As filed with the Securities and Exchange Commission on January 5, 2007
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: 811-21421
NEUBERGER BERMAN REAL ESTATE SECURITIES 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
(Address of Principal Executive Offices - Zip Code)
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 Securities Income Fund Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur C. Delibert, Esq.
Kirkpatrick & Lockhart Preston Gates Ellis LLP
1601 K Street, N.W.
Washington, D.C. 20006-1600
(Names and addresses of agents for service)
Date of fiscal year end: October 31, 2006
Date of reporting period: October 31, 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
ANNUAL REPORT
OCTOBER 31, 2006
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN
REAL ESTATE
SECURITIES INCOME
FUND INC.
NEUBERGER BERMAN OCTOBER 31, 2006
CHAIRMAN'S LETTER
Dear Shareholder,
I am pleased to present to you this annual report for Neuberger Berman Real
Estate Securities Income Fund Inc. for the fiscal year ended October 31, 2006.
The report includes portfolio commentary, a listing of the Fund's investments,
and its audited 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.
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
SECURITIES 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
CHAIRMAN'S LETTER 1
PORTFOLIO COMMENTARY 2
SCHEDULE OF INVESTMENTS/TOP TEN EQUITY HOLDINGS 6
FINANCIAL STATEMENTS 9
FINANCIAL HIGHLIGHTS/PER SHARE DATA 20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 22
DISTRIBUTION REINVESTMENT PLAN 23
DIRECTORY 25
DIRECTORS AND OFFICERS 26
PROXY VOTING POLICIES AND PROCEDURES 35
QUARTERLY PORTFOLIO SCHEDULE 35
MARYLAND ANTI-TAKEOVER STATUTES 35
NOTICE TO SHAREHOLDERS 36
BOARD CONSIDERATION OF THE MANAGEMENT AND SUB-ADVISORY AGREEMENTS 37
1
REAL ESTATE SECURITIES INCOME FUND INC. PORTFOLIO COMMENTARY
Improving commercial real estate fundamentals, increased merger and acquisition
activity, and a strong flow of funds from institutional and retail investors
translated into excellent gains for the real estate investment trust (REIT)
market in the 12 months ended October 31, 2006. REITs once again substantially
outperformed the broad equity markets, with the FTSE NAREIT Equity REITs Index
returning 36.36% versus the Dow Jones Industrial Average's 18.47%, the S&P 500's
16.33%, and the NASDAQ Composite's 11.62% respective gains. On a net asset value
(NAV) basis, Neuberger Berman Real Estate Securities Income Fund Inc. (AMEX:
NRO) slightly outperformed the FTSE NAREIT benchmark for the fiscal year.
Office, Apartment, Diversified, and Health Care sector investments had an
especially positive impact on portfolio total return. Driven by job growth,
office REIT fundamentals continue to improve, with supply/demand dynamics
showing particular strength in coastal cities including New York, Washington, DC
and Los Angeles. Office occupancy rates have already trended higher,
foreshadowing higher lease prices in 2007. High home prices and higher mortgage
rates have finally undermined the new housing market, turning more potential
buyers into renters and improving the outlook for apartment REITs. We believe
this trend will remain intact until the housing market stabilizes.
Although an underweight compared to the benchmark, the relatively weak Regional
Mall sector made only a slightly positive contribution to portfolio total
return. We believe "retail" REITs (the Shopping Center and Regional Mall
sectors) may be vulnerable if ongoing weakness in the housing market undermines
consumer confidence and still high energy prices pinch consumer cash flows.
Commercial real estate fundamentals remain healthy. Rising demand and restrained
supply growth resulting from an estimated 10% to 20% increase in development
costs have translated into higher occupancy rates, increasing rental and lease
prices, and above average REIT earnings growth in most property sectors. With
REITs currently trading at 19 times earnings versus a historical average P/E of
12.2, strong earnings growth in the year ahead is at least partially discounted
in REIT valuations. Also, REITs' 4% average yield is well below the roughly 7%
historical average. However, it is important to remember that because REITs must
distribute at least 90% of earnings to shareholders, rising earnings translate
into dividend increases.
REITs have become more fully valued relative to historic average price/earnings
ratios and yield. Relative to net asset value (NAV), they are trading at their
historical average premium of 107%. This year alone, we have seen more than a
dozen publicly traded REITs taken over (in dollar volume, in excess of $25
billion), mostly by well-funded real estate opportunity funds. On average, these
deals are being done at a 10% to 15% premium to published NAVs--an indication
that NAVs should be revised upward to more accurately reflect "real world"
economic value. We expect institutional money to continue to flow into
alternative investment pools including real estate opportunity funds.
Consequently, we expect further consolidation in the REIT market to continue to
surface value.
Historically, REITs have delivered average annual percentage returns in the low
teens, with approximately 60% of the return coming from dividends and 40% from
price appreciation. In the year ahead, we believe that REITs are capable of
matching this historical return average with earnings- and deal activity-driven
price appreciation playing a bigger role in the total return equation.
REIT preferred stock yields are now in the 7.5% to 8% range, materially higher
than the yield on preferred shares in other stock market sectors and still
attractive relative to the current 4.6% yield on the 10-year Treasury note. If
the economy appears to be heading for a harder than anticipated landing and the
Federal Reserve begins to ease monetary policy in 2007, the capital appreciation
potential of REIT preferred stocks should improve.
Sincerely,
/s/ Steven R. Brown
- -------------------------------------
STEVEN R. BROWN
PORTFOLIO MANAGER
2
NEUBERGER BERMAN OCTOBER 31, 2006
REAL ESTATE
SECURITIES INCOME FUND
AMEX TICKER SYMBOL NRO
1 YEAR TOTAL RETURN
NAV(1),(3) 37.59%
MARKET PRICE(2),(3) 40.49%
AVERAGE ANNUAL TOTAL RETURN (Life of Fund as of October 31, 2006)
NAV(1),(3) 23.94%
MARKET PRICE(2),(3) 15.89%
INCEPTION DATE 10/28/2003
INDUSTRY DIVERSIFICATION
(% OF TOTAL NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS)
Apartments 14.0%
Commercial Services 9.4
Community Centers 2.6
Diversified 23.0
Freestanding 1.5
Health Care 17.5
Industrial 7.2
Lodging 13.3
Manufactured Homes 2.0
Office 30.2
Office-Industrial 2.1
Regional Malls 7.4
Self Storage 2.6
Short-Term Investments 11.0
Liabilities, less cash, receivables and other assets (43.8)
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
ENDNOTES
(1) Returns based on Net Asset Value ("NAV") of the Fund.
(2) Returns based on market price of Fund shares on the American 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. Please see the notes to
the financial statements for specific information regarding the rate of the
management fees waived by Neuberger Berman Management Inc. Absent such a
waiver, 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
NEUBERGER BERMAN OCTOBER 31, 2006
GLOSSARY OF INDICES
FTSE NAREIT EQUITY REITs 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.
S&P 500 INDEX: The S&P 500 Index is widely regarded as the
standard for measuring large-cap U.S. stock
markets' performance and includes a
representative sample of leading companies in
leading industries.
DOW JONES INDUSTRIAL AVERAGE: A price-weighted average of 30 actively traded
blue-chip stocks, primarily industrials,
including stocks that trade on the New York
Stock Exchange. The 30 stocks are chosen by
the editors of the Wall Street Journal.
NASDAQ COMPOSITE: The NASDAQ Composite is a broad market index
that encompasses about 4,000 issues traded on
the Nasdaq National Market. The index is
calculated based on a market cap weighting and
the top 10 stocks in the index account for
greater than 30% of the Nasdaq.
Please note that the indices do not take into account any fees and expenses or
any tax consequences of investing in the individual securities that they track
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
SCHEDULE OF INVESTMENTS REAL ESTATE SECURITIES INCOME FUND INC.
