As filed with the Securities and Exchange Commission on July 10, 2006
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: 811-21200
NEUBERGER BERMAN REAL ESTATE 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 Real Estate Income Fund Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur C. Delibert, Esq.
Kirkpatrick & Lockhart Nicholson Graham LLP
1601 K Street, N.W.
Washington, DC 20006-1600
(Names and addresses of agents for service)
Date of fiscal year end: October 31, 2006
Date of reporting period: April 30, 2006
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, 100 F Street, NE,
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 SHAREHOLDERS
Semi-Annual Report
April 30, 2006
NEUBERGER | BERMAN
A LEHMAN BROTHERS COMPANY
Neuberger | Berman
REAL ESTATE INCOME FUND INC.
<Page>
NEUBERGER BERMAN APRIL 30, 2006 (UNAUDITED)
CHAIRMAN'S LETTER
Dear Shareholder,
I am pleased to present to you this semi-annual report for Neuberger Berman Real
Estate Income Fund Inc. for the six months ended April 30, 2006. The report
includes portfolio commentary, a listing of the Fund's investments, and its
unaudited financial statements for the reporting period.
The Fund seeks to provide high current income with capital appreciation as a
secondary objective. To pursue both, we have assembled a portfolio with a broad
mix of equity securities of real estate investment trusts 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 real estate company securities that are
attractively priced relative to both their historical growth rates and the
valuation of other property sectors. We believe our conservative investment
philosophy and disciplined investment process will benefit you with superior
returns over the long term.
The Fund continues to defend against the hostile tender offer commenced in
September 2004 by two trusts advised by Stewart Horejsi. As further described in
Note F to the Financial Statements, the Fund and the Horejsi Trusts have filed
with the court, and the court has heard oral argument on, motions for summary
judgment seeking to have the remaining claims in their litigation adjudicated
promptly. The Fund's board of directors continues to monitor the effect of the
Fund's defensive measures on shareholders. The board of directors and Neuberger
Berman continue to take steps to reduce or offset the cost of such measures.
Thank you for your confidence in Neuberger Berman. We will continue to do our
best to earn it.
Sincerely,
/s/ Peter Sundman
- ---------------------
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN REAL ESTATE
INCOME FUND INC.
"Neuberger Berman" and the Neuberger Berman logo are service marks of Neuberger
Berman, LLC. "Neuberger Berman Management Inc." and the individual fund name in
this shareholder report are either service marks or registered service marks of
Neuberger Berman Management Inc. (C)2006 Neuberger Berman Management Inc. All
rights reserved.
CONTENTS
<Table>
THE FUND
CHAIRMAN'S LETTER 1
PORTFOLIO COMMENTARY 2
SCHEDULE OF INVESTMENTS/TOP TEN EQUITY HOLDINGS 6
FINANCIAL STATEMENTS 9
FINANCIAL HIGHLIGHTS/ PER SHARE DATA 22
DISTRIBUTION REINVESTMENT PLAN 24
DIRECTORY 26
PROXY VOTING POLICIES AND PROCEDURES 27
QUARTERLY PORTFOLIO SCHEDULE 27
ADDITION OF ASSOCIATE PORTFOLIO MANAGER 27
</Table>
1
<Page>
REAL ESTATE INCOME FUND INC. Portfolio Commentary
For the six months ended April 30, 2006, on a Net Asset Value (NAV) basis,
Neuberger Berman Real Estate Income Fund Inc. (NYSE: NRL) provided an 15.65%
return, compared to a gain of 14.90% for the FTSE NAREIT Equity REITs Index. The
Fund outperformed despite its holdings of real estate investment trust (REIT)
preferred stocks, which did not perform as well as REIT common stocks. During
the period, REITs generally benefited from ongoing investor interest in this
segment of the market and healthy operating results, which we expect to continue
over the coming quarters.
During the six-month reporting period, the commercial real estate market was
robust, as occupancies and rents improved due to a healthy economy and stronger
demand than supply in most regions of the country. Despite ongoing rate hikes by
the Federal Reserve, the long-term interest rate environment was relatively
benign, while REIT earnings were strong in both the fourth quarter of (calendar)
2005 and the first quarter of 2006. A variety of property sectors showed
strength, particularly Office properties, Shopping Centers, Apartments and
Hotels.
Gains in the Apartment sector reflected a slowdown in the housing market, as
higher interest rates and slower housing price appreciation lessened the
attractiveness of buying homes and encouraged renters to stay longer. With a
slower supply of new apartments, we anticipate improving occupancy and economics
for apartment REITs.
REITs that own office buildings were bolstered by growing evidence of
improvement in the office market, particularly over the last three months of the
period, as occupancy and expectations for rising rents improved. In addition,
community shopping centers and hotels performed well. With fundamentals
particularly strong in the Lodging/Resorts sector, a number of hotel REITs have
been acquired by private buyers, reflecting optimism for continued improvement.
On the downside, Regional Malls lagged over the six-month period, as investors
showed concern that a slowdown in housing price appreciation and the rise in
interest rates would have a negative impact on consumers. Despite the ongoing
strength of consumer spending, we think this remains a worrisome issue. The
Health Care sector also exhibited weakness, due to concerns over new government
reimbursement rates for Medicare and Medicaid and the potential impact of higher
interest rates on their ability to finance acquisitions.
In this environment, the Fund provided strong absolute returns, outperforming
the benchmark despite a roughly 16% weighting in REIT preferred stocks, which
advanced but not as much as REITs generally. We purchased the REIT preferred
stocks for their income yields rather than potential for price appreciation and
are optimistic about their future contribution to the overall strategy. The
balance of our portfolio outperformed the benchmark, although our overweight in
Health Care detracted from performance, as did our stock selection in Regional
Malls. Shopping Center and Office holdings were positives relative to the
benchmark.
Looking forward, we believe that REITs are unlikely to maintain the exceptional
performance they have shown over the past six months. Still, our outlook remains
positive for a number of reasons. First, the supply growth of commercial real
estate has been modest, due to the increased costs of raw materials,
construction and financing, and is likely to remain that way for the next 12-18
months. We anticipate that this dynamic, combined with modest economic growth,
bodes well for REIT earnings and price performance moving into the second half
of the fiscal year.
In addition, we expect to see solid dividend growth from REITs, as well as a
continuation of the merger and acquisition activity that has taken place over
the past 12 months. Although current yields are lower than usual, we believe
that they will grow over time through dividend increases reflecting the ongoing
strength of the commercial real estate market.
Sincerely,
/s/ Steven R. Brown
- -------------------------
STEVEN R. BROWN
PORTFOLIO MANAGER
2
<Page>
NEUBERGER BERMAN APRIL 30, 2006 (UNAUDITED)
PERFORMANCE HIGHLIGHTS
<Table>
<Caption>
SIX MONTH AVERAGE ANNUAL
PERIOD ENDED TOTAL RETURN
INCEPTION DATE 4/30/2006 1 YEAR SINCE INCEPTION
NAV(1,3) 11/25/2002 15.65% 30.76% 30.57%
</Table>
PERFORMANCE HIGHLIGHTS
<Table>
<Caption>
SIX MONTH AVERAGE ANNUAL
PERIOD ENDED TOTAL RETURN
INCEPTION DATE 4/30/2006 1 YEAR SINCE INCEPTION
MARKET PRICE(2,3) 11/25/2002 16.11% 30.77% 23.82%
</Table>
INDUSTRY DIVERSIFICATION
(% OF TOTAL NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS)
<Table>
Apartments 19.2%
Commercial Services 6.5
Community Centers 8.9
Diversified 24.9
Health Care 18.3
Industrial 4.1
Lodging 7.1
Office 23.0
Office-Industrial 7.0
Regional Malls 14.7
Self Storage 1.0
Short-Term Investments 5.1
Liabilities, less cash, receivables and other assets (39.8)
</Table>
Closed-end funds, unlike open-end funds, are not continually offered. There is
an initial public offering and once issued common shares of closed-end funds are
sold in the open market through a stock exchange.
