-Daily.com
Schwab Investment Management from 1994 (micro investing services)
to 1997. since 1999; Formerly,
Director, Offroad Capital Inc.
(pre-public internet commerce
company).
DIRECTOR WHO IS AN "INTERESTED PERSON"
Jack L. Rivkin* (63) Executive Vice President and Chief 37 Director, Dale Carnegie and
President and Director Investment Officer, Neuberger Berman Associates, Inc. (private
since 2002 and 2003, respectively; company) since 1998; Director,
Director and Chairman, NB Management Emagin Corp. (public company)
since December 2002; Executive Vice since 1997; Director,
President, Citigroup Investments, Inc. Solbright, Inc. (private
from September 1995 to February 2002; company) since 1998; Director,
Executive Vice President, Citigroup Infogate, Inc. (private
Inc. from September 1995 to February company) since 1997.
2002.
CLASS III
INDEPENDENT FUND DIRECTORS*
Walter G. Ehlers (70) Consultant; Retired President and 37
Director Director, Teachers Insurance & Annuity
(TIAA) and College Retirement Equities
Fund (CREF).
Robert A. Kavesh (76) Marcus Nadler Professor of Finance and 37 Director, DEL Laboratories,
Director Economics Emeritus, New York Inc. (cosmetics and
University Stern School of Business. pharmaceuticals) since 1978;
The Caring Community
(not-for-profit).
Howard A. Mileaf (66) Retired. Formerly, Vice President and 37 Director, WHX Corporation
Director Special Counsel, WHX Corporation (holding company) since August
(holding company) 1993-2001. 2002; Director, Webfinancial
Corporation (holding company)
since December 2002; Director,
State Theatre of New Jersey
(not-for-profit theater) since
2000; Formerly, Director,
Kevlin Corporation
(manufacturer of microwave and
other products).
</Table>
25
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
NAME, AGE, ADDRESS (1) OVERSEEN BY OTHER DIRECTORSHIPS HELD OUTSIDE
AND POSITION WITH FUND PRINCIPAL OCCUPATION(S) (2) DIRECTOR FUND COMPLEX BY DIRECTOR
- -----------------------------------------------------------------------------------------------------------------------------------
William E. Rulon (71) Retired. Senior Vice President, Foodmaker, 37 Director, Pro-Kids Golf and
Director Inc. (operator and franchiser of Learning Academy (teach golf
restaurants) until January 1997. and computer usage to "at
risk" children) since 1998;
Director, Prandium, Inc.
(restaurants) from March 2001
until July 2002.
Candace L. Straight (56) Private investor and consultant 37 Director, Providence
Director specializing in the insurance industry; Washington (property and
Advisory Director, Securitas Capital LLC (a casualty insurance company)
global private equity investment firm since December 1998; Director,
dedicated to making investments in the Summit Global Partners
insurance sector). (insurance brokerage firm)
since October 2000.
DIRECTOR WHO IS AN "INTERESTED PERSON"
Edward I. O'Brien* (75) Member, Investment Policy Committee, Edward 37 Director, Legg Mason, Inc.
Director Jones, 1993-2001; President, Securities (financial services holding
Industry Association ("SIA") (securities company) since 1993; Director,
industry's representative in government Boston Financial Group (real
relations and regulatory matters at the estate and tax shelters)
federal and state levels) 1974-1992; 1993-1999.
Adviser to SIA, November 1992-November
1993.
</Table>
* Indicates a director who is an "interested person" within the meaning of
the 1940 Act. Mr. Sundman and Mr. Rivkin are interested persons of the Fund
by virtue of the fact that each is an officer and/or director of NB
Management and Executive Vice President of Neuberger Berman. Mr. O'Brien is
an interested person of the Fund by virtue of the fact that he is a
director of Legg Mason, Inc., a wholly owned subsidiary of which, from time
to time, serves as a broker or dealer to the Fund and other funds or
accounts for which NB Management serves as investment manager.