TOP TEN EQUITY HOLDINGS
HOLDING %
1 iStar Financial 8.0
2 OMEGA Healthcare Investors 7.1
3 Maguire Properties 6.7
4 Crescent Real Estate Equities 6.0
5 Apartment Investment & Management 5.5
6 Colonial Properties Trust 4.6
7 HRPT Properties Trust 4.5
8 Nationwide Health Properties 4.5
9 Glimcher Realty Trust 4.4
10 Equity Office Properties Trust 4.2
MARKET VALUE+
NUMBER OF SHARES (000'S OMITTED)
COMMON STOCKS (101.4%)
APARTMENTS (12.6%)
591,100 Apartment Investment & Management $ 33,882
270,800 Archstone-Smith Trust 16,305
175,000 BNP Residential Properties 4,181
110,000 Camden Property Trust 8,879
448,900 Education Realty Trust 6,944
49,400 Home Properties 3,121
172,400 Mid-America Apartment Communities 10,973
93,200 Post Properties 4,565
--------
88,850
COMMERCIAL SERVICES (9.4%)
457,600 Capital Trust 20,368
182,000 Deerfield Triarc Capital 2,705
866,300 Gramercy Capital 24,170
50,000 Newcastle Investment 1,483
1,159,100 NorthStar Realty Finance 17,560
--------
66,286
COMMUNITY CENTERS (1.7%)
146,200 Cedar Shopping Centers 2,443
174,400 New Plan Excel Realty Trust 5,023
117,400 Tanger Factory Outlet Centers 4,379^^
--------
11,845
DIVERSIFIED (18.1%)
631,700 Colonial Properties Trust 31,831
1,511,500 Crescent Real Estate Equities 32,951@@
784,800 iStar Financial 36,360
143,300 Lexington Corporate Properties Trust 3,052@@
761,500 Newkirk Realty Trust 12,900
949,900 Spirit Finance 11,313
--------
128,407
FREESTANDING (1.5%)
479,000 National Retail Properties 10,763@@
HEALTH CARE (13.7%)
497,800 Health Care Property Investors 15,631
231,700 Health Care REIT 9,565@@
101,700 Healthcare Realty Trust 4,119
66,700 LTC Properties 1,807
1,110,500 Nationwide Health Properties 31,916
2,010,900 OMEGA Healthcare Investors $ 33,944
--------
96,982
INDUSTRIAL (7.2%)
430,529 EastGroup Properties 22,917
614,800 First Industrial Realty Trust 28,262@@
--------
51,179
LODGING (3.5%)
296,500 Ashford Hospitality Trust 3,819
433,000 Hospitality Properties Trust 20,983
--------
24,802
OFFICE (24.9%)
1,303,000 American Financial Realty Trust 15,206
502,813 Brandywine Realty Trust 16,774
700,000 Equity Office Properties Trust 29,750@@
248,200 Glenborough Realty Trust 6,448
556,700 Highwoods Properties 21,266
2,689,500 HRPT Properties Trust 32,005
139,400 Kilroy Realty 10,501
41,800 Mack-Cali Realty 2,211
622,000 Maguire Properties 26,597
350,100 Reckson Associates Realty 15,446
--------
176,204
OFFICE--INDUSTRIAL (1.5%)
215,000 Liberty Property Trust 10,363
REGIONAL MALLS (4.7%)
740,500 Glimcher Realty Trust 19,075
36,100 Macerich Co. 2,901
258,900 Pennsylvania REIT 11,159
--------
33,135
SELF STORAGE (2.6%)
127,000 Extra Space Storage 2,342
267,700 Sovran Self Storage 15,789
--------
18,131
TOTAL COMMON STOCKS
(COST $500,007) 716,947
--------
PREFERRED STOCKS (31.4%)
APARTMENTS (1.4%)
190,000 Apartment Investment & Management, Ser. U 4,839
200,000 Associated Estates Realty, Ser. B 5,270
--------
10,109
6
NEUBERGER BERMAN OCTOBER 31, 2006
SCHEDULE OF INVESTMENTS REAL ESTATE INCOME FUND INC. CONT'D
MARKET VALUE+
NUMBER OF SHARES (000'S OMITTED)
COMMUNITY CENTERS (0.9%)
60,000 Cedar Shopping Centers, Ser. A $ 1,605
70,000 Saul Centers, Ser. A 1,793
110,000 Tanger Factory Outlet Centers, Ser. C 2,794
----------
6,192
DIVERSIFIED (4.9%)
32,400 Colonial Properties Trust, Ser. E 823
160,000 Cousins Properties, Ser. B 4,040
430,000 Crescent Real Estate Equities, Ser. A 9,438
200,000 iStar Financial, Ser. G 5,062
600,000 iStar Financial, Ser. I 15,240
----------
34,603
HEALTH CARE (3.8%)
417,000 LTC Properties, Ser. F 10,738
600,000 OMEGA Healthcare Investors, Ser. D 15,960
----------
26,698
LODGING (9.8%)
165,000 Ashford Hospitality Trust, Ser. A 4,307
132,800 Eagle Hospitality Properties Trust, Ser. A 3,373
54,600 Equity Inns, Ser. B 1,446
327,700 Felcor Lodging Trust, Ser. C 8,209
80,900 Hersha Hospitality Trust, Ser. A 2,111
42,000 Host Hotels & Resorts, Ser. E 1,147
780,000 Innkeepers USA Trust, Ser. C 19,859
140,000 LaSalle Hotel Properties, Ser. D 3,640@@
123,000 LaSalle Hotel Properties, Ser. E 3,198
50,000 Strategic Hotels & Resorts, Ser. A 1,272**
203,100 Strategic Hotels & Resorts, Ser. C 5,369
135,000 Sunstone Hotel Investors, Ser. A 3,470
480,000 Winston Hotels, Ser. B 12,168
----------
69,569
MANUFACTURED HOMES (2.0%)
600,000 Affordable Residential Communities, Ser. A 14,400
OFFICE (5.3%)
100,000 Brandywine Realty Trust, Ser. C $ 2,576
80,000 Brandywine Realty Trust, Ser. D 2,004
90,000 Corporate Office Properties Trust, Ser. H 2,295
6,000 Highwoods Properties, Ser. A 6,535
840,000 Maguire Properties, Ser. A 20,874
100,000 SL Green Realty, Ser. C 2,582
20,000 SL Green Realty, Ser. D 516
----------
37,382
OFFICE--INDUSTRIAL (0.6%)
70,000 Digital Realty Trust, Ser. A 1,824
60,800 Digital Realty Trust, Ser. B 1,563
32,000 PS Business Parks, Ser. K 839
----------
4,226
REGIONAL MALLS (2.7%)
50,000 Glimcher Realty Trust, Ser. F 1,280
425,000 Glimcher Realty Trust, Ser. G 10,748
78,400 Taubman Centers, Ser. G 2,078
191,600 Taubman Centers, Ser. H 4,981
----------
19,087
TOTAL PREFERRED STOCKS
(COST $215,871) 222,266
----------
SHORT-TERM INVESTMENTS (11.0%)
7,129,374 Neuberger Berman Prime Money Fund Trust Class 7,129@
70,512,501 Neuberger Berman Securities Lending Quality
Fund, LLC 70,513+++
----------
TOTAL SHORT-TERM INVESTMENTS
(COST $77,642) 77,642#
----------
TOTAL INVESTMENTS (143.8%)
(COST $793,520) 1,016,855##
Liabilities, less cash, receivables and other assets [(9.1%)] (64,625)
Liquidation Value of Auction Market Preferred Shares [(34.7%)] (245,000)
----------
TOTAL NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS (100.0%) $ 707,230
----------
See Notes to Schedule of Investments
7
NOTES TO SCHEDULE OF INVESTMENTS
+ Investments in equity securities by Neuberger Berman Real Estate Securities
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 currently translated from the local currency into U.S. dollars using
the exchange rate as of 4:00 p.m., Eastern time. The Board has approved the
use of FT Interactive Data Corporation ("FT Interactive") to assist in
determining the fair value of the Fund's foreign equity securities 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 October 31, 2006, the cost of investments for U.S. federal income tax
purposes was $793,520,000. Gross unrealized appreciation of investments was
$224,011,000 and gross unrealized depreciation of investments was $676,000,
resulting in net unrealized appreciation of $223,335,000, based on cost for
U.S. federal income tax purposes.
@ 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.
@@ 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).
** 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 October 31,
2006, these securities amounted to $1,272,000 or 0.2% of net assets
applicable to common shareholders.
^^ All or a portion of this security is segregated as collateral for interest
rate swap contracts.