The composition, industries and holdings of the Fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
3
<Page>
ENDNOTES
1. Returns based on Net Asset Value (NAV) of the Fund.
2. Returns based on market price of Fund shares on the New York Stock
Exchange.
3. Neuberger Berman Management Inc. has contractually agreed to waive a
portion of the management fees that it is entitled to receive from the
Fund. The undertaking lasts until October 31, 2011. Beginning September 22,
2004, Neuberger Berman Management Inc. voluntarily agreed to waive all
management and administration fees from the Fund indefinitely. This
voluntary waiver may be terminated without prior notice. Please see the
notes to the financial statements for specific information regarding the
rate of the fees waived by Neuberger Berman Management Inc. Absent such
waivers, the performance of the Fund would be lower.
4. Unaudited performance data current to the most recent month-end are
available at www.nb.com.
4
<Page>
GLOSSARY OF INDICES
FTSE NAREIT Equity REITs Index: The FTSE NAREIT Equity REITs 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 or
any tax consequences of investing in the individual securities that it tracks
and that investors cannot invest directly in any index. Data about the
performance of the index is prepared or obtained by Neuberger Berman Management
Inc. and includes reinvestment of all dividends and capital gain distributions.
The Fund may invest in securities not included in its index.
5
<Page>
SCHEDULE OF INVESTMENTS Real Estate Income Fund Inc.
TOP TEN EQUITY HOLDINGS
<Table>
<Caption>
HOLDING %
1 Ventas, Inc. 8.7
2 Vornado Realty Trust 6.6
3 Tanger Factory Outlet Centers 6.0
4 Glimcher Realty Trust 5.5
5 Kilroy Realty 5.5
6 Colonial Properties Trust 5.1
7 Crescent Real Estate Equities 4.9
8 iStar Financial 4.8
9 Mills Corp. 4.8
10 Reckson Associates Realty 3.9
</Table>
<Table>
<Caption>
MARKET VALUE+
NUMBER OF SHARES (000'S OMITTED)
COMMON STOCKS (112.8%)
APARTMENTS (17.9%)
57,500 Apartment Investment & Management $ 2,570
73,000 Archstone-Smith Trust 3,568
18,900 Avalonbay Communities 2,035
61,700 Camden Property Trust 4,241
46,000 Education Realty Trust 686
38,800 Home Properties 1,941
61,200 Mid-America Apartment Communities 3,244
72,800 United Dominion Realty Trust 1,979
--------
20,264
COMMERCIAL SERVICES (6.0%)
77,500 Capital Trust 2,411
36,000 Deerfield Triarc Capital 480
158,400 Gramercy Capital 3,933
--------
6,824
COMMUNITY CENTERS (7.5%)
26,600 Cedar Shopping Centers 392
30,900 Heritage Property Investment Trust 1,193
27,000 New Plan Excel Realty Trust 666
191,400 Tanger Factory Outlet Centers 6,274
--------
8,525
DIVERSIFIED (23.5%)
114,900 Colonial Properties Trust 5,658
202,200 Crescent Real Estate Equities 4,044
143,200 iStar Financial 5,479
123,300 Newkirk Realty Trust 2,203
149,800 Spirit Finance 1,738
78,000 Vornado Realty Trust 7,460
--------
26,582
HEALTH CARE (16.1%)
106,300 Health Care Property Investors 2,915
84,700 Health Care REIT 2,948(E)
61,800 Nationwide Health Properties 1,330
95,700 OMEGA Healthcare Investors 1,224
301,200 Ventas, Inc. 9,840
--------
18,257
INDUSTRIAL (4.1%)
42,800 EastGroup Properties 1,912
69,000 First Industrial Realty Trust 2,707
--------
4,619
LODGING (1.2%)
32,000 Hospitality Properties Trust $ 1,379
OFFICE (23.0%)
114,990 Brandywine Realty Trust 3,255
92,000 Equity Office Properties Trust 2,972
77,400 Glenborough Realty Trust 1,622
69,800 Highwoods Properties 2,202
34,800 HRPT Properties Trust 382
86,700 Kilroy Realty 6,183
89,900 Mack-Cali Realty 4,065
30,400 Maguire Properties 1,032
107,600 Reckson Associates Realty 4,377
--------
26,090
OFFICE--INDUSTRIAL (4.3%)
18,800 Bedford Property Investors 507
25,700 Duke Realty 910
76,300 Liberty Property Trust 3,410
--------
4,827
REGIONAL MALLS (8.2%)
30,000 CBL & Associates Properties 1,200
195,600 Glimcher Realty Trust 5,046
67,400 Mills Corp. 2,151
21,100 Pennsylvania REIT 856
--------
9,253
SELF STORAGE (1.0%)
23,100 Sovran Self Storage 1,135
TOTAL COMMON STOCKS
(COST $79,082) 127,755
--------
PREFERRED STOCKS (21.9%)
APARTMENTS (1.3%)
31,800 Apartment Investment & Management, Ser. R 811
27,000 Apartment Investment & Management, Ser. T 679
--------
1,490
COMMERCIAL SERVICES (0.5%)
20,000 Newcastle Investment, Ser. B 524
COMMUNITY CENTERS (1.4%)
10,000 Developers Diversified Realty, Ser. I 252
13,100 Ramco-Gershenson Properties Trust, Ser. B 335
17,000 Saul Centers, Ser. A 449
21,000 Tanger Factory Outlet Centers, Ser. C 512
--------
1,548
</Table>
6
<Page>
NEUBERGER BERMAN APRIL 30, 2006 (UNAUDITED)
SCHEDLE OF INVESTMENTS Real Estate Income Fund Inc. cont'd
<Table>
<Caption>
MARKET VALUE+
NUMBER OF SHARES (000'S OMITTED)
DIVERSIFIED (1.4%)
5,800 Colonial Properties Trust, Ser. E $ 147
45,200 Crescent Real Estate Equities, Ser. A 962
19,500 Crescent Real Estate Equities, Ser. B 495(OO)
--------
1,604
HEALTH CARE (2.2%)
56,000 LTC Properties, Ser. E 2,457
LODGING (5.9%)
66,300 Boykin Lodging, Ser. A 1,698
23,300 Eagle Hospitality Properties Trust, Ser. A 574
18,000 Equity Inns, Ser. B 463
20,400 Felcor Lodging Trust, Ser. A 502
14,600 Hersha Hospitality Trust, Ser. A 364
34,000 LaSalle Hotel Properties, Ser. A 871
13,000 LaSalle Hotel Properties, Ser. D 311
21,000 LaSalle Hotel Properties, Ser. E 525
20,000 Strategic Hotel & Resorts, Ser. B 497
37,200 Strategic Hotels & Resorts, Ser. C 931*
--------
6,736
OFFICE--INDUSTRIAL (2.7%)
50,000 Bedford Property Investors, Ser. A 2,431(n)
15,000 Digital Realty Trust, Ser. A 380
10,900 Digital Realty Trust, Ser. B 267
--------
3,078
REGIONAL MALLS (6.5%)
32,000 Glimcher Realty Trust, Ser. F 813
13,500 Glimcher Realty Trust, Ser. G 338
100,000 Mills Corp., Ser. B 2,400
11,400 Mills Corp., Ser. C 272
25,000 Mills Corp., Ser. G 584(E)
50,200 Pennsylvania REIT, Ser. A 2,779
7,200 Taubman Centers, Ser. G 184
--------
7,370
TOTAL PREFERRED STOCKS
(COST $23,695) 24,807
--------
SHORT-TERM INVESTMENTS (5.1%)
3,557,821 Neuberger Berman Securities Lending Quality Fund,
LLC $3,558++
2,221,712 Neuberger Berman Prime Money Fund 2,222@
--------
TOTAL SHORT-TERM INVESTMENTS
(COST $5,780) 5,780#
--------
TOTAL INVESTMENTS (139.8%)
(COST $108,557) 158,342##
Liabilities, less cash, receivables
and other assets [(2.7%)] (3,075)
Liquidation Value of Auction
Preferred Shares (37.1%) (42,000)
--------
TOTAL NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS (100.0%) $113,267
--------
</Table>
See Notes to Schedule of Investments
7
<Page>
NOTES TO SCHEDULE OF INVESTMENTS
+ Investments in equity securities by Neuberger Berman Real Estate Income
Fund Inc. (the "Fund") are valued at the latest sale 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. 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, including securities for which the necessary
last sale, asked and/or bid prices are not readily available, by methods
the Board of Directors of the Fund (the "Board") has approved on the belief
that they reflect fair value. Numerous factors may be considered when
determining the fair value of a security, including available analyst,
media or other reports, trading in futures or ADRs and whether the issuer
of the security being fair valued has other securities outstanding. Foreign
security prices are furnished by independent quotation services and
expressed in local currency values. Foreign security prices are translated
from the local currency into U.S. dollars using the exchange rate as of
12:00 noon, Eastern time. The Board has approved the use of FT Interactive
Data Corporation ("FT Interactive") to assist in determining the fair value
of the Fund's foreign equity securities when changes in the value of a
certain index suggest that the closing prices on the foreign exchanges may
no longer represent the amount that the Fund could expect to receive for
those securities. In this event, FT Interactive will provide adjusted
prices for certain foreign equity securities using a statistical analysis
of historical correlations of multiple factors. In the absence of precise
information about the market values of these foreign securities as of the
close of the New York Stock Exchange, the Board has determined on the basis
of available data that prices adjusted in this way are likely to be closer
to the prices the Fund could realize on a current sale than are the prices
of those securities established at the close of the foreign markets in
which the securities primarily trade. However, fair value prices are
necessarily estimates, and there is no assurance that such a price will be
at or close to the price at which the security next trades. Short-term debt