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Except as otherwise indicated, each person has held the positions shown for
at least the last five years. The Board of Directors shall at all times be
divided as equally as possible into three classes of Directors designated
Class I, Class II, and Class III. The terms of office of Class I, Class II,
and Class III Directors shall expire at the annual meetings of stockholders
held in 2006, 2004, and 2005 respectively, and at each third annual meeting
of stockholders thereafter.
26
<Page>
INFORMATION ABOUT THE OFFICERS OF THE FUND (OTHER THAN THOSE LISTED ABOVE)
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S)
- ------------------------------------------------------------------------------------------------------------------------------------
Claudia A. Brandon (47) Secretary since 2002 Vice President-Mutual Fund Board Relations, NB Management since
2000; Vice President, Neuberger Berman since 2002 and employee since
1999; Vice President, NB Management from 1986 to 1999; Secretary,
ten registered investment companies for which NB Management acts as
investment manager and administrator (four since 2002 and three
since 2003).
Robert Conti (47) Vice President since 2002 Senior Vice President, Neuberger Berman since 2003; Vice President,
Neuberger Berman from 1999 until 2003; Senior Vice President, NB
Management since 2000; Controller, NB Management until 1996;
Treasurer, NB Management from 1996 until 1999; Vice President, ten
registered investment companies for which NB Management acts as
investment manager and administrator (three since 2000, four since
2002 and three since 2003).
Brian P. Gaffney (50) Vice President since 2002 Managing Director, Neuberger Berman since 1999; Senior Vice
President, NB Management since 2000; Vice President, NB Management
from 1997 until 1999; Vice President, ten registered investment
companies for which NB Management acts as investment manager and
administrator (three since 2000, four since 2002 and three since
2003).
Sheila R. James (38) Assistant Secretary since 2002 Employee, Neuberger Berman since 1999; Employee, NB Management from
1991 to 1999; Assistant Secretary, ten registered investment
companies for which NB Management acts as investment manager and
administrator (seven since 2002 and three since 2003).
Kevin Lyons (48) Assistant Secretary since 2003 Employee, Neuberger Berman since 1999; Employee, NB Management from
1993 to 1999; Assistant Secretary, ten registered investment
companies for which NB Management acts as investment manager and
administrator (since 2003).
</Table>
27
<Page>
<Table>
<Caption>
POSITION AND
NAME, AGE, AND ADDRESS (1) LENGTH OF TIME SERVED (2) PRINCIPAL OCCUPATION(S)
- ------------------------------------------------------------------------------------------------------------------------------------
John M. McGovern (33) Assistant Treasurer since 2002 Employee, NB Management since 1993; Assistant Treasurer, ten
registered investment companies for which NB Management acts as
investment manager and administrator (seven since 2002 and three
since 2003).
Barbara Muinos (44) Treasurer and Principal Financial Vice President, Neuberger Berman since 1999; Assistant Vice
and Accounting Officer since 2002 President, NB Management from 1993 to 1999; Treasurer and Principal
Financial and Accounting Officer, ten registered investment
companies for which NB Management acts as investment manager and
administrator (seven since 2002 and three since 2003); Assistant
Treasurer, three registered investment companies for which NB
Management acts as investment manager and administrator from 1996
until 2002.
Frederic B. Soule (57) Vice President since 2002 Senior Vice President, Neuberger Berman since 2003; Vice President,
Neuberger Berman from 1999 until 2003; Vice President, NB Management
from 1995 until 1999; Vice President, ten registered investment
companies for which NB Management acts as investment manager and
administrator (three since 2000, four since 2002 and three since
2003).
Trani Jo Wyman (34) Assistant Treasurer since 2002 Employee, NB Management since 1991; Assistant Treasurer, ten
registered investment companies for which NB Management acts as
investment manager and administrator (seven since 2002 and three
since 2003).
</Table>
- ----------------
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
28
<Page>
REPORT OF VOTES OF SHAREHOLDERS (Unaudited)
A special meeting of shareholders of Neuberger Berman Realty Income Fund Inc.