See Notes to Financial Statements
8
NEUBERGER BERMAN OCTOBER 31, 2006
STATEMENT OF ASSETS AND LIABILITIES
REAL ESTATE
NEUBERGER BERMAN SECURITIES
(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 $ 939,213
- ---------------------------------------------------------------------------------------------------------
Affiliated issuers 77,642
=========================================================================================================
1,016,855
Interest rate swaps, at market value (Note A) 5,814
- ---------------------------------------------------------------------------------------------------------
Dividends and interest receivable 2,338
Receivable for securities lending income (Note A) 200
- ---------------------------------------------------------------------------------------------------------
Prepaid expenses and other assets 12
=========================================================================================================
TOTAL ASSETS 1,025,219
=========================================================================================================
LIABILITIES
Payable for collateral on securities loaned (Note A) 70,513
Distributions payable--preferred shares 410
- ---------------------------------------------------------------------------------------------------------
Distributions payable--common shares 352
Payable for securities purchased 938
- ---------------------------------------------------------------------------------------------------------
Payable to investment manager--net (Notes A & B) 278
Payable to administrator (Note B) 199
- ---------------------------------------------------------------------------------------------------------
Payable for securities lending fees (Note A) 190
Accrued expenses and other payables 109
=========================================================================================================
TOTAL LIABILITIES 72,989
=========================================================================================================
AUCTION MARKET PREFERRED SHARES SERIES A, B, C & D AT LIQUIDATION VALUE
12,000 shares authorized; 9,800 shares issued and outstanding
$.0001 par value; $25,000 liquidation value per share (Note A) 245,000
=========================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 707,230
=========================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Paid-in capital--common shares $ 462,576
Distributions in excess of net investment income (860)
- ---------------------------------------------------------------------------------------------------------
Accumulated net realized gains (losses) on investments 16,375
Net unrealized appreciation (depreciation) in value of investments 229,139
=========================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $ 707,230
=========================================================================================================
COMMON SHARES OUTSTANDING ($.0001 PAR VALUE; 999,988,000 SHARES AUTHORIZED) 33,316
=========================================================================================================
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 21.23
=========================================================================================================
[+]SECURITIES ON LOAN, AT MARKET VALUE $ 68,391
=========================================================================================================
[*]COST OF INVESTMENTS:
Unaffiliated issuers $ 715,878
Affiliated issuers 77,642
=========================================================================================================
TOTAL COST OF INVESTMENTS $ 793,520
=========================================================================================================
See Notes to Financial Statements
9
NEUBERGER BERMAN FOR THE YEAR ENDED OCTOBER 31, 2006
STATEMENT OF OPERATIONS
REAL ESTATE
NEUBERGER BERMAN SECURITIES
(000'S OMITTED) INCOME FUND
INVESTMENT INCOME
INCOME (NOTE A):
Dividend income--unaffiliated issuers $ 33,046
Interest income--unaffiliated issuers 1
- ---------------------------------------------------------------------------------------------------------------
Income from investments in affiliated issuers (Note E) 274
Income from securities loaned--net (Note E) 264
===============================================================================================================
Total income 33,585
===============================================================================================================
EXPENSES:
Investment management fees (Notes A & B) 5,135
Administration fees (Note B) 2,139
- ---------------------------------------------------------------------------------------------------------------
Auction agent fees (Note B) 622
Audit fees 45
- ---------------------------------------------------------------------------------------------------------------
Basic maintenance expense (Note B) 25
Custodian fees (Note B) 188
- ---------------------------------------------------------------------------------------------------------------
Directors' fees and expenses 31
Insurance expense 38
- ---------------------------------------------------------------------------------------------------------------
Legal fees 69
Shareholder reports 117
- ---------------------------------------------------------------------------------------------------------------
Stock exchange listing fees 13
Stock transfer agent fees 35
- ---------------------------------------------------------------------------------------------------------------
Miscellaneous 44
===============================================================================================================
Total expenses 8,501
Investment management fees waived (Notes A & B) (2,144)
Expenses reduced by custodian fee expense offset and commission recapture arrangements (Note B) (26)
===============================================================================================================
Total net expenses 6,331
===============================================================================================================
Net investment income 27,254
===============================================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE A)
Net realized gain (loss) on:
Sales of investment securities of unaffiliated issuers 50,077
Interest rate swap contracts 3,006
- ---------------------------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) in value of:
Unaffiliated investment securities 124,376
Interest rate swap contracts (1,519)
===============================================================================================================
Net gain (loss) on investments 175,940
===============================================================================================================
Distributions to Preferred Shareholders (11,503)
===============================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS RESULTING FROM OPERATIONS $ 191,691
===============================================================================================================
See Notes to Financial Statements
10
NEUBERGER BERMAN OCTOBER 31, 2006
STATEMENT OF CHANGES IN NET ASSETS
REAL ESTATE SECURITIES INCOME FUND
NEUBERGER BERMAN YEAR ENDED OCTOBER 31,
(000'S OMITTED) 2006 2005
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $ 27,254 $ 19,779
Net realized gain (loss) on investments 53,083 21,018
- --------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) of
investments 122,857 45,346
================================================================================
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM (NOTE A):
Net investment income (6,133) (3,968)
Net realized gain on investments (5,370) (2,732)
- --------------------------------------------------------------------------------
Tax return of capital -- (525)
Total distributions to preferred shareholders (11,503) (7,225)
================================================================================
Net increase (decrease) in net assets applicable to
common shareholders resulting from operations 191,691 78,918
================================================================================
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM (NOTE A):
Net investment income (26,189) (21,958)
Net realized gain on investments (22,926) (15,116)
- --------------------------------------------------------------------------------
Tax return of capital -- (2,906)
================================================================================
Total distributions to common shareholders (49,115) (39,980)
================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS 142,576 38,938
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of year 564,654 525,716
================================================================================
End of year $707,230 $564,654
================================================================================
Distributions in excess of net investment income at end
of year $ (860) $ (774)
================================================================================
See Notes to Financial Statements
11
NOTES TO FINANCIAL STATEMENTS REAL ESTATE SECURITIES INCOME FUND INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Real Estate Securities Income Fund Inc. (the
"Fund") was organized as a Maryland corporation on August 28, 2003 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 trade date for financial reporting purposes. 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, 2006, 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 asset value 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,
2006 and October 31, 2005 was as follows:
DISTRIBUTIONS PAID FROM:
LONG-TERM TAX RETURN OF
ORDINARY INCOME CAPITAL GAIN CAPITAL TOTAL
2006 2005 2006 2005 2006 2005 2006 2005
$32,322,108 $25,926,597 $28,295,937 $17,847,875 $-- $3,430,524 $60,618,045 $47,204,996
12
NEUBERGER BERMAN OCTOBER 31, 2006
As of October 31, 2006, the components of distributable earnings
(accumulated losses) on a U.S. federal income tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED UNREALIZED LOSS
ORDINARY LONG-TERM APPRECIATION CARRYFORWARDS
INCOME GAIN (DEPRECIATION) AND DEFERRALS TOTAL
$-- $16,374,700 $229,040,155 $-- $245,414,855
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 the Fund receives from REITs are generally
comprised of income, capital gains, and return of capital, but the REITs do
not report this information to the Fund until the following calendar year.
At October 31, 2006, 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. For the year ended October 31, 2006, 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 paid to the Fund during its
fiscal year, estimates previously recorded are adjusted on the books of the
Fund 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.
13
NOTES TO FINANCIAL STATEMENTS REAL ESTATE SECURITIES INCOME FUND INC. CONT'D
On September 28, 2006, the Fund declared two monthly distributions to
common shareholders in the amount of $0.10 per share per month, payable
after the close of the reporting period, on November 30, 2006 and December
29, 2006, to shareholders of record on November 15, 2006 and December 15,
2006, respectively, with ex-dates of November 13, 2006 and December 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 10, 2003, the Fund re-classified
12,000 unissued shares of capital stock as Series A Auction Market
Preferred Shares, Series B Auction Market Preferred Shares, Series C
Auction Market Preferred Shares and Series D Auction Market Preferred
Shares ("AMPS"). On January 27, 2004, the Fund issued 2,450 Series A AMPS,
2,450 Series B AMPS, 2,450 Series C AMPS and 2,450 Series D AMPS. All AMPS
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 for Series A and Series B AMPS and every 28 days for Series C
and Series D AMPS. Distribution rates are reset every 7 days for Series A
and Series B AMPS and every 28 days for Series C and Series D AMPS based on
the results of an auction, except during special rate periods. For the year
ended October 31, 2006, distribution rates ranged from 3.90% to 5.15% for
Series A, 3.73% to 5.15% for Series B, 3.90% to 5.35% for Series C and
3.75% to 5.25% for Series D AMPS. The Fund declared distributions to
preferred shareholders for the period November 1, 2006 to November 30, 2006
of ($252,137, $255,542, $265,542 and $264,051) for Series A, Series B,
Series C and Series D AMPS, respectively.
The Fund may redeem AMPS, 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 AMPS. 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 AMPS at Liquidation Value. The
holders of AMPS are entitled to one vote per share and will vote with
holders of common shares as a single class, except that the AMPS will vote
separately as a class on certain matters, as required by law or the Fund's
charter. The holders of the AMPS, 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 AMPS
for two consecutive years.
14
NEUBERGER BERMAN OCTOBER 31, 2006
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
AMPS. 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 or its
total net increase (decrease) in net assets applicable to common
shareholders resulting from operations. At October 31, 2006, the Fund had
outstanding interest rate swap contracts as follows:
RATE TYPE
--------------------------
FIXED-RATE VARIABLE-RATE ACCRUED
PAYMENTS PAYMENTS NET INTEREST UNREALIZED
SWAP NOTIONAL MADE BY RECEIVED BY RECEIVABLE APPRECIATION TOTAL
COUNTER PARTY AMOUNT TERMINATION DATE THE FUND THE FUND(1) (PAYABLE) (DEPRECIATION) FAIR VALUE
Merrill Lynch $100,000,000 February 23, 2008 3.035% 5.32% $57,125 $2,701,692 $2,758,817
Merrill Lynch 85,000,000 February 23, 2009 3.387% 5.32% 41,076 3,014,444 3,055,520
------- ---------- ----------
$98,201 $5,716,136 $5,814,337
(1) 30 day LIBOR (London Interbank Offered Rate) at October 19, 2006.
9 SECURITY LENDING: Since 2005, a third party, eSecLending has assisted the
Fund in conducting a bidding process to identify agents/principals that
would pay a guaranteed amount to the Fund in consideration of the Fund
entering into an exclusive securities lending arrangement.
From October 4, 2005 to October 3, 2006, the Fund lent its securities to a
single principal borrower that was selected through the bidding process.
Through another bidding process in August 2006, and pursuant to an
Exemptive Order issued by the Securities and Exchange Commission, the Fund
selected Neuberger Berman, LLC ("Neuberger"), an affiliate of the Fund, to
be its exclusive lending agent for a specified period. Under the agreement
entered into between the Fund and Neuberger, Neuberger pays a guaranteed
amount to the Fund.
15
NOTES TO FINANCIAL STATEMENTS REAL ESTATE SECURITIES INCOME FUND INC. CONT'D
Under the securities lending arrangements arranged through eSecLending, 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 may invest all the
cash collateral in 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.
Net income from the applicable lending program represents the guaranteed
amount plus income earned on the cash collateral invested in Quality Fund
or in other investments, less cash collateral fees and other expenses
associated with the loans. For the year ended October 31, 2006, the Fund
received net income under the securities lending arrangements of
approximately $264,000, which is reflected in the Statement of Operations
under the caption "Income from securities loaned-net." For the year ended
October 31, 2006, "Income from securities loaned-net" consisted of
approximately $2,226,000 in income earned on cash collateral and guaranteed
amounts (including approximately $1,840,000 of interest income earned from
the Quality Fund and $8,000 in guaranteed amounts received from Neuberger),
less fees and expenses paid of approximately $1,962,000 (including
approximately $6,000 retained by Neuberger).