securities with less than 60 days until maturity may be valued at cost
which, when combined with interest earned, approximates market value.
# At cost, which approximates market value.
## At April 30, 2006, the cost of investments for U.S. federal income tax
purposes was $108,557,000. Gross unrealized appreciation of investments was
$50,359,000 and gross unrealized depreciation of investments was $574,000,
resulting in net unrealized appreciation of $49,785,000, based on cost for
U.S. federal income tax purposes.
* Non-income producing security.
(n) Restricted security subject to restrictions on resale under federal
securities laws. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers under Rule 144A
and have been deemed by the investment manager to be liquid. At April 30,
2006, these securities amounted to $2,431,000 or 2.1% of net assets
applicable to common shareholders.
(oo) All or a portion of this security is segregated as collateral for interest
rate swap contracts.
@ Neuberger Berman Prime Money Fund ("Prime Money") is also managed by
Neuberger Berman Management Inc. (see Notes A & E of Notes to Financial
Statements) and may be considered an affiliate since it has the same
officers, Board members, and investment manager as the Fund and because, at
times, the Fund may own 5% or more of the outstanding voting securities of
Prime Money.
(E) All or a portion of this security is on loan (see Note A of Notes to
Financial Statements).
++ Managed by an affiliate of Neuberger Berman Management Inc. and could be
deemed an affiliate of the Fund (see Notes A & E of Notes to Financial
Statements).
See Notes to Financial Statements
8
<Page>
STATEMENT OF ASSETS AND LIABILITIES
<Table>
<Caption>
NEUBERGER BERMAN REAL ESTATE
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) INCOME FUND
ASSETS
INVESTMENTS IN SECURITIES,AT MARKET VALUE*+ (NOTES A & E)--SEE SCHEDULE
OF INVESTMENTS:
- -----------------------------------------------------------------------------------------
Unaffiliated issuers $152,562
- -----------------------------------------------------------------------------------------
Affiliated issuers 5,780
=========================================================================================
158,342
Dividends and interest receivable 494
Receivable for insurance reimbursement (Note F) 1,050
- -----------------------------------------------------------------------------------------
Interest rate swaps,at market value (Note A) 1,024
Receivable from investment manager--net (Notes A & B) 32
- -----------------------------------------------------------------------------------------
Receivable for securities lending income (Note A) 4
Prepaid expenses and other assets 24
=========================================================================================
TOTAL ASSETS 160,970
=========================================================================================
LIABILITIES
Payable for collateral on securities loaned (Note A) 3,558
Distributions payable--preferred shares 22
- -----------------------------------------------------------------------------------------
Distributions payable--common shares 58
Payable for securities purchased 1,337
- -----------------------------------------------------------------------------------------
Payable to administrator (Note B) 32
Accrued tender offer and related fees (Note F) 607
- -----------------------------------------------------------------------------------------
Payable for securities lending fees (Note A) 1
Accrued expenses and other payables 88
=========================================================================================
TOTAL LIABILITIES 5,703
=========================================================================================
AUCTION PREFERRED SHARES SERIES A AT LIQUIDATION VALUE
2,000 shares authorized; 1,680 shares issued and outstanding
$.0001 par value; $25,000 liquidation value per share (Note A) 42,000
=========================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $113,267
=========================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Paid-in capital--common shares $ 55,280
Distributions in excess of net investment income (3,734)
- -----------------------------------------------------------------------------------------
Accumulated net realized gains (losses) on investments 10,934
Net unrealized appreciation (depreciation) in value of investments 50,787
=========================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $113,267
=========================================================================================
COMMON SHARES OUTSTANDING ($.0001 PAR VALUE; 999,998,000 SHARES AUTHORIZED) 4,157
=========================================================================================
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 27.25
=========================================================================================
+SECURITIES ON LOAN,AT MARKET VALUE $ 3,480
=========================================================================================
*COST OF INVESTMENTS:
Unaffiliated issuers $102,777
Affiliated issuers 5,780
=========================================================================================
TOTAL COST OF INVESTMENTS $108,557
=========================================================================================
</Table>
See Notes to Financial Statements
9
<Page>
STATEMENT OF OPERATIONS
<Table>
<Caption>
NEUBERGER BERMAN REAL ESTATE
(000'S OMITTED) INCOME FUND
INVESTMENT INCOME
INCOME (NOTE A):
Dividend income--unaffiliated issuers $ 2,640
Income from securities loaned (affiliated issuers $18) (Note E) 19
- --------------------------------------------------------------------------------
Income from investments in affiliated issuers (Note E) 27
================================================================================
Total income 2,686
================================================================================
EXPENSES:
Investment management fee (Notes A & B) 452
Administration fee (Note B) 188
- --------------------------------------------------------------------------------
Tender offer and related fees (Note F) 1,439
Auction agent fees (Note B) 53
- --------------------------------------------------------------------------------
Audit fees 20
Basic maintenance expense (Note B) 12
- --------------------------------------------------------------------------------
Custodian fees (Note B) 41
Insurance expense 4
- --------------------------------------------------------------------------------
Legal fees 27
Shareholder reports 32
- --------------------------------------------------------------------------------
Stock exchange listing fees 13
Stock transfer agent fees 19
- --------------------------------------------------------------------------------
Miscellaneous 7
================================================================================
Total expenses 2,307
Investment management and administration fees waived (Notes A & B) (640)
Expenses reduced by custodian fee expense offset and
commission recapture arrangements (Note B) (3)
================================================================================
Net expenses prior to reimbursement of insurance proceeds 1,664
================================================================================
Reimbursement from insurance proceeds (Note F) (903)
================================================================================
Net expenses 761
================================================================================
Net investment income (loss) 1,925
================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE A)
Net realized gain (loss) on:
Sales of investment securities of unaffiliated issuers 10,849
-----------------------------------------------------------------------------
Interest rate swap contracts 85
-----------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) in value of:
Unaffiliated investment securities 3,061
-----------------------------------------------------------------------------
Interest rate swap contracts 210
=============================================================================
Net gain (loss) on investments 14,205
================================================================================
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM:
Net investment income (894)
=============================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS RESULTING FROM OPERATIONS $ 15,236
================================================================================