(the "Fund") was held on September 23, 2003. Upon completion of the acquisition
of Neuberger Berman Inc. by Lehman Brothers Holdings Inc. (the "Transaction"),
the management agreement between the Fund and NB Management, and the
sub-advisory agreement between NB Management and Neuberger Berman LLC
automatically terminated. To provide for continuity of management, the
shareholders of the Fund voted on the following matters, which became effective
upon completion of the Transaction on October 31, 2003:
PROPOSAL 1--TO APPROVE A NEW MANAGEMENT AGREEMENT BETWEEN THE FUND AND NB
MANAGEMENT
<Table>
<Caption>
VOTES FOR VOTES AGAINST ABSTENTIONS*
23,010,912.000 216,815.000 265,330.000
</Table>
PROPOSAL 2--TO APPROVE A NEW SUB-ADVISORY AGREEMENT BETWEEN NB MANAGEMENT AND
NEUBERGER BERMAN LLC
<Table>
<Caption>
VOTES FOR VOTES AGAINST ABSTENTIONS*
22,998,502.000 224,413.000 270,142.000
</Table>
* Abstentions were counted as shares that were present and entitled to vote
for purposes of determining a quorum and had a negative effect on the
proposals.
29
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Statistics and projections in this report are derived from sources deemed to be
reliable but cannot be regarded as a representation of future results of the
Fund. This report is prepared for the general information of shareholders and is
not an offer of shares of the Fund.
[NEUBERGER BERMAN A LEHMAN BROTHERS COMPANY LOGO]
NEUBERGER BERMAN MANAGEMENT INC.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
INTERNAL SALES & SERVICES
877.461.1899
www.nb.com
[RECYCLED SYMBOL]
DO499 12/03
THE FOLLOWING INFORMATION WILL BE INCLUDED WITH THE REGISTRANT'S PROXY STATEMENT
TO SHAREHOLDERS DATED JANUARY 12, 2004:
The following information supplements the Annual Report to Shareholders for the
fiscal period ended October 31, 2003:
A DESCRIPTION OF THE POLICIES AND PROCEDURES THAT THE FUND USES TO DETERMINE HOW
TO VOTE PROXIES RELATING TO PORTFOLIO SECURITIES IS AVAILABLE (1) WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 877-461-1899; OR (2) ON THE WEBSITE
OF THE U.S. SECURITIES AND EXCHANGE COMMISSION AT WWW.SEC.GOV.
ITEM 2. CODE OF ETHICS
At a meeting on September 10, 2003, the Board of Directors ("Board") of
Neuberger Berman Realty Income Fund Inc. ("Registrant") adopted a code of ethics
that applies to the Registrant's principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions ("Code of Ethics"). A copy of the Code of Ethics is
filed as Exhibit 10(a)(1) to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that the Registrant has two audit committee financial
experts serving on its audit committee. The Registrant's audit committee
financial experts are John Cannon and Walter G. Ehlers. Mr. Cannon and Mr.
Ehlers are both independent directors as defined by Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Form N-CSR disclosure requirement not yet effective with respect to the
Registrant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
The Board has established an Audit Committee to oversee particular aspects of
the Registrant's management. The Audit Committee's purposes are (a) to oversee
the accounting and financial reporting processes of the Registrant and their
internal controls and, as the Committee deems appropriate, to inquire into the
internal controls of certain service providers; (b) to oversee the quality and
objectivity of the Registrant's financial statements and the independent audit
thereof; (c) to oversee, or, as appropriate, assist Board oversight of, the
Registrant's compliance with legal and regulatory requirements that relate to
the Portfolios' accounting and financial reporting, internal controls and
independent audits; (d) to approve prior to appointment the engagement of the
Registrant's independent auditors and, in connection therewith, to review and
evaluate the qualifications, independence and performance of the Registrant's
independent auditors; and (e) to act as a liaison between the Registrant's
independent auditors and the full Board. The Audit Committee is composed
entirely of Independent Fund Directors; its members are John Cannon, Walter G.
Ehlers, Cornelius T. Ryan (Chairman), Tom D. Seip (appointed 12/10/03), and
Peter P. Trapp.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Board has delegated to Neuberger Berman, LLC ("Neuberger Berman") the
responsibility to vote proxies related to the securities held in the Fund's
portfolios. Under this authority, Neuberger Berman is required by the Board to
vote proxies related to portfolio securities in the best interests of the Fund
and its stockholders. The Board permits Neuberger Berman to contract with a
third party to obtain proxy voting and related services, including research of
current issues.
