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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: 811-21241

RMR REAL ESTATE FUND
(Exact name of registrant as specified in charter)

400 CENTRE STREET
NEWTON, MASSACHUSETTS 02458
(Address of principal executive offices)(Zip code)

(Name and Address of Agent for Service of Process)
Thomas M. O'Brien, President
RMR Real Estate Fund
400 Centre Street
Newton, Massachusetts 02458

Copy to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1666 K Street, NW
Washington, DC 20006

Thomas J. Reyes, Esq.
State Street Bank and Trust Company
2 Avenue de Lafayette
Boston, Massachusetts 02111

Registrant's telephone number, including area code: (617) 332-9530
Date of fiscal year end: December 31
Date of reporting period: December 31, 2006



Item 1. Reports to Shareholders.



 

 

 




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ANNUAL REPORTS
DECEMBER 31, 2006




 




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RMR Real Estate Fund

RMR Hospitality and Real Estate Fund

RMR F.I.R.E. Fund

RMR Preferred Dividend Fund

RMR Asia Pacific Real Estate Fund

About information contained in this report:


NOTICE CONCERNING LIMITED LIABILITY

THE AGREEMENTS AND DECLARATIONS OF TRUST OF RMR REAL ESTATE FUND, RMR HOSPITALITY AND REAL ESTATE FUND, RMR F.I.R.E. FUND, RMR PREFERRED DIVIDEND FUND AND RMR ASIA PACIFIC REAL ESTATE FUND, COPIES OF WHICH, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS THERETO, ARE DULY FILED IN THE OFFICE OF THE SECRETARY, CORPORATIONS DIVISION, OF THE COMMONWEALTH OF MASSACHUSETTS, PROVIDE THAT THE NAMES "RMR REAL ESTATE FUND", "RMR HOSPITALITY AND REAL ESTATE FUND", "RMR F.I.R.E. FUND", "RMR PREFERRED DIVIDEND FUND" AND "RMR ASIA PACIFIC REAL ESTATE FUND" REFER TO THE TRUSTEES UNDER THE AGREEMENTS AND DECLARATIONS COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF ANY OF THE FUNDS SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, ANY OF THESE FUNDS. ALL PERSONS DEALING WITH ANY OF THE FUNDS IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THAT FUND WITH WHICH HE OR SHE MAY DEAL FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.


RMR Funds
December 31, 2006
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February 16, 2007

To our shareholders,

We are pleased to present you with our 2006 annual report for five funds:

Our management team and board of trustees wasted no time becoming fellow shareholders of RMR Asia Pacific Real Estate Fund, having made investments of over $800,000 of shares at the public offering price of $20/share and in the open market. Our management team and board of trustees currently own shares in the RMR Funds with a market value in excess of $21 million.

We invite you to read through the information contained in this report and to view our website at www.rmrfunds.com.

Sincerely,

GRAPHIC

Thomas M. O'Brien
President


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1


RMR Real Estate Fund
December 31, 2006

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To our shareholders,

In the pages that follow, you will find data summarizing our financial results for the year ended December 31, 2006, and our financial position as of December 31, 2006.

During 2006, our allocation to the sub-sector of mortgage real estate investment trusts, or REITs, increased from 2.2% to 10.1% of total investments, our largest sub-sector increase. During the same time period, our allocation to the office sub-sector decreased from 13.3% to 8.7% of total investments, our largest sub-sector decrease. These changes reflect our view of the business environments in these sub-sectors, the strengths and weaknesses of the companies that operate in those sub-sectors and the share prices of individual companies. During 2007, we will continue to monitor market conditions and position our portfolio according to our views of market conditions.

For securities that we held continuously during 2006, our three best performing investments were the common stocks of BNP Residential Properties, Inc., Glenborough Realty Trust and Omega Healthcare Investors, Inc. with total returns of 60%, 50% and 50%, respectively. Our three worst performing investments during the same period were the common stock of Brandywine Realty Trust, a series of preferred stock of The Mills Corp. and common stock of The Mills Corp. with total returns of positive 3%, negative 4% and negative 47%, respectively.

Thank you for your continued support. For more information, please view our website, at www.rmrfunds.com.

Sincerely,

GRAPHIC

Thomas M. O'Brien
President


2


RMR Real Estate Fund
December 31, 2006

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Relevant Market Conditions

Real Estate Industry Fundamentals.    We believe that the operating environment for real estate companies will continue to improve in 2007, although not at the same rate as 2006. We expect vacancy rates to decline, rental rates to improve and funds from operations, or FFO, an important measure of performance for real estate companies, to grow. Most public real estate companies have ample liquidity to make acquisitions to further increase their earnings potential.

Real Estate Industry Technicals.    We believe demand for real estate securities over the long term will continue to increase. Demographic trends in the U.S. include growth in the over age 50 population; we believe that individuals in that age category tend to focus their investments in higher yielding stocks like REITs. Institutions have been increasing their allocations to real estate securities. We believe that the demand for real estate made 2006 the biggest merger and acquisition year ever in the real estate securities market.

Fund Strategies, Techniques and Performance

Our primary investment objective is to earn and pay a high level of current income to our common shareholders by investing in real estate companies. Our secondary investment objective is capital appreciation. There can be no assurances that we will meet our investment objectives.