</Table>
See Notes to Financial Statements
10
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
REAL ESTATE INCOME FUND
-------------------------
NEUBERGER BERMAN Six Months Year
Ended Ended
April 30, October 31,
2006 2005
(000'S OMITTED) (Unaudited)
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $ 1,925 $ 1,509
Net realized gain (loss) on investments 10,934 6,995
- --------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) of investments 3,271 7,239
==================================================================================================
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM (NOTE A):
Net investment income (894) (317)
Net realized gain on investments -- (920)
- --------------------------------------------------------------------------------------------------
Tax return of capital -- (5)
==================================================================================================
Total distributions to preferred shareholders (894) (1,242)
==================================================================================================
Net increase (decrease) in net assets applicable to common
shareholders resulting from operations 15,236 14,501
==================================================================================================
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM (NOTE A):
Net investment income (4,690) (1,884)
Net realized gain on investments -- (5,459)
- --------------------------------------------------------------------------------------------------
Tax return of capital -- (32)
==================================================================================================
Total distributions to common shareholders (4,690) (7,375)
==================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 10,546 7,126
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 102,721 95,595
==================================================================================================
End of period $113,267 $102,721
==================================================================================================
Distributions in excess of net investment income at end of period $ (3,734) $ (75)
==================================================================================================
</Table>
See Notes to Financial Statements
11
<Page>
NOTES TO FINANCIAL STATEMENTS Real Estate Income Fund Inc.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Real Estate Income Fund Inc. (the "Fund") was
organized as a Maryland corporation on September 11, 2002 as a
non-diversified, closed-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Board of
Directors of the Fund (the "Board") 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 U.S. generally
accepted accounting principles 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, if any, is recorded on
the accrual basis. Realized gains and losses from securities transactions
and foreign currency transactions, if any, are recorded on the basis of
identified cost and stated separately in the Statement of Operations.
4 INCOME TAX INFORMATION: It is the policy of the Fund to continue to qualify
as a regulated investment company by complying with the requirements of
Subchapter M of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its earnings to
its shareholders. Therefore, no federal income or excise tax provision is
required.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations, which may differ from U.S.
generally accepted accounting principles. These differences are primarily
due to differing treatments of income and gains on various investment
securities held by the Fund, timing differences and differing
characterization of distributions made by the Fund as a whole.
As determined on October 31, 2005, permanent differences resulting
primarily from different book and tax accounting for distributions in
excess of earnings and income recognized on interest rate swaps were
reclassified at fiscal year end. These reclassifications had no effect on
net income, net assets applicable to common shareholders or net asset value
per common share of the Fund.
The tax character of distributions paid during the years ended October 31,
2005 and October 31, 2004 was as follows:
DISTRIBUTIONS PAID FROM:
<Table>
<Caption>
ORDINARY INCOME LONG -TERM CAPITAL GAIN TAX RETURN OF CAPITAL TOTAL
2005 2004 2005 2004 2005 2004 2005 2004
$2,200,849 $4,029,483 $6,379,404 $2,795,848 $37,144 $77,542 $8,617,397 $6,902,873
</Table>
12
<Page>
As of October 31, 2005, the components of distributable earnings
(accumulated losses) on a U.S. federal income tax basis were as follows:
<Table>
<Caption>
UNDISTRIBUTED UNREALIZED LOSS
UNDISTRIBUTED LONG-TERM APPRECIATION CARRYFORWARDS
ORDINARY INCOME GAIN (DEPRECIATION) AND DEFERRALS TOTAL
$-- $-- $47,511,675 $-- $47,511,675
</Table>
The difference between book and tax basis distributable earnings is
attributable primarily to timing differences of distribution payments and
income recognized on interest rate swaps.
5 DISTRIBUTIONS TO SHAREHOLDERS: The Fund earns income, net of expenses,
daily on its investments. It is the policy of the Fund to declare quarterly
and pay monthly distributions to common shareholders. The Fund has adopted
a policy to pay common shareholders a stable monthly distribution. The
Fund's ability to satisfy its policy will depend on a number of factors,
including the stability of income received from its investments, the
availability of capital gains, distributions paid on preferred shares and
the level of expenses. In an effort to maintain a stable distribution
amount, the Fund may pay distributions consisting of net investment income,
realized gains and paid-in capital. There is no assurance that the Fund
will always be able to pay distributions of a particular size, or that
distributions will consist solely of net investment income and realized
capital gains. The composition of the Fund's distributions for the calendar
year 2006 will be reported to Fund shareholders on IRS Form 1099DIV. The
Fund may pay distributions in excess of those required by its stable
distribution policy to avoid excise tax or to satisfy the requirements of
Subchapter M of the Internal Revenue Code. Distributions to common
shareholders are recorded on the ex-date. Net realized capital gains, if
any, will be offset to the extent of any available capital loss
carryforwards. Any such offset will not reduce the level of the stable
distribution paid by the Fund. Distributions to preferred shareholders are
accrued and determined as described in Note A-7.
The Fund invests a significant portion of its assets in securities issued
by real estate companies, including real estate investment trusts
("REITs"). The distributions received from REITs held by the Fund are
generally comprised of income, capital gains, and return of REIT capital,
but the REITs do not report this information to the Fund until the
following calendar year. At October 31, 2005, the Fund estimated these
amounts within the financial statements since the information is not
available from the REITs until after the Fund's fiscal year-end. At April
30, 2006, the Fund estimated these amounts for the period January 1, 2006
through April 30, 2006 within the financial statements since the 2006
information is not available from the REITs until after the Fund's fiscal
period. For the year ended October 31, 2005, the character of distributions
paid to shareholders is disclosed within the Statement of Changes and is
also based on these estimates. All estimates are based upon REIT
information sources available to the Fund together with actual IRS Forms
1099DIV received to date. Based on past experience it is probable that a
portion of the Fund's distributions during the current fiscal year will be
considered tax return of capital but the actual amount of tax return of
capital, if any, is not determinable until after the Fund's fiscal year
end. After calendar year-end, when the Fund learns the nature of the
distributions paid by REITs during that year, distributions previously
identified as income are often recharacterized as return of capital and/or
capital gain. After all applicable REITs have informed the Fund of the
actual breakdown of distributions
13
<Page>
paid to the Fund during its fiscal year, estimates previously recorded are
adjusted to reflect actual results. As a result, the composition of the
Fund's distributions as reported herein may differ from the final
composition determined after calendar year-end and reported to Fund
shareholders on IRS Form 1099DIV.