10 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.
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 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 year
ended October 31, 2006, management fees waived under this Arrangement
amounted to $4,821 and are reflected in the Statement of Operations under
the caption "Investment management fees waived." For the year ended October
31, 2006, income earned under this Arrangement amounted to $273,783 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.
16
NEUBERGER BERMAN OCTOBER 31, 2006
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. 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.
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 AMPS outstanding is not considered a liability.
Management has contractually agreed to waive a portion of the management
fees it is entitled to receive from the Fund at the following annual rates:
YEAR ENDED % OF AVERAGE
OCTOBER 31, DAILY MANAGED ASSETS
----------------------------------
2006 - 2008 0.25
2009 0.19
2010 0.13
2011 0.07
Management has not contractually agreed to waive any portion of its fees
beyond October 31, 2011.
For the year ended October 31, 2006, such waived fees amounted to
$2,139,412.
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.
Management and 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 year ended October 31, 2006, the
impact of this arrangement was a reduction of expenses of $20,136.
17
NOTES TO FINANCIAL STATEMENTS REAL ESTATE SECURITIES INCOME FUND INC. CONT'D
The Fund has an expense offset arrangement in connection with its custodian
contract. For the year ended October 31, 2006, the impact of this
arrangement was a reduction of expenses of $5,938.
In connection with the settlement of each AMPS auction, the Fund pays,
through the auction agent, a service fee to each participating
broker-dealer based upon the aggregate liquidation preference of the AMPS
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 AMPS. "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 year ended October 31, 2006, there were purchase and sale
transactions (excluding short-term securities and interest rate swap
contracts) of $118,966,692 and $91,276,242, respectively.
During the year ended October 31, 2006, brokerage commissions on securities
transactions amounted to $366,314, of which Neuberger received $14, Lehman
Brothers Inc. received $58,709, and other brokers received $307,591.
NOTE D--CAPITAL:
At October 31, 2006, the common shares outstanding and the common shares of
the Fund owned by Neuberger were as follows:
COMMON SHARES COMMON SHARES
OUTSTANDING OWNED BY NEUBERGER
33,316,439 6,981
There were no transactions in common shares for the years ended October 31,
2006 and October 31, 2005.
18
NEUBERGER BERMAN OCTOBER 31, 2006
NOTE E--INVESTMENTS IN AFFILIATES*:
INCOME FROM
INVESTMENTS
BALANCE OF BALANCE OF IN AFFILIATED
SHARES HELD GROSS GROSS SHARES HELD VALUE ISSUERS
OCTOBER 31, PURCHASES SALES AND OCTOBER 31, OCTOBER 31, INCLUDED IN
NAME OF ISSUER 2005 AND ADDITIONS REDUCTIONS 2006 2006 TOTAL INCOME
Neuberger Berman
Prime Money Fund
Trust Class** 4,143,881 119,991,969 117,006,476 7,129,374 $ 7,129,374 $ 273,783
Neuberger Berman
Securities Lending
Quality Fund, LLC*** 14,692,101 310,935,411 255,115,011 70,512,501 70,512,501 1,839,634
----------- ----------
TOTAL $77,641,875 $2,113,417
----------- ----------
* Affiliated issuers, as defined in the 1940 Act.
** 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.
*** 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.
NOTE F--RECENT ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation No. 48 "Accounting for Uncertainty in Income
Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions
should be recognized, measured, presented and disclosed in the financial
statements. FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. FIN 48 requires
that a "more-likely-than-not" threshold be met before the benefit of a tax
position may be recognized in the financial statements and prescribes how
such benefit should be measured. Adoption of FIN 48 is required for fiscal
years beginning after December 15, 2006 and is to be applied to all open
tax years as of the effective date. At this time, Management is evaluating
the implications of FIN 48 and its impact in the financial statements has
not yet been determined.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years.
Management believes the adoption of SFAS 157 will not have a material
impact on the Fund's financial positions or results of operations.
19
FINANCIAL HIGHLIGHTS REAL ESTATE SECURITIES 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.
ONE DAY
PERIOD ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31,
--------------------------- ------------
2006 2005 2004 2003^
COMMON SHARE NET ASSET VALUE, BEGINNING OF PERIOD $ 16.95 $ 15.78 $ 14.29 $14.32
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO
COMMON SHAREHOLDERS:
NET INVESTMENT INCOME (LOSS)~ .82 .59 .79 (.00)
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED AND UNREALIZED) 5.28 2.00 1.96 --
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO PREFERRED
SHAREHOLDERS FROM:
NET INVESTMENT INCOME ~ (.19) (.12) (.05) --
NET CAPITAL GAINS ~ (.16) (.08) (.01) --
TAX RETURN OF CAPITAL ~ -- (.02) (.02) --
------- ------- ------- ------
TOTAL DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (.35) (.22) (.08) --
------- ------- ------- ------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO
COMMON SHAREHOLDERS 5.75 2.37 2.67 (.00)
------- ------- ------- ------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
NET INVESTMENT INCOME (.79) (.66) (.69) --
NET CAPITAL GAINS (.68) (.45) (.18) --
TAX RETURN OF CAPITAL -- (.09) (.23) --
------- ------- ------- ------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (1.47) (1.20) (1.10) --
------- ------- ------- ------
LESS CAPITAL CHARGES FROM:
ISSUANCE OF COMMON SHARES -- -- (.00) (.03)
ISSUANCE OF PREFERRED SHARES -- -- (.08) --
------- ------- ------- ------
TOTAL CAPITAL CHARGES -- -- (.08) (.03)
------- ------- ------- ------
COMMON SHARE NET ASSET VALUE, END OF PERIOD $ 21.23 $ 16.95 $ 15.78 $14.29
------- ------- ------- ------
COMMON SHARE MARKET VALUE, END OF PERIOD $ 18.16 $ 14.20 $ 14.42 $15.01
------- ------- ------- ------
TOTAL RETURN, COMMON SHARE NET ASSET VALUE+ +37.59% +16.61% +19.30% -0.24%**
TOTAL RETURN, COMMON SHARE MARKET VALUE+ +40.49% +6.90% +3.79% +0.07%**
RATIOS/SUPPLEMENTAL DATA++
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS,
END OF PERIOD (IN MILLIONS) $ 707.2 $ 564.7 $ 525.7 $414.6
PREFERRED SHARES, AT LIQUIDATION VALUE ($25,000 PER SHARE
LIQUIDATION PREFERENCE) (IN MILLIONS) $ 245.0 $ 245.0 $ 245.0 $ --
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS# 1.04% 1.08% 1.02% 3.57%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS++ 1.04% 1.08% 1.01% 3.57%*
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING PREFERRED SHARE
DISTRIBUTIONS TO AVERAGE NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS 4.46% 3.56% 5.41% (2.65%)*
RATIO OF PREFERRED SHARE DISTRIBUTIONS TO AVERAGE NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS 1.88% 1.30% .54% --%*
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING PREFERRED
SHARE DISTRIBUTIONS TO AVERAGE NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS 2.58% 2.26% 4.87% --%*
PORTFOLIO TURNOVER RATE 11% 8% 50% 0%**
ASSET COVERAGE PER PREFERRED SHARE, END OF PERIOD@ $97,208 $82,650 $78,659 $ --
See Notes to Financial Highlights
20
NEUBERGER BERMAN OCTOBER 31, 2006
NOTES TO FINANCIAL HIGHLIGHTS REAL ESTATE SECURITIES 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 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 by Management.
Had Management not undertaken such action, the annualized ratios of net
expenses to average daily net assets applicable to common shareholders
would have been:
ONE DAY
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
2006 2005 2004 2003
1.39% 1.44% 1.36% 3.82%
^ The date investment operations commenced.
* Annualized.
** Not annualized.
@ Calculated by subtracting the Fund's total liabilities (excluding
accumulated unpaid distributions on AMPS) from the Fund's total assets and
dividing by the number of AMPS outstanding.
++ Expense ratios do not include the effect of distributions to holders of
AMPS. Income ratios include income earned on assets attributable to AMPS
outstanding.
~ Calculated based on the average number of shares outstanding during each
fiscal period.
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Neuberger Berman Real Estate Securities Income Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Neuberger Berman Real Estate Securities Income Fund Inc. (the "Fund"), including
the schedule of investments, as of October 31, 2006, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of October 31, 2006, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Neuberger Berman Real Estate Securities Income Fund Inc. at October 31, 2006,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and its financial
highlights for each of the periods indicated therein, in conformity with U.S.
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
December 8, 2006
22
NEUBERGER BERMAN OCTOBER 31, 2006
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.
23
DISTRIBUTION REINVESTMENT PLAN CONT'D
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.
24
NEUBERGER BERMAN OCTOBER 31, 2006
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
25
DIRECTORS AND OFFICERS
The following tables set forth information concerning the directors and officers
of the Fund. All persons named as directors and officers also serve in similar
capacities for other funds administered or managed by Management and Neuberger.
The Fund's Statement of Additional Information includes additional information
about Fund directors as of the time of the Fund's most recent public offering
and is available upon request, without charge, by calling (877) 461-1899.