Neuberger Berman has implemented written Proxy Voting Policies and Procedures
("Proxy Voting Policy") that are designed to reasonably ensure that Neuberger
Berman votes proxies prudently and in the best interest of its advisory clients
for whom Neuberger Berman has voting authority, including the Fund. The Proxy
Voting Policy also describes how Neuberger Berman addresses any conflicts that
may arise between its interests and those of its clients with respect to proxy
voting.
Neuberger Berman's Proxy Committee is responsible for developing, authorizing,
implementing and updating the Proxy Voting Policy, overseeing the proxy voting
process and engaging and overseeing any independent third-party vendors as
voting delegate to review, monitor and/or vote proxies. In order to apply the
Proxy Voting Policy noted above in a timely and consistent manner, Neuberger
Berman utilizes Institutional Shareholder Services Inc. ("ISS") to vote proxies
in accordance with Neuberger Berman's voting guidelines.
Neuberger Berman's guidelines adopt the voting recommendations of ISS. Neuberger
Berman retains final authority and fiduciary responsibility for proxy voting.
Neuberger Berman believes that this process is reasonably designed to address
material conflicts of interest that may arise between Neuberger Berman and a
client as to how proxies are voted.
In the event that an investment professional at Neuberger Berman believes that
it is in the best interests of a client or clients to vote proxies in a manner
inconsistent with Neuberger Berman's proxy voting guidelines or in a manner
inconsistent with ISS recommendations, the Proxy Committee will review
information submitted by the investment professional to determine that there is
no material conflict of interest between Neuberger Berman and the client with
respect to the voting of the proxy in that manner.
If the Proxy Committee determines that the voting of a proxy as recommended by
the investment professional presents a material conflict of interest between
Neuberger Berman and the client or clients with respect to the voting of the
proxy, the Proxy Committee shall: (i) take no further action, in which case ISS
shall vote such proxy in accordance with the proxy voting guidelines or as ISS
recommends; (ii) disclose such conflict to the client or clients and obtain
written direction from the client as to how to vote the proxy; (iii) suggest
that the client or clients engage another party to determine how to vote the
proxy; or (iv) engage another independent third party to determine how to vote
the proxy.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES
(a) Based on an evaluation of the disclosure controls and procedures (as
defined in rule 30a-2(c) under the Act) as of a date within 90 days of
the filing date of this document, the Chief Executive Officer and
Treasurer and Principal Financial and Accounting Officer of the
Registrant have concluded that such disclosure controls and procedures
are effectively designed to ensure that information required to be
disclosed by the Registrant is accumulated and communicated to the
Registrant's management to allow timely decisions regarding required
disclosure.
(b) There were no significant changes in the Registrant's internal controls
over financial reporting (as defined in rule 30a-3(d) under the Act) that
occurred during the Registrant's second fiscal half-year that have
materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 10. EXHIBITS
(a) A copy of the Code of Ethics is filed as Exhibit 10(a)(1).
(b) The certifications required by Rule 30a-2 of the Investment Company Act
of 1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act
of 2002 are attached hereto.
The certifications provided pursuant to Section 906 of the Sarbanes-Oxley Act
are not deemed "filed" for purposes of Section 18 of the Securities Exchange Act
of 1934 ("Exchange Act"), or otherwise subject to the liability of that section.
Such certifications will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Exchange Act, except to the
extent that the Registrant specifically incorporates them by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Neuberger Berman Realty Income Fund Inc.
By: /s/ Peter E. Sundman
----------------------
Peter E. Sundman
Chief Executive Officer
Date: December 31, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Peter E. Sundman
------------------------------
Peter E. Sundman
Chief Executive Officer
Date: December 31, 2003
By: /s/ Barbara Muinos
------------------------------
Barbara Muinos
Treasurer and Principal Financial
and Accounting Officer
Date: January 8, 2004