On March 30, 2006, the Fund declared two monthly distributions to common
shareholders in the amount of $0.115 per share per month, payable after the
close of the reporting period, on May 31, 2006 and June 30, 2006, to
shareholders of record on May 15, 2006 and June 15, 2006, respectively,
with ex-dates of May 11, 2006 and June 13, 2006, respectively.
6 EXPENSE ALLOCATION: Certain expenses are applicable to multiple funds.
Expenses directly attributable to the Fund are charged to the Fund.
Expenses borne by the complex of related investment companies, which
includes open-end and closed-end investment companies for which Management
serves as investment manager, that are not directly attributed to the Fund
are allocated among the Fund and the other investment companies in the
complex or series thereof on the basis of relative net assets, except where
a more appropriate allocation of expenses to each investment company in the
complex or series thereof can otherwise be made fairly.
7 REDEEMABLE PREFERRED SHARES: On December 12, 2002, the Fund re-classified
1,500 unissued shares of capital stock as Series A Auction Preferred Shares
("Preferred Shares"). On February 7, 2003, the Fund issued 1,260 Preferred
Shares. On September 10, 2003, the Fund re-classified an additional 500
unissued shares of capital stock as Preferred Shares. On October 24, 2003,
the Fund issued an additional 420 Preferred Shares. All Preferred Shares
have a liquidation preference of $25,000 per share plus any accumulated
unpaid distributions, 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, distributions to
preferred shareholders, which are cumulative, are accrued daily and paid
every 7 days. Distribution rates are reset every 7 days based on the
results of an auction, except during special rate periods. For the six
months ended April 30, 2006, distribution rates ranged from 3.61% to 4.75%.
The Fund declared distributions to preferred shareholders for the period
May 1, 2006 to May 31, 2006 of $168,350.
The Fund may redeem Preferred Shares, in whole or in part, on the second
business day preceding any distribution 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 will vote with holders of common shares as a
single class, except that the Preferred Shares will vote separately as a
class on certain matters, as required by law or the Fund's charter. The
holders of the Preferred Shares, voting as a separate class, are entitled
at all times to elect two Directors of the Fund, and to elect a majority of
the Directors of the Fund if the Fund fails to pay distributions on
Preferred Shares for two consecutive years.
14
<Page>
8 INTEREST RATE SWAPS: The Fund may enter into interest rate swap
transactions, with institutions that Management 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. Under
the terms of the interest rate swap contracts, 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 fixed-rate and variable-rate payment flows are netted
against each other, with the difference being paid by one party to the
other on a monthly basis. The Fund segregates 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.
Periodic expected interim net interest payments or receipts on the swaps
are recorded as an adjustment to unrealized gains/losses, along with the
fair value of the future periodic payment streams on the swaps. The
unrealized gains/losses associated with the periodic interim net interest
payments are reclassified to realized gains/losses in conjunction with the
actual net receipt or payment of such amounts. The reclassifications do not
impact the Fund's total net assets applicable to common shareholders. At
April 30, 2006, the Fund had outstanding interest rate swap contracts as
follows:
<Table>
<Caption>
RATE TYPE
--------------------------
FIXED-RATE VARIABLE-RATE ACCRUED
SWAP PAYMENTS PAYMENTS NET INTEREST UNREALIZED
COUNTER NOTIONAL TERMINATION MADE BY RECEIVED BY RECEIVABLE APPRECIATION TOTAL
PARTY AMOUNT DATE THE FUND THE FUND(1) (PAYABLE) (DEPRECIATION) FAIR VALUE
Citibank, N.A. $13,000,000 February 12, 2008 3.396% 4.860% $ 10,045 $ 407,535 $ 417,580
Citibank, N.A. 13,000,000 February 12, 2010 3.923% 4.860% 6,429 599,887 606,316
---------- ---------- ----------
$ 16,474 $1,007,422 $1,023,896
</Table>
(1) 30 day LIBOR (London Interbank Offered Rate)
9 REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
institutions that Management has determined are creditworthy. Each
repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase agreement be transferred to the
custodian in a manner sufficient to enable the Fund to assert a perfected
security interest in those securities in the event of a default under the
repurchase agreement. The Fund monitors, on a daily basis, the value of the
securities transferred to ensure that their value, including accrued
interest, is greater than amounts owed to the Fund under each such
repurchase agreement.
10 SECURITY LENDING: Effective October 4, 2005, the Fund entered into
securities lending arrangements using a third party, eSecLending, to secure
bids. Pursuant to such arrangements, eSecLending currently acts as lending
agent for the Fund and assisted the Fund in conducting a bidding process to
identify principals that would guarantee a certain amount of revenue to the
Fund.
15
<Page>
Under the securities lending arrangements, the Fund receives cash
collateral at the beginning of each transaction equal to at least 102% of
the prior day's market value of the loaned securities (105% in the case of
international securities). The Fund invests the cash collateral in the
Neuberger Berman Securities Lending Quality Fund, LLC ("Quality Fund"), a
fund managed by Lehman Brothers Asset Management LLC, an affiliate of
Management, as approved by the Board.
Income from the lending program represents income earned on the cash
collateral and, where necessary, payment under the guarantee for the Fund,
less fees and expenses associated with the loans. These amounts are
reflected in the Statement of Operations under the caption "Income from
securities loaned."
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 a money market fund managed by
Management or an affiliate. The Fund invests in the Neuberger Berman Prime
Money Fund ("Prime Money"), as approved by the Board. Prime Money seeks to
provide the highest available current income consistent with safety and
liquidity. For any cash that the Fund invests in Prime Money, Management
waives a portion of its management fee equal to the management fee it
receives from Prime Money on those assets (the "Arrangement"). For the six
months ended April 30, 2006, management fees waived under this Arrangement
amounted to $527 and are reflected in the Statement of Operations under the
caption "Investment management and administration fees waived." For the six
months ended April 30, 2006, income earned under this Arrangement amounted
to $27,471 and is reflected in the Statement of Operations under the
caption "Income from investments in affiliated issuers."
12 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. The
value of the Fund's shares may fluctuate more due to economic, legal,
cultural, geopolitical or technological developments affecting the United
States real estate industry, or a segment of the United States real estate
industry in which the Fund owns a substantial position, than would the
shares of a fund not concentrated in the real estate industry.
13 INDEMNIFICATIONS: Like many other companies, the Fund's organizational
documents provide that its officers and directors are indemnified against
certain liabilities arising out of the performance of their duties to the
Fund. The Fund has also entered into Indemnification Agreements with its
officers and directors to indemnify them against certain liabilities
arising out of the performance of their duties to the Fund. In addition,
both in some of its principal service contracts and in the normal course of
its business, the Fund enters into contracts that provide indemnifications
to other parties for certain types of losses or liabilities. The Fund's
maximum exposure under these arrangements is unknown as this could involve
future claims against the Fund.
16
<Page>
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>
YEAR ENDED % OF AVERAGE
OCTOBER 31, DAILY MANAGED ASSETS
----------- --------------------
2006 - 2007 0.40
2008 0.32
2009 0.24
2010 0.16
2011 0.08
</Table>
Management has not contractually agreed to waive any portion of its fees
beyond October 31, 2011.
The Fund retains Management as its administrator under an Administration
Agreement. The Fund pays Management an administration fee at the annual
rate of 0.25% of its average daily Managed Assets under this agreement.