INFORMATION ABOUT THE BOARD OF DIRECTORS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN BY OTHER DIRECTORSHIPS HELD
NAME, AGE, ADDRESS(1) AND LENGTH OF FUND OUTSIDE FUND COMPLEX BY
POSITION(2) WITH FUND TIME SERVED PRINCIPAL OCCUPATION(S)(4) DIRECTOR(5) FUND DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------
CLASS I
INDEPENDENT FUND DIRECTORS
Faith Colish (71) Since the Counsel, Carter Ledyard & 56 Advisory Director, ABA
Director Inception of Milburn LLP (law firm) since Retirement Funds (formerly,
the Fund(3) October 2002; formerly, American Bar Retirement
Attorney-at-Law and President, Association (ABRA)) since
Faith Colish, A Professional 1997 (not-for-profit
Corporation, 1980 to 2002. membership association).
Cornelius T. Ryan (75) Since the Founding General Partner, 56 None.
Director Inception of Oxford Partners and Oxford
the Fund(3) Bioscience Partners (venture
capital investing) and
President, Oxford Venture
Corporation since 1981.
Peter P. Trapp (62) Since the Regional Manager for Mid- 56 None.
Director Inception of Southern Region, Ford Motor
the Fund(3) Credit Company since
September 1997; formerly,
President, Ford Life Insurance
Company, April 1995 to August
1997.
26
NEUBERGER BERMAN OCTOBER 31, 2006
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN BY OTHER DIRECTORSHIPS HELD
NAME, AGE, ADDRESS(1) AND LENGTH OF FUND OUTSIDE FUND COMPLEX BY
POSITION(2) WITH FUND TIME SERVED PRINCIPAL OCCUPATION(S)(4) DIRECTOR(5) FUND DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------
FUND DIRECTOR WHO IS AN "INTERESTED PERSON"
Peter E. Sundman* (47) Since the Executive Vice President, 56 Director and Vice President,
Chief Executive Officer, Inception of Neuberger Berman Inc. (holding Neuberger & Berman Agency,
Director and Chairman of the Fund(3) company) since 1999; Head of Inc. since 2000; formerly,
the Board Neuberger Berman Inc.'s Mutual Director, Neuberger Berman
Funds Business (since 1999) Inc. (holding company),
and Institutional Business October 1999 to March 2003;
(1999 to October 2005); Trustee, Frost Valley YMCA;
responsible for Managed Trustee, College of Wooster.
Accounts Business and
intermediary distribution
since October 1999; President
and Director, Management since
1999; Managing Director,
Neuberger since 2005;
formerly, Executive Vice
President, Neuberger, 1999 to
December 2005; formerly,
Principal, Neuberger, 1997 to
1999; formerly, Senior Vice
President, Management, 1996 to
1999.
CLASS II**
INDEPENDENT FUND DIRECTORS
John Cannon (76) Since the Consultant; formerly, 56 Independent Trustee or
Director Inception of Chairman, CDC Investment Director of three series of
the Fund(3) Advisers (registered Oppenheimer Funds: Limited
investment adviser), 1993 to Term New York Municipal
January 1999; formerly, Fund, Rochester Fund
President and Chief Executive Municipals, and Oppenheimer
Officer, AMA Investment Convertible Securities Fund
Advisors, an affiliate of the since 1992.
American Medical Association.
C. Anne Harvey (69) Since the President, C.A. Harvey 56 Formerly, President, Board
Director Inception of Associates since October 2001; of Associates to The
the Fund(3) formerly, Director, AARP, 1978 National Rehabilitation
to December 2001. Hospital's Board of
Directors, 2001 to 2002;
formerly, Member, Individual
Investors Advisory Committee
to the New York Stock
Exchange Board of Directors,
1998 to June 2002.
27
DIRECTORS AND OFFICERS CONT'D
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN BY OTHER DIRECTORSHIPS HELD
NAME, AGE, ADDRESS(1) AND LENGTH OF FUND OUTSIDE FUND COMPLEX BY
POSITION(2) WITH FUND TIME SERVED PRINCIPAL OCCUPATION(S)(4) DIRECTOR(5) FUND DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------
Tom D. Seip (56) Since the General Partner, Seip 56 Director, H&R Block, Inc.
Director Inception of Investments LP (a private (financial services company)
the Fund(3) investment partnership); since May 2001; Director,
formerly, President and CEO, America One Foundation since
Westaff, Inc. (temporary 1998; formerly, Director,
staffing), May 2001 to January Forward Management, Inc.
2002; formerly, Senior (asset management company),
Executive at the Charles 1999 to 2006; formerly
Schwab Corporation, 1983 to Director, E-Bay Zoological
1999, including Chief Society, 1999 to 2003;
Executive Officer, Charles formerly, Director, General
Schwab Investment Management, Magic (voice recognition
Inc. and Trustee, Schwab software), 2001 to 2002;
Family of Funds and Schwab formerly, Director,
Investments, 1997 to 1998, and E-Finance Corporation
Executive Vice (credit decisioning
President-Retail Brokerage, services), 1999 to 2003;
Charles Schwab Investment formerly, Director,
Management, 1994 to 1997. Save-Daily.com (micro
investing services), 1999 to
2003.
FUND DIRECTOR WHO IS AN "INTERESTED PERSON"
Jack L. Rivkin* (66) Since Executive Vice President and 56 Director, Dale Carnegie and
President and Director 2002(3) Chief Investment Officer, Associates, Inc. (private
Neuberger Berman Inc. (holding company) since 1998;
company) since 2002 and 2003, Director, Solbright, Inc.
respectively; Managing (private company) since
Director and Chief Investment 1998.
Officer, Neuberger since
December 2005 and 2003,
respectively; formerly,
Executive Vice President,
Neuberger, December 2002 to
2005; Director and Chairman,
Management since December
2002; formerly, Executive Vice
President, Citigroup
Investments, Inc., September
1995 to February 2002;
formerly, Executive Vice
President, Citigroup Inc.,
September 1995 to February
2002.
28
NEUBERGER BERMAN OCTOBER 31, 2006
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN BY OTHER DIRECTORSHIPS HELD
NAME, AGE, ADDRESS(1) AND LENGTH OF FUND OUTSIDE FUND COMPLEX BY
POSITION(2) WITH FUND TIME SERVED PRINCIPAL OCCUPATION(S)(4) DIRECTOR(5) FUND DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------
CLASS III
INDEPENDENT FUND DIRECTORS
Robert A. Kavesh (79) Since the Marcus Nadler Professor 56 Director, The Caring
Director Inception of Emeritus of Finance and Community (not-for-profit);
the Fund(3) Economics, New York University formerly, Director, DEL
Stern School of Business; Laboratories, Inc.
formerly, Executive (cosmetics and
Secretary-Treasurer, American pharmaceuticals), 1978 to
Finance Association, 1961 to 2004; formerly, Director,
1979. Apple Bank for Savings, 1979
to 1990; formerly, Director,
Western Pacific Industries,
Inc., 1972 to 1986 (public
company).
Howard A. Mileaf (69) Since the Retired; formerly, Vice 56 Director, Webfinancial
Director Inception of President and General Counsel, Corporation (holding
the Fund(3) WHX Corporation (holding company) since December
company), 1993 to 2001. 2002; formerly, Director WHX
Corporation (holding
company), January 2002 to
June 2005; formerly,
Director, State Theatre of
New Jersey (not-for-profit
theater), 2000 to 2005;
formerly, Director, Kevlin
Corporation (manufacturer of
microwave and other
products).
Edward I. O'Brien (78) Since the Formerly, Member, Investment 56 Director, Legg Mason, Inc.
Director Inception of Policy Committee, Edward (financial services holding
the Fund(3) Jones, 1993 to 2001; company) since 1993;
President, Securities Industry formerly, Director, Boston
Association ("SIA") Financial Group (real estate
(securities industry's and tax shelters), 1993 to
representative in government 1999.
relations and regulatory
matters at the federal and
state levels), 1974 to 1992;
Adviser to SIA, November 1992
to November 1993.
29
DIRECTORS AND OFFICERS CONT'D
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN BY OTHER DIRECTORSHIPS HELD
NAME, AGE, ADDRESS(1) AND LENGTH OF FUND OUTSIDE FUND COMPLEX BY
POSITION(2) WITH FUND TIME SERVED PRINCIPAL OCCUPATION(S)(4) DIRECTOR(5) FUND DIRECTOR
- ------------------------------------------------------------------------------------------------------------------------
William E. Rulon (74) Since the Retired; formerly, Senior Vice 56 Formerly, Director, Pro-Kids
Director Inception of President, Foodmaker, Inc. Golf and Learning Academy
the Fund(3) (operator and franchiser of (teach golf and computer
restaurants) until January usage to "at risk"
1997. children), 1998 to 2006;
formerly, Director,
Prandium, Inc.
(restaurants), March 2001 to
July 2002.
Candace L. Straight (59) Since the Private investor and 56 Director, Montpelier Re
Director Inception of consultant specializing in the (reinsurance company) since
the Fund(3) insurance industry; formerly, 2006; Director, National
Advisory Director, Securitas Atlantic Holdings
Capital LLC (a global private Corporation (property and
equity investment firm casualty insurance company)
dedicated to making since 2004; Director, The
investments in the insurance Proformance Insurance
sector), 1998 to December Company (personal lines
2003. property and casualty
insurance company) since
March 2004; formerly,
Director, Providence
Washington Insurance Company
(property and casualty
insurance company), December
1998 to March 2006;
formerly, Director, Summit
Global Partners (insurance
brokerage firm), 2000 to
2005.