Additionally, Management retains State Street Bank and Trust Company
("State Street") as its sub-administrator under a Sub-Administration
Agreement. Management pays State Street a fee for all services received
under the agreement.
In connection with the unsolicited tender offer described in Note F below,
Management has voluntarily agreed to waive all fees under the Management
and Administration Agreements described above for an indefinite period;
Management may terminate this voluntary waiver at any time without prior
notice.
For the six months ended April 30, 2006, such waived fees amounted to
$639,722.
Management and Neuberger Berman, LLC ("Neuberger"), a member firm of the
New York Stock Exchange and sub-adviser to the Fund, are wholly-owned
subsidiaries of Lehman Brothers Holdings Inc. ("Lehman"), a publicly-owned
holding company. 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.
The Fund has entered into a commission recapture program, which enables it
to pay some of its operational expenses by recouping a portion of the
commissions it pays to a broker that is not a related party of the Fund.
Expenses paid through this program may include costs of custodial, transfer
agency or accounting services. For the six months ended April 30, 2006, the
impact of this arrangement was a reduction of expenses of $2,450.
17
<Page>
The Fund has an expense offset arrangement in connection with its custodian
contract. For the six months ended April 30, 2006, the impact of this
arrangement was a reduction of expenses of $688.
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 rating agencies' requirements, the Fund is required to
provide each rating agency a report on a monthly basis verifying that the
Fund is maintaining eligible assets having a discounted value equal to or
greater than the Preferred Shares Basic Maintenance Amount, which is a
minimum level set by each rating agency as one of the conditions to
maintain the AAA/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 rates determined by the rating agencies. The Fund pays a fee to State
Street for the preparation of this report, which is reflected in the
Statement of Operations under the caption "Basic maintenance expense."
NOTE C--SECURITIES TRANSACTIONS:
During the six months ended April 30, 2006, there were purchase and sale
transactions (excluding short-term securities and interest rate swap
contracts) of $16,452,944 and $18,585,072, respectively.
During the six months ended April 30, 2006, brokerage commissions on
securities transactions amounted to $37,363, of which Lehman Brothers Inc.
received $6,137, and other brokers received $31,226.
NOTE D--CAPITAL:
At April 30, 2006, the common shares outstanding and the common shares of
the Fund owned by Neuberger were as follows:
<Table>
<Caption>
COMMON SHARES COMMON SHARES
OUTSTANDING OWNED BY NEUBERGER
4,157,117 146,516
</Table>
There were no transactions in common shares for the six months ended April
30, 2006 and for the year ended October 31, 2005.
18
<Page>
NOTE E--INVESTMENTS IN AFFILIATES*:
<Table>
<Caption>
INCOME FROM
BALANCE OF BALANCE OF INVESTMENTS
SHARES HELD GROSS GROSS SHARES HELD VALUE IN AFFILIATED
OCTOBER 31, PURCHASES SALES AND APRIL 30, APRIL 30, ISSUERS INCLUDED
NAME OF ISSUER 2005 AND ADDITIONS REDUCTIONS 2006 2006 IN TOTAL INCOME
Neuberger Berman
Securities Lending
Quality Fund, LLC** 411,200 12,127,451 8,980,830 3,557,821 $3,557,821 $17,741
Neuberger Berman
Prime Money Fund
Trust Class*** 701,525 17,500,352 15,980,165 2,221,712 2,221,712 27,471
---------- -------
TOTAL $5,779,533 $45,212
---------- -------
</Table>
* Affiliated issuers, as defined in the 1940 Act.
** The Quality Fund, a fund managed by Lehman Brothers Asset Management LLC,
an affiliate of Management, is used to invest cash the Fund receives as
collateral for securities loans as approved by the Board. Because all
shares of the Quality Fund are held by funds in the related investment
management complex, the Quality Fund may be considered an affiliate of the
Fund.
*** Prime Money is also managed by Management and may be considered an
affiliate since it has the same officers, Board members, and investment
manager as the Fund and because, at times, the Fund may own 5% or more of
the outstanding voting securities of Prime Money.
NOTE F--LITIGATION:
In September 2004, two trusts advised by Stewart R. Horejsi (the "Trusts")
commenced an unsolicited tender offer to purchase up to 50% of the Fund's issued
and outstanding common shares at a price of $19.89 net per share. In response to
this unsolicited tender offer, the Board appointed a Special Committee comprised
of independent directors of the Fund to consider the tender offer and the Fund's
response. The Special Committee determined that the offer was coercive and, if
successful, would be harmful to the Fund's shareholders. Accordingly, the
Special Committee recommended, and the Board approved, certain defensive
measures, including a self-tender offer, a rights agreement and certain other
legal actions.
On October 1, 2004, the Fund commenced a self-tender offer for up to 20% of its
outstanding common shares, at a price of $20.00 net per share, in order to
provide liquidity to those common shareholders who were determined to sell their
shares so they would not need to tender into the Trusts' hostile tender offer.
The Board recommended, however, that common shareholders not tender their shares
into either the Fund's self-tender offer or the Trusts' tender offer. In order
to partially fund the Fund's repurchase of shares, on September 23, 2004, the
Fund issued 139,535 new common shares to Neuberger in a private placement at the
Fund's then current net asset value ("NAV") of $21.50 per share, for an
aggregate investment of approximately $3,000,000. The per share price Neuberger
paid represented a premium of
19
<Page>
approximately 12% over the per share market price of the Fund's common shares at
that date. The Fund's self-tender offer expired at 12:00 midnight on October 29,
2004. Under the terms of the self-tender offer, on November 4, 2004, the Fund
accepted 561,401.374 common shares, representing approximately 11.9% of its
total outstanding common shares, at an aggregate redemption amount of
$11,228,020. Because the Fund repurchased these common shares at below NAV, the
self-tender offer had a positive impact on NAV in the amount of $1,493,328.
On September 23, 2004, the Board also adopted a rights agreement under which all
common shareholders of record as of October 7, 2004 received rights to purchase
common shares. These rights would have become exercisable 10 days following a
public announcement that a person or group of affiliated or associated persons
(collectively, an "Acquiring Person") had acquired beneficial ownership above a
certain threshold of common shares; the Acquiring Person would not have been
able to exercise all its rights. The rights expired on January 21, 2005, in
accordance with Section 18(d) of the 1940 Act, which provides that any rights or
warrants issued by a registered investment company must expire no later than 120
days after issuance. On January 18, 2005, May 13, 2005, September 11, 2005,
December 21, 2005 and April 12, 2006, the Board adopted new rights agreements
under which all shareholders of record received rights to purchase common
shares. The currently outstanding rights will expire on August 10, 2006.
In addition to the defensive actions described above, the Fund filed suit in
federal district court in Maryland against the Trusts, their trustees (Badlands
Trust Company, Larry Dunlap and Susan Ciciora), and Stewart R. Horejsi alleging
that the Trusts' tender offer materials were false and misleading and that
Stewart R. Horejsi, Larry Dunlap and Susan Ciciora are "control persons" of the
Trusts under the federal securities laws, and therefore liable for any violation
of those laws by the Trusts. The Trusts and Badlands Trust Company, as trustee,
have filed counterclaims against the Fund alleging that the Fund's defensive
measures violate federal securities laws and Maryland state law and seeking
unspecified damages for tortious interference with their prospective business.
While the court in October 2004 upheld the validity of the rights agreement
adopted on September 23, 2004, litigation continues on other aspects of the
case. On March 30, 2005, the Trusts and Badlands Trust Company, as trustee,
supplemented their counterclaims with a counterclaim that the rights agreement
adopted by the Board on January 18, 2005 violated federal securities laws. On
May 24, 2005, one of the Trusts dropped out of the tender offer, while the other
extended its offer and slightly increased the number of shares it is offering to
buy to account for the absence of the other Trust. The remaining Trust has
extended its tender offer several times, most recently to August 15, 2006; the
offering price remains $19.89 per share.
In late 2004 and early 2005, the Fund filed motions to compel defendants to
produce documents and other information that the Fund requested in discovery,
but that the defendants refused to produce. These motions were referred to a
magistrate judge by the Court. On June 24, 2005, the magistrate judge ruled on
the Fund's motions to compel and required defendants to produce documents and
other information. In the ruling, the magistrate judge stated that the
defendants' actions had delayed the Fund's discovery, unnecessarily slowed and
complicated the resolution of the case and caused the Fund to incur unnecessary
costs. The magistrate judge also stated an intention, upon application by the
Fund, and subject to defendants' right to a hearing, to require defendants and
their counsel to pay the reasonable expenses,
20
<Page>
including attorneys' fees, incurred by the Fund in connection with the filing
and litigation of the motions to compel. In accordance with the June 24, 2005
ruling, the Fund filed an application to recover expenses. The defendants
appealed the June 24, 2005 ruling and opposed the Fund's application to recover
expenses. On December 23, 2005, the magistrate judge awarded the Fund $154,655,
jointly and severally against defendants and their lead counsel. This ruling was
also appealed and on March 20, 2006, the Court affirmed both the June 24, 2005
ruling and the December 23, 2005 ruling.
In Spring 2005, the Fund filed a motion to strike the defendants' expert reports
and the defendants filed a motion to strike portions of one of the Fund's expert
reports. On March 17, 2006, the Court ruled that it would not strike any of the
expert reports but that it would give each expert report appropriate weight. In
November 2005, the Fund filed a motion for summary judgment with the Court. In
December 2005, defendants opposed the Fund's motion for summary judgment and
filed their own motion for summary judgment. The briefing of both summary
judgment motions was completed in January 2006 and the Court heard oral argument
regarding these motions on April 28, 2006. Both motions are still pending.
In October 2004, the Fund and its Directors were named in a lawsuit filed by
Full Value Partners, L.P. ("Full Value") that repeated certain factual
allegations made by the Trusts and Badlands Trust Company, as trustee, and
alleged that a) certain of the Fund's defensive measures violated the federal
securities laws and the Board's adoption of these measures violated the Board's
fiduciary duties and b) the Board's failure to take certain other defensive
actions also violated its fiduciary duties. The Court dismissed Full Value's
claims and gave Full Value until May 6, 2005 to amend its complaint. On May 6,
2005, Full Value amended its complaint, adding a claim that the rights agreement
adopted on January 18, 2005 violated the federal securities laws.
The Fund and the Board believe that the defensive actions taken were lawful and
proper, and they are defending the respective cases vigorously. Several of the
issues in each case are matters of first impression. Accordingly, it is unclear
how the Court may rule.
For the period ended April 30, 2006, the tender offer and related fees recorded
in the Statement of Operations were $1,439,022. In an effort to offset these
costs, Management has agreed voluntarily to waive all fees under the Management
and Administration Agreements described in Note B for an indefinite period;
Management may terminate this voluntary waiver at any time without prior notice.
In addition, in April 2005, the Fund's directors agreed to forego their
directors' fees for an indefinite period. Neither is subject to recoupment. The
Fund is also negotiating certain expense reductions with other service
providers. The Fund also has filed a claim under its insurance policy for
reimbursement of certain litigation expenses. As of April 30, 2006, the Fund has
received $3,118,351 in insurance proceeds. Although there is no assurance as to
whether or to what extent the insurance carrier will continue to pay on this
claim, the Fund is hopeful that insurance proceeds may continue to offset a
portion of its defensive litigation expenses. In addition, as mentioned above,
the Court awarded the Fund $154,655 on its fee application.
NOTE G--UNAUDITED FINANCIAL INFORMATION:
The financial information included in this interim report is taken from the
records of the Fund without audit by an independent registered public accounting
firm. Annual reports contain audited financial statements.
21
<Page>
FINANCIAL HIGHLIGHTS Real Estate Income Fund Inc.
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.
<Table>
<Caption>
PERIOD FROM
SIX MONTHS ENDED NOVEMBER 29,2002^
APRIL 30, YEAR ENDED OCTOBER 31, TO OCTOBER 31,
---------------- ---------------------- -----------------
2006 2005 2004 2003
(UNAUDITED)
COMMON SHARE NET ASSET VALUE,BEGINNING OF PERIOD $ 24.71 $ 23.00 $ 18.40 $ 14.33
------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS:
NET INVESTMENT INCOME (LOSS)(cc) .46 .36 .87('b') .87
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND UNREALIZED) 3.42 3.42 4.90('b') 4.60
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO PREFERRED SHAREHOLDERS
FROM:
NET INVESTMENT INCOME(cc) (.21) (.08) (.07) (.05)
NET CAPITAL GAINS(cc) -- (.22) (.05) (.00)
TAX RETURN OF CAPITAL(cc) -- (.00) (.00) (.01)
------- ------- ------- --------
TOTAL DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (.21) (.30) (.12) (.06)
------- ------- ------- --------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS 3.67 3.48 5.65 5.41
------- ------- ------- --------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
NET INVESTMENT INCOME (1.13) (.45) (.76) (.84)
NET CAPITAL GAINS -- (1.31) (.61) (.15)
TAX RETURN OF CAPITAL -- (.01) (.01) (.16)
------- ------- ------- --------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (1.13) (1.77) (1.38) (1.15)
------- ------- ------- --------
LESS CAPITAL CHARGES FROM:
ISSUANCE OF COMMON SHARES -- -- (.00) (.03)
ISSUANCE OF PREFERRED SHARES -- -- (.00) (.16)
------- ------- ------- --------
TOTAL CAPITAL CHARGES -- -- (.00) (.19)
------- ------- ------- --------
ANTI-DILUTIVE EFFECT OF ACQUIRING TREASURY SHARES -- -- .33 --
------- ------- ------- --------
COMMON SHARE NET ASSET VALUE,END OF PERIOD $ 27.25 $ 24.71 $ 23.00 $ 18.40
------- ------- ------- --------
COMMON SHARE MARKET VALUE,END OF PERIOD $ 23.65 $ 21.36 $ 20.01 $ 17.29
------- ------- ------- --------
TOTAL RETURN,COMMON SHARE NET ASSET VALUE+ +15.65%** +18.68% +34.44% +38.13%**
TOTAL RETURN,COMMON SHARE MARKET VALUE+ +16.11%** +16.17% +24.54% +23.96%**
RATIOS/SUPPLEMENTAL DATA++
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS,END OF PERIOD (IN $ 113.3 $ 102.7 $ 95.6 $ 84.3
MILLIONS)
PREFERRED SHARES,AT LIQUIDATION VALUE ($25,000 PER SHARE
LIQUIDATION PREFERENCE) (IN MILLIONS) $ 42.0 $ 42.0 $ 42.0 $ 42.0
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS# 1.41%* 3.02% 1.85%('b') 1.82%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS++ 1.40%* 3.01% 1.85%('b') 1.82%*
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING PREFERRED
SHARE DISTRIBUTIONS
TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 3.53%* 1.52% 4.23%('b') 6.00%*
RATIO OF PREFERRED SHARE DISTRIBUTIONS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS 1.64%* 1.25% .61% .44%*
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING PREFERRED
SHARE DISTRIBUTIONS
TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 1.89%* .27% 3.62%('b') 5.56%*
PORTFOLIO TURNOVER RATE 11%** 8% 5% 14%**
ASSET COVERAGE PER PREFERRED SHARE,END OF PERIOD@ $92,434 $86,156 $81,907 $ 75,165
</Table>
See Notes to Financial Highlights
22
<Page>
NOTES TO FINANCIAL HIGHLIGHTS Real Estate Income Fund Inc.
+ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during each
fiscal period. Total return based on per share market value assumes the
purchase of common shares at the market price on the first day and sales of
common shares at the market price on the last day of the period indicated.
Dividends and distributions, if any, are assumed to be reinvested at prices
obtained under the Fund's distribution reinvestment plan. Results represent
past performance and do not guarantee future results. Current returns may
be lower or higher than the performance data quoted. Investment returns may
fluctuate and shares when sold may be worth more or less than original
cost. Total return would have been lower if Management had not waived a
portion of the investment management and administration fees.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
++ After waiver of, depending on the period, all or a portion of the
management and/or administration fees by Management. Had Management not
undertaken such actions, the annualized ratios of net expenses to average
daily net assets applicable to common shareholders would have been:
<Table>
<Caption>
Six Months Ended Year Ended October 31,
April 30,
2006 2005 2004 2003(1)
2.58% 4.22% 2.50% 2.36%
</Table>
(1) Period from November 29, 2002 to October 31, 2003.
^ The date investment operations commenced.
* Annualized.
** Not annualized.
@ Calculated by subtracting the Fund's total liabilities (excluding
accumulated unpaid distributions 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 distributions to preferred
shareholders. Income ratios include income earned on assets attributable to
Preferred Shares.
('b') Prior to November 1, 2003, the Fund recorded the accrual of the net
interest income or expense expected to be received or paid at interim
settlement dates as a net payable or receivable for swap contracts and
actual amounts paid as net interest income or expense on swap contracts. As
a result of SEC staff guidance relating to the application of FASB
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, to registered investment companies, effective November 1, 2003,
periodic expected interim net interest payments or receipts on the swaps
are recorded as an adjustment to unrealized gains/losses, along with the
fair value of the future periodic payment streams on the swaps.
Accordingly, for the year ended October 31, 2004, the per share amounts and
ratios shown decreased or increased as follows:
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
2004
Net Investment Income $ .14
Net Gains or Losses in Securities (both realized and unrealized) $(.14)
Ratio of Gross Expenses to Average Net Assets Applicable to Common Shareholders (.67%)
Ratio of Net Expenses to Average Net Assets Applicable to Common Shareholders (.67%)
Ratio of Net Investment Income (Loss) Excluding Preferred Share Distributions to
Average
Net Assets Applicable to Common Shareholders .67%
Ratio of Net Investment Income (Loss) Including Preferred Share Distributions to
Average
Net Assets Applicable to Common Shareholders .67%
</Table>
(cc) Calculated based on the average number of shares outstanding during each
fiscal period.
23
<Page>
DISTRIBUTION REINVESTMENT PLAN
The Bank of New York ("Plan Agent") will act as Plan Agent for shareholders who
have not elected in writing to receive dividends and distributions in cash (each
a "Participant"), will open an account for each Participant under the
Distribution 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 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 or distribution 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 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.
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
24
<Page>
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. Upon any termination, the Plan Agent
will cause a certificate or certificates for the number of Shares held for each
Participant under the Plan to be delivered to the Participant (or if the Shares
are not then in certificated form, will cause the Shares to be transferred to
the Participant) without charge.
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.
25
<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
The Bank of New York
101 Barclay Street, 11-E
New York, NY 10286
LEGAL COUNSEL
Kirkpatrick & Lockhart Nicholson Graham LLP
1601 K Street, NW
Washington, DC 20006
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
26
<Page>
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available, without charge,
by calling 1-800-877-9700 (toll-free) and on the website of the Securities and
Exchange Commission at www.sec.gov. Information regarding how the Fund voted
proxies relating to portfolio securities during the most recent 12-month period
ended June 30 is also available without charge, by calling 1-800-877-9700
(toll-free), on the website of the Securities and Exchange Commission at
www.sec.gov and on the Fund's website at www.nb.com.
QUARTERLY PORTFOLIO SCHEDULE
The Fund files a complete schedule of portfolio holdings with the Securities and
Exchange Commission for the first and third quarters of each fiscal year on Form
N-Q. The Fund's Forms N-Q are available on the Securities and Exchange
Commission's website at www.sec.gov and may be reviewed and copied at the
Securities and Exchange Commission's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. The information on Form N-Q is available upon request,
without charge, by calling 1-800-877-9700 (toll-free).
ADDITION OF ASSOCIATE PORTFOLIO MANAGER
In January 2006, Steve S. Shigekawa was made an Associate Portfolio Manager for
the Fund. He is a Vice President of Neuberger Berman Management Inc. and of
Neuberger Berman, LLC. He was an analyst for the Fund from 2002 to 2005. He held
associate analyst positions at two other investment firms from 2000 to 2002.
27
<Page>
This page has been left blank intentionally
<Page>
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
NEUBERGER BERMAN MANAGEMENT INC.
605 Third Avenue 2nd Floor
New York, NY 10158-0180
INTERNAL SALES & SHAREHOLDER SERVICES
877.461.1899
WWW.NB.COM
[GRAPHIC] D0122 06/06
ITEM 2. CODE OF ETHICS
The Board of Directors ("Board") of Neuberger Berman Real Estate 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"). For the period covered by this Form N-CSR, there were no waivers from
the Code of Ethics granted to the Registrant's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions.
A copy of the Code of Ethics is filed as Exhibit 12(a)(1) to this Form N-CSR.
The Code of Ethics is also available, without charge, by calling 1-800-877-9700
(toll-free).
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 Howard Mileaf. Mr. Cannon and Mr. Mileaf
are independent directors as defined by Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Only required in the annual report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Only required in the annual report.
ITEM 6. SCHEDULE OF INVESTMENTS
The complete schedule of investments for the Fund is disclosed in the
Registrant's semi-annual report, which is included as Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
Only required in the annual report.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Only required in the annual report.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
No reportable purchases for the period covered by this report.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no changes to the procedures by which shareholders may recommend
nominees to the Board.
ITEM 11. CONTROLS AND PROCEDURES
(a) Based on an evaluation of the disclosure controls and procedures (as
defined in rule 30a-3(c) under the Investment Company Act of 1940, as
amended (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 in
the report it files or submits on Form N-CSR 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 quarter
of the period covered by this report that have materially affected, or
are reasonably likely to materially affect, the Registrant's internal
control over financial reporting.
ITEM 12. EXHIBITS
(a)(1) A copy of the Code of Ethics is filed herewith.
(a)(2) The certifications required by Rule 30a-2(a) of the Act and Section
302 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") are
filed herewith.
(a)(3) Not applicable.
(b) The certifications required by Rule 30a-2(b) of the Act and Section
906 of the Sarbanes-Oxley Act are filed herewith.
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 Real Estate Income Fund Inc.
By: /s/ Peter E. Sundman
-----------------------
Peter E. Sundman
Chief Executive Officer
Date: July 10, 2006
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: July 10, 2006
By: /s/ John M. McGovern
-----------------------
John M. McGovern
Treasurer and Principal Financial
and Accounting Officer
Date: July 10, 2006