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) The Board of Directors shall at 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 meeting of shareholders held in 2009, 2007, and
2008, respectively, and at each third annual meeting of stockholders
thereafter.
(3) The Director has served since the Fund's inception except for Mr. Rivkin
who has served as a Director since December 2002 for the Funds with an
inception date of 2002. The inception date of Neuberger Berman Intermediate
Municipal Fund Inc., Neuberger Berman California Intermediate Municipal
Fund Inc., Neuberger Berman New York Intermediate Municipal Fund Inc., and
Neuberger Berman Real Estate Income Fund Inc. is 2002. The inception date
of Neuberger Berman Realty Income Fund Inc., Neuberger Berman Real Estate
Securities Income Fund Inc. and Neuberger Berman Income Opportunity Fund
Inc. is 2003. The inception date of Neuberger Berman Dividend Advantage
Fund Inc. is 2004.
(4) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
(5) For funds organized in a master-feeder structure, we count the master fund
and its associated feeder funds as a single portfolio.
* Indicates a Fund 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 they are officers and/or directors of
Management and Neuberger.
** Barry Hirsch was elected as a Class II Director at the annual shareholder
meeting on April 19, 2006. Mr. Hirsch passed away in July 2006. In August
2006, C. Anne Harvey, formerly a Class I Director of the Fund, was
appointed as a Class II Director of the Fund.
30
NEUBERGER BERMAN OCTOBER 31, 2006
INFORMATION ABOUT THE OFFICERS OF THE FUND
POSITION AND
NAME, AGE, AND ADDRESS(1) LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S)(2)
- ------------------------------------------------------------------------------------------
Andrew B. Allard (45) Anti-Money Laundering Senior Vice President, Neuberger
Compliance Officer since since 2006; Deputy General
inception(3) Counsel, Neuberger since 2004;
formerly, Vice President,
Neuberger, 2000 to 2006;
formerly, Associate General
Counsel, Neuberger, 1999 to 2004;
Anti-Money Laundering Compliance
Officer, fifteen registered
investment companies for which
Management acts as investment
manager and administrator (seven
since 2002, three since 2003,
four since 2004 and one since
2005) and one registered
investment company for which
Lehman Brothers Asset Management
Inc. acts as investment adviser
(since 2006).
Michael J. Bradler (36) Assistant Treasurer since Vice President, Neuberger since
2005 2006; Employee, Management since
1997; Assistant Treasurer,
fifteen registered investment
companies for which Management
acts as investment manager and
administrator (fifteen since
2005) and one registered
investment company for which
Lehman Brothers Asset Management
Inc. acts as investment adviser
(since 2006).
Claudia A. Brandon (50) Secretary since the Fund's Vice President-Mutual Fund Board
inception(3) Relations, Management since 2000
and Assistant Secretary since
2004; Vice President, Neuberger
since 2002 and Employee since
1999; Secretary, fifteen
registered investment companies
for which Management acts as
investment manager and
administrator (three since 1985,
four since 2002, three since
2003, four since 2004 and one
since 2005) and one registered
investment company for which
Lehman Brothers Asset Management
Inc. acts as investment adviser
(since 2006).
Robert Conti (50) Vice President since the Senior Vice President, Neuberger
Fund's inception(3) since 2003; formerly, Vice
President, Neuberger, 1999 to
2003; Senior Vice President,
Management since 2000; Vice
President, fifteen registered
investment companies for which
Management acts as investment
manager and administrator (three
since 2000, four since 2002,
three since 2003, four since 2004
and one since 2005) and one
registered investment company for
which Lehman Brothers Asset
Management Inc. acts as
investment adviser (since 2006).
31
INFORMATION ABOUT THE OFFICERS OF THE FUND CONT'D
POSITION AND
NAME, AGE, AND ADDRESS(1) LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S)(2)
- ------------------------------------------------------------------------------------------
Brian J. Gaffney (53) Vice President since the Managing Director, Neuberger
Fund's inception(3) since 1999; Senior Vice
President, Management since 2000;
Vice President, fifteen
registered investment companies
for which Management acts as
investment manager and
administrator (three since 2000,
four since 2002, three since
2003, four since 2004 and one
since 2005) and one registered
investment company for which
Lehman Brothers Asset Management
Inc. acts as investment adviser
(since 2006).
Maxine L. Gerson (56) Chief Legal Officer since Senior Vice President, Neuberger
2005 (only for purposes of since 2002; Deputy General
sections 307 and 406 of Counsel and Assistant Secretary,
the Sarbanes-Oxley Act of Neuberger since 2001; formerly,
2002) Vice President, Neuberger, 2001
to 2002; formerly, Associate
General Counsel, Neuberger, 2001;
formerly, Counsel, Neuberger,
2000; Secretary and General
Counsel, Management since 2004;
Chief Legal Officer (only for
purposes of sections 307 and 406
of the Sarbanes-Oxley Act of
2002), fifteen registered
investment companies for which
Management acts as investment
manager and administrator
(fifteen since 2005) and one
registered investment company for
which Lehman Brothers Asset
Management Inc. acts as
investment adviser (since 2006).
Sheila R. James (41) Assistant Secretary since Employee, Neuberger since 1999;
the Fund's inception(3) Assistant Secretary, fifteen
registered investment companies
for which Management acts as
investment manager and
administrator (seven since 2002,
three since 2003, four since 2004
and one since 2005) and one
registered investment company for
which Lehman Brothers Asset
Management Inc. acts as
investment adviser (since 2006).
Kevin Lyons (51) Assistant Secretary since Employee, Neuberger since 1999;
2003(4) Assistant Secretary, fifteen
registered investment companies
for which Management acts as
investment manager and
administrator (ten since 2003,
four since 2004 and one since
2005) and one registered
investment company for which
Lehman Brothers Asset Management
Inc. acts as investment adviser
(since 2006).
32
NEUBERGER BERMAN OCTOBER 31, 2006
POSITION AND
NAME, AGE, AND ADDRESS(1) LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S)(2)
- ---------------------------------------------------------------------------------------
John M. McGovern (36) Treasurer and Principal Vice President, Neuberger since
Financial and Accounting 2004; Employee, Management since
Officer since 2005; prior 1993; Treasurer and Principal
thereto, Assistant Financial and Accounting Officer,
Treasurer since the Fund's fifteen registered investment
inception(3) companies for which Management
acts as investment manager and
administrator (fifteen since
2005) and one registered
investment company for which
Lehman Brothers Asset Management
Inc. acts as investment adviser
(since 2006); formerly, Assistant
Treasurer, fifteen registered
investment companies for which
Management acts as investment
manager and administrator, 2002
to 2005.
Frank Rosato (35) Assistant Treasurer since Vice President, Neuberger since
2005 2006; Employee, Management since
1995; Assistant Treasurer,
fifteen registered investment
companies for which Management
acts as investment manager and
administrator (fifteen since
2005) and one registered
investment company for which
Lehman Brothers Asset Management
Inc. acts as investment adviser
(since 2006).
Frederic B. Soule (60) Vice President since the Senior Vice President, Neuberger
Fund's inception(3) since 2003; formerly, Vice
President, Neuberger, 1999 to
2003; Vice President, fifteen
registered investment companies
for which Management acts as
investment manager and
administrator (three since 2000,
four since 2002, three since
2003, four since 2004 and one
since 2005) and one registered
investment company for which
Lehman Brothers Asset Management
Inc. acts as investment adviser
(since 2006).
33
INFORMATION ABOUT THE OFFICERS OF THE FUND CONT'D
POSITION AND
NAME, AGE, AND ADDRESS(1) LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S)(2)
- ---------------------------------------------------------------------------------------
Chamaine Williams (35) Chief Compliance Officer Vice President, Lehman Brothers
since 2005 Inc. since 2003; Chief Compliance
Officer, fifteen registered
investment companies for which
Management acts as investment
manager and administrator
(fifteen since 2005) and one
registered investment company for
which Lehman Brothers Asset
Management Inc. acts as
investment adviser (since 2005);
Chief Compliance Officer, Lehman
Brothers Asset Management Inc.
since 2003; Chief Compliance
Officer, Lehman Brothers
Alternative Investment Management
LLC since 2003; formerly, Vice
President, UBS Global Asset
Management (US) Inc. (formerly,
Mitchell Hutchins Asset
Management, a wholly-owned
subsidiary of PaineWebber Inc.),
1997 to 2003.
- ----------
(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.
(3) The officer has served since the Fund's inception. The inception date of
Neuberger Berman Intermediate Municipal Fund Inc., Neuberger Berman
California Intermediate Municipal Fund Inc., Neuberger Berman New York
Intermediate Municipal Fund Inc., and Neuberger Berman Real Estate Income
Fund Inc. is 2002. The inception date of Neuberger Berman Realty Income
Fund Inc., Neuberger Berman Real Estate Securities Income Fund Inc. and
Neuberger Berman Income Opportunity Fund Inc. is 2003. The inception date
of Neuberger Berman Dividend Advantage Fund Inc. is 2004.
(4) For Neuberger Berman Dividend Advantage Fund Inc., the officer has served
since the Fund's inception in May.
34
NEUBERGER BERMAN OCTOBER 31, 2006
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 Management'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).
MARYLAND ANTI-TAKEOVER STATUTES
By resolution of the Board of Directors, the Fund has opted into the Maryland
Control Share Acquisition Act and the Maryland Business Combination Act. In
general, the Maryland Control Share Acquisition Act provides that "control
shares" of a Maryland corporation acquired in a control share acquisition may
not be voted except to the extent approved by shareholders at a special meeting
by a vote of two-thirds of the votes entitled to be cast on the matter
(excluding shares owned by the acquiror and by officers or directors who are
employees of the corporation). "Control shares" are voting shares of stock
which, if aggregated with all other shares of stock owned by the acquiror or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within certain
statutorily-defined ranges (one-tenth but less than one-third, one-third but
less than a majority, and more than a majority of the voting power). In general,
the Maryland Business Combination Act prohibits an interested shareholder (a
shareholder that holds 10% or more of the voting power of the outstanding stock
of the corporation) of a Maryland corporation from engaging in a business
combination (generally defined to include a merger, consolidation, share
exchange, sale of a substantial amount of assets, a transfer of the
corporation's securities and similar transactions to or with the interested
shareholder or an entity affiliated with the interested shareholder) with the
corporation for a period of five years after the most recent date on which the
interested shareholder became an interested shareholder. The Fund is not aware
of any shareholder that holds control shares or that is an interested
shareholder under the statutes.
35
NOTICE TO SHAREHOLDERS
The Fund hereby designates $28,295,937 as a capital gain distribution.
36
NEUBERGER BERMAN OCTOBER 31, 2006
BOARD CONSIDERATION OF THE MANAGEMENT AND SUB-ADVISORY AGREEMENTS
At a meeting held on September 27, 2006, the Board of Directors ("Board") of
Neuberger Berman Real Estate Securities Income Fund Inc. ("Fund"), including the
Directors who are not "interested persons" of the Fund ("Independent Fund
Directors"), approved continuance of the Management and Sub-Advisory Agreements
("Agreements") for the Fund.
In evaluating the Agreements, the Board, including the Independent Fund
Directors, reviewed materials furnished by Neuberger Berman Management Inc.
("Management") and Neuberger Berman, LLC ("Neuberger") in response to questions
submitted by counsel to the Independent Fund Directors, and met with senior
representatives of Management and Neuberger regarding their personnel and
operations. The Independent Fund Directors were advised by counsel that is
experienced in Investment Company Act of 1940 matters and that is independent of
Management and Neuberger. The Independent Fund Directors received a memorandum
from independent counsel discussing the legal standards for their consideration
of the proposed continuance of the Agreements. They met with such counsel
separately from representatives of Management to discuss the annual contract
review. The annual contract review extends over two regular meetings of the
Board to ensure that Management and Neuberger have time to respond to any
questions the Independent Fund Directors may have on their initial review of the
report and that the Independent Fund Directors have time to consider those
responses. In addition, during this process, the Board held a separate meeting
devoted to reviewing and discussing Fund performance.
The Board considered the following factors, among others, in connection with its
approval of the continuance of the Agreements: (1) the nature, extent, and
quality of the services provided by Management and Neuberger; (2) the
performance of the Fund compared to relevant market indices and a peer group of
investment companies; (3) the costs of the services provided and profits
historically realized by Management and its affiliates from the relationship
with the Fund; (4) the extent to which economies of scale might be realized as
the Fund grows; and (5) whether fee levels reflect those potential economies of
scale for the benefit of investors in the Fund. In their deliberations, the
Board members did not identify any particular information that was all-important
or controlling, and each Director may have attributed different weights to the
various factors.
The Board evaluated the terms of the Agreements and whether the Agreements were
in the best interests of the Fund and its shareholders. The Board considered the
nature, extent and quality of the services provided under the Agreements and the
overall fairness of the Agreements to the Fund.
With respect to the nature, extent and quality of the services provided, the
Board considered the performance of the Fund and the degree of risk undertaken
by the portfolio manager. The Board considered the experience and staffing of
portfolio management and the investment research personnel of Management and
Neuberger dedicated to performing services for the Fund. The Board noted that
Management also provides certain administrative services, including fund
accounting and compliance oversight. The Board also considered Management's and
Neuberger's policies and practices regarding brokerage and allocation of
portfolio transactions for the Fund. The Board considered the quality of
brokerage execution provided by Management and its affiliates. The Board's
Portfolio Transactions and Pricing Committee from time to time reviews the
quality of the brokerage services that Neuberger and Lehman Brothers Inc.
provide, and has reviewed studies by an independent firm engaged to review and
evaluate the quality of brokerage execution received by the Fund. The Board also
reviewed whether Management and Neuberger used brokers to execute Fund
transactions that provide research and other services to Management and
Neuberger, and the types of benefits potentially derived by Management,
Neuberger, the Fund and by other clients of Management and Neuberger from such
services. In addition, the Board noted the positive compliance history of
Management and Neuberger, as each firm has been free of significant compliance
problems.
With respect to the performance of the Fund, the Board considered the
performance of the Fund on both a market return and net asset value basis
relative to its benchmark and a peer group of investment companies pursuing
broadly similar strategies. The Board also considered the performance in
relation to the degree of risk undertaken by the portfolio manager. The Board
noted the difficulty of constructing an appropriate peer group. The Board
discussed the Fund's performance with Management and discussed steps that
Management had taken, or intended to take, to improve the Fund's performance.
The Board also considered Management's resources and responsiveness with respect
to the Fund.
37
BOARD CONSIDERATION OF THE MANAGEMENT AND SUB-ADVISORY AGREEMENTS CONT'D
With respect to the overall fairness of the Agreements, the Board considered the
fee structure of the Agreements as compared to a peer group of comparable funds
and any fall-out benefits likely to accrue to Management or Neuberger or their
affiliates. The Board also considered the profitability of Management and its
affiliates from their association with the Fund.
The Board reviewed a comparison of the Fund's management fee and overall expense
ratio to a peer group of comparable funds. The Board considered the mean and
median of the management fees and expense ratios of the peer group. With regard
to the sub-advisory fee paid to Neuberger, the Board noted that this fee is
reflective of an "at cost" basis and there is no profit to Neuberger with regard
to these fees. The Board considered the Fund's overall expenses in relation to
the overall expenses of the peer group mean and median. In addition, the Board
considered the contractual waiver of a portion of the management fee undertaken
by Management.
The Board considered whether there were other funds that were sub-advised by
Management or its affiliates or separate accounts managed by Management with
similar investment objectives, policies and strategies as the Fund. The Board
compared the fees charged to a comparable sub-advised fund and comparable
separate accounts to the fees charged to the Fund. The Board considered the
appropriateness and reasonableness of the differences between the fees charged
between the Fund and the comparable sub-advised fund and comparable separate
accounts and determined that the differences in fees were consistent with the
management and other services provided.
The Board also evaluated any actual or anticipated economies of scale in
relation to the services Management provides to the Fund. The Board considered
that the Fund was a closed-end fund that is not continuously offering shares and
that, without daily inflows and outflows of capital, there were not at this time
significant economies of scale to be realized by Management in managing the
Fund's assets.
In concluding that the benefits accruing to Management and its affiliates by
virtue of their relationship to the Fund were reasonable in comparison with the
costs of providing the investment advisory services and the benefits accruing to
the Fund, the Board reviewed specific data as to Management's profit on the Fund
for a recent period and the trend in profit or loss over time. The Board also
carefully examined Management's cost allocation methodology and had an
independent consultant review the methodology. It also reviewed an analysis from
an independent data service on investment management profitability margins. The
Board recognized that Management should be entitled to earn a reasonable level
of profits for services it provides to the Fund and, based on its review,
concluded it was satisfied that Management's level of profitability from its
relationship with the Fund was not excessive.
CONCLUSIONS
In approving the Agreements, the Board concluded that the terms of each
Agreement are fair and reasonable and that approval of the Agreements is in the
best interest of the Fund and its shareholders. In reaching this determination,
the Board considered that Management and Neuberger could be expected to provide
a high level of service to the Fund; that it retained confidence in Management's
and Neuberger's capabilities to manage the Fund; that the Fund's fee structure
appeared to the Board to be reasonable given the nature and quality of services
expected to be provided; and that the benefits accruing to Management and its
affiliates by virtue of their relationship to the Fund were reasonable in
comparison with the costs of providing the investment advisory services and the
benefits accruing to the Fund.
38
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[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN MANAGEMENT INC.
605 Third Avenue, 2nd Floor
New York, NY 10158-0180
INTERNAL SALES & SERVICES
877.461.1899
www.nb.com
Statistics and projections in this report are derived from sources deemed to be
reliable but cannot be regarded as a representation of future results of the
Fund. This report is prepared for the general information of shareholders and is
not an offer of shares of the Fund.
[GRAPHIC] D0501 12/06
ITEM 2. CODE OF ETHICS
The Board of Directors ("Board") of Neuberger Berman Real Estate Securities
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 amendments
to the Code of Ethics and 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 was included as an exhibit to Registrant's Form
N-CSR filed on July 10, 2006. 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
Ernst & Young, LLP ("E&Y") serves as independent registered public accounting
firm to the Registrant.
(a) Audit Fees
----------
The aggregate fees billed for professional services rendered by E&Y for the
audit of the annual financial statements or services that are normally provided
by E&Y in connection with statutory and regulatory filings or engagements were
$31,250 and $33,500 for the fiscal years ended 2005 and 2006, respectively.
(b) Audit-Related Fees
------------------
The aggregate fees billed to the Registrant for assurance and related services
by E&Y that are reasonably related to the performance of the audit of the
Registrant's financial statements and are not reported above in AUDIT FEES were
$6,000 and $6,250 for the fiscal years ended 2005 and 2006, respectively. The
nature of the services provided involved agreed upon procedures relating to the
Preferred Shares. The Audit Committee approved 0% and 0% of these services
provided by E&Y for the fiscal years ended 2005 and 2006, respectively, pursuant
to the waiver provisions of Rule 2-01(c)(7)(i)(C) of Regulation S-X.
The fees billed to other entities in the investment company complex for
assurance and related services by E&Y that are reasonably related to the
performance of the audit that the Audit Committee was required to approve
because the engagement related directly to the operations and financial
reporting of the Registrant were $0 and $0 for the fiscal years ended 2005 and
2006, respectively.
(c) Tax Fees
--------
The aggregate fees billed to the Registrant for professional services rendered
by E&Y for tax compliance, tax advice, and tax planning were $8,700 and $9,500
for the fiscal years ended 2005 and 2006, respectively. The nature of the
services provided was tax compliance, tax advice, and tax planning. The Audit
Committee approved 0% and 0% of these services provided by E&Y for the fiscal
years ended 2005 and 2006, respectively, pursuant to the waiver provisions of
Rule 2-01(c)(7)(i)(C) of Regulation S-X.
The fees billed to other entities in the investment company complex for tax
compliance, tax advice, and tax planning by E&Y that the Audit Committee was
required to approve because the engagement related directly to the operations
and financial reporting of the Registrant were $0 and $0 for the fiscal years
ended 2005 and 2006, respectively.
(d) All Other Fees
--------------
The aggregate fees billed to the Registrant for products and services provided
by E&Y, other than services reported in AUDIT FEES, AUDIT-RELATED FEES, and TAX
FEES were $0 and $0 for the fiscal years ended 2005 and 2006, respectively.
The fees billed to other entities in the investment company complex for products
and services provided by E&Y, other than services reported in AUDIT FEES,
AUDIT-RELATED FEES and TAX FEES that the Audit Committee was required to
approve because the engagement related directly to the operations and financial
reporting of the Registrant were $0 and $0 for the fiscal years ended 2005 and
2006, respectively.
(e) Audit Committee's Pre-Approval Policies and Procedures
------------------------------------------------------
(1) The Audit Committee's pre-approval policies and procedures for the
Registrant to engage an accountant to render audit and non-audit services
delegate to each member of the Committee the power to pre-approve services
between meetings of the Committee.
(2) None of the services described in paragraphs (b) through (d) above were
approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X.
(f) Hours Attributed to Other Persons
---------------------------------
Not applicable.
(g) Non-Audit Fees
--------------
Non-audit fees billed by E&Y for services rendered to the Registrant were
$14,700 and $15,750 for the fiscal years ended 2005 and 2006, respectively.
Non-audit fees billed by E&Y for services rendered to the Registrant's
investment adviser and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the Registrant were
$160,650 and $126,000 for the fiscal years ended 2005 and 2006, respectively.
(h) The Audit Committee of the Board considered whether the provision of
non-audit services rendered to the Registrant's investment adviser and any
entity controlling, controlled by, or under common control with the adviser that
provides ongoing services to the Registrant that were not pre-approved by the
Audit Committee because the engagement did not relate directly to the operations
and financial reporting of the Registrant is compatible with maintaining E&Y's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
The Board has established a separately-designed standing audit committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended ("Exchange Act"). Its members are John Cannon, Howard A.
Mileaf, Cornelius T. Ryan (Chairman), Tom D. Seip, and Peter P. Trapp.
ITEM 6. SCHEDULE OF INVESTMENTS
The complete schedule of investments for each series is disclosed in the
Registrant's 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
The Board has delegated to Neuberger Berman, LLC ("Neuberger Berman") the
responsibility to vote proxies related to the securities held in the
Registrant's portfolio. Under this authority, Neuberger Berman is required by
the Board to vote proxies related to portfolio securities in the best interests
of the Registrant 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 Registrant. 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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
(a)(1) The following Portfolio Manager has day-to-day management responsibility
of the Registrant's portfolio as of the date of the filing of this report.
STEVEN BROWN is a Vice President of Neuberger Berman Management Inc. ("NB
Management") and a Managing Director of Neuberger Berman. He has been a
Portfolio Manager with the firm since 2002 and has been part of the
Registrant's management team since its inception. From 1997 to 2002, Mr.
Brown was a co-portfolio manager at an investment firm specializing in
securities of REITs.
(a)(2) The table below describes the other accounts for which the Portfolio
Manager has day-to-day management responsibility as of October 31, 2006.
NUMBER OF
TOTAL ACCOUNTS ASSETS MANAGED FOR
NUMBER ASSETS MANAGED FOR WHICH ADVISORY FEE
OF MANAGED WHICH ADVISORY IS
ACCOUNTS ($ FEE IS PERFORMANCE-BASED
TYPE OF ACCOUNT MANAGED MILLIONS) PERFORMANCE-BASED ($ MILLIONS)
STEVEN R. BROWN
Registered
Investment
Companies* 6 1,841 0 0
Other Pooled
Investment Vehicles 0 0 0 0
Other Accounts** 135 55.5 0 0
*Registered Investment Companies include: Mutual Funds.
**Other Accounts include: Institutional Separate Accounts, Sub-Advised, and
Managed Accounts (WRAP).
Conflicts of Interest
- ---------------------
Actual or apparent conflicts of interest may arise when a Portfolio Manager has
day-to-day management responsibilities with respect to more than one fund or
other account. The management of multiple funds and accounts (including
proprietary accounts) may give rise to potential conflicts of interest if the
funds and accounts have different or similar objectives, benchmarks, time
horizons, and fees as the Portfolio Manager must allocate his time and
investment ideas across multiple funds and accounts. The Portfolio Manager may
execute transactions for another fund or account that may adversely impact the
value of securities held by the Registrant. Moreover, if a Portfolio Manager
identifies a limited investment opportunity that may be suitable for more than
one fund or other account, the Registrant may not be able to take full advantage
of that opportunity. Securities selected for funds or accounts other than the
Registrant may outperform the securities selected for the Registrant. NB
Management, Neuberger Berman and the Registrant have adopted certain compliance
procedures which are designed to address these types of conflicts. However,
there is no guarantee that such procedures will detect each and every situation
in which a conflict arises.
(a)(3) Compensation (as of October 31, 2006)
-------------------------------------
A portion of the compensation paid to the Portfolio Manager is determined by
comparisons to pre-determined peer groups and benchmarks, as opposed to a system
dependent on a percent of management fees. The Portfolio Manager is paid a base
salary that is not dependent on performance. The Portfolio Manager also has a
"target bonus," which is set each year and can be increased or decreased prior
to payment based in part on performance measured against the relevant peer group
and benchmark. Performance is measured on a three-year rolling average in order
to emphasize longer-term performance. There is also a subjective component to
determining the bonus, which consists of the following factors: (i) the
individual's willingness to work with the marketing and sales groups; (ii) his
or her effectiveness in building a franchise; and (iii) client servicing. Senior
management determines this component in appropriate cases. There are additional
components that comprise the Portfolio Manager's compensation packages,
including: (i) whether the manager was a partner/principal of Neuberger Berman
prior to Neuberger Berman Inc.'s initial public offering; (ii) for more recent
hires, incentives that may have been negotiated at the time the Portfolio
Manager joined the Neuberger Berman complex; and (iii) the total amount of
assets for which the Portfolio Manager is responsible.
NB Management's Portfolio Managers have always had a degree of independence that
they would not get at other firms that have, for example, investment committees.
NB Management believes that its Portfolio Managers are retained not only through
compensation and opportunities for advancement, but also by a collegial and
stable money management environment.
In addition, there are additional stock and option award programs available.
NB Management believes the measurement versus the peer groups on a three-year
rolling average basis creates a meaningful disincentive to try and beat the peer
group and benchmark in any given year by taking undue risks in portfolio
management. The incentive is to be a solid performer over the longer-term, not
necessarily to be a short-term winner in any given year.
(a)(4) Ownership of Securities
-----------------------
Set forth below is the dollar range of equity securities beneficially owned by
the Portfolio Manager in the Registrant as of October 31, 2006.
-------------------------------------------------
DOLLAR RANGE OF EQUITY
PORTFOLIO MANAGER SECURITIES OWNED IN THE
REGISTRANT
-------------------------------------------------
Steven R. Brown A
-------------------------------------------------
A = None E = $100,001-$500,000
B = $1-$10,000 F = $500,001-$1,000,000
C = $10,001 - $50,000 G = $1,000,001 or More
D =$50,001-$100,000
(b) Not applicable.
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 on
Form N-CSR and Form N-Q 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 incorporated by reference to Registrant's
Form N-CSR, Investment Company Act file number 811-21421 (filed July 10,
2006).
(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 to the Registrant.
(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 Rule 30a-2(b) of the Act and Section 906
of the Sarbanes-Oxley Act are not deemed "filed" for purposes of Section 18 of
the 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 Securities Income Fund Inc.
By: /s/ Peter E. Sundman
--------------------
Peter E. Sundman
Chief Executive Officer
Date: January 4, 2007
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
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Peter E. Sundman
Chief Executive Officer
Date: January 4, 2007
By: /s/ John M. McGovern
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John M. McGovern
Treasurer and Principal Financial
and Accounting Officer
Date: January 4, 2007