During 2006, our total return on net asset value, or NAV (including NAV changes and assuming a hypothetical reinvestment of distributions at NAV) was 35.3%. During that same period, the total return for the MSCI US REIT Total Return Index (an unmanaged index of REIT common stocks) was 35.9% and the total return for the Merrill Lynch REIT Preferred Index (an unmanaged index of REIT preferred stocks) was 9.7%. We believe these two indices are relevant to us because our investments, excluding short term investments, as of December 31, 2006, include 73% REIT common stocks and 25% REIT preferred stocks. The S&P 500 Index (an unmanaged index published as Standard and Poor's Composite Index of 500 common stocks) total return for 2006 was 15.8%.

Portfolio holdings by sub-sector as a percentage of investments
(as of December 31, 2006) *

REITs      
Diversified   17 %
Health care   15 %
Hospitality   11 %
Mortgage   10 %
Others, less than 10% each   42 %
   
 
  Total REITs   95 %
Other   2 %
Short term investments   3 %
   
 
  Total investments   100 %
   
 

*
These percentages represent the Fund's portfolio holdings by sub-sector as a percentage of total portfolio holdings and do not agree with the percentages included in the Portfolio of Investments schedule which represent the Fund's portfolio holdings by sub-sector as a percentage of the Fund's total net assets.

3


RMR Real Estate Fund
Portfolio of Investments
– December 31, 2006


 
Company

  Shares

  Value

 

 
Common Stocks – 99.6%
Real Estate Investment Trusts – 96.8%
           
  Apartments – 10.5%            
    Apartment Investment & Management Co.   58,100   $ 3,254,762  
    Associated Estates Realty Corp.   100,400     1,379,496  
    BNP Residential Properties, Inc.   200,000     4,830,000  
    Home Properties, Inc.   71,800     4,255,586  
    United Dominion Realty Trust, Inc.   12,000     381,480  
       
 
          14,101,324  
  Diversified – 22.3%            
    Centracore Properties Trust   28,050     906,856  
    Colonial Properties Trust   131,700     6,174,096  
    Cousins Properties, Inc.   10,100     356,227  
    Crescent Real Estate Equities Co.   372,500     7,356,875  
    Duke Realty Corp.   7,000     286,300  
    iStar Financial, Inc.   6,000     286,920  
    Lexington Corporate Properties Trust   252,400     5,658,808  
    Liberty Property Trust   24,000     1,179,360  
    National Retail Properties, Inc.   310,700     7,130,565  
    Newkirk Realty Trust, Inc.   8,000     144,320  
    Spirit Finance Corp.   17,500     218,225  
    Vornado Realty Trust   3,000     364,500  
    Washington Real Estate Investment Trust   300     12,000  
       
 
          30,075,052  
  Health Care – 13.6%            
    Cogdell Spencer, Inc.   15,000     322,500  
    Health Care Property Investors, Inc.   19,080     702,526  
    Health Care REIT, Inc.   162,600     6,995,052  
    Healthcare Realty Trust, Inc.   11,200     442,848  
    Medical Properties Trust, Inc.   20,900     319,770  
    Nationwide Health Properties, Inc.   257,600     7,784,672  
    OMEGA Healthcare Investors, Inc.   85,200     1,509,744  
    Universal Health Realty Income Trust   7,000     272,860  
       
 
          18,349,972  
  Hospitality – 2.7%            
    Ashford Hospitality Trust, Inc.   2,500     31,125  
    Eagle Hospitality Properties Trust, Inc.   60,000     550,800  
    Entertainment Properties Trust   22,000     1,285,680  
    Equity Inns, Inc.   5,000     79,800  
    FelCor Lodging Trust, Inc.   17,000     371,280  
    Hersha Hospitality Trust   6,100     69,174  
See notes to financial statements and notes to portfolio of investments.  

4


  Hospitality – continued            
    Highland Hospitality Corp.   7,000   $ 99,750  
    LaSalle Hotel Properties   3,200     146,720  
    Supertel Hospitality, Inc.   150,000     1,039,500  
       
 
          3,673,829  
  Industrial – 7.9%            
    DCT Industrial Trust, Inc.   12,500     147,500  
    EastGroup Properties, Inc.   4,400     235,664  
    First Industrial Realty Trust, Inc.   204,640     9,595,570  
    ProLogis   11,000     668,470  
       
 
          10,647,204  
  Manufactured Homes – 1.8%            
    Sun Communities, Inc.   75,900     2,456,124  
  Mortgage – 11.2%            
    Abingdon Investment, Ltd. (a)(b)   550,000     5,500,000  
    Alesco Financial, Inc.   539,600     5,773,720  
    American Home Mortgage Investment Corp.   4,000     140,480  
    American Mortgage Acceptance Co.   22,800     384,864  
    Anthracite Capital, Inc.   2,000     25,460  
    Arbor Realty Trust, Inc.   1,200     36,108  
    Crystal River Capital, Inc.   26,800     684,204  
    HomeBanc Corp.   12,500     52,875  
    KKR Financial Corp.   5,500     147,345  
    New Century Financial Corp.   12,000     379,080  
    Newcastle Investment Corp.   17,600     551,232  
    NovaStar Financial, Inc.   43,500     1,159,275  
    Thornburg Mortgage, Inc.   7,000     175,910  
       
 
          15,010,553  
  Office – 11.2%            
    American Financial Realty Trust   77,100     882,024  
    Boston Properties, Inc.   9,000     1,006,920  
    Brandywine Realty Trust   2,400     79,800  
    Columbia Equity Trust, Inc.   3,000     57,330  
    Corporate Office Properties Trust   11,500     580,405  
    Douglas Emmett, Inc.   12,500     332,375  
    Equity Office Properties Trust   140,000     6,743,800  
    Highwoods Properties, Inc.   55,000     2,241,800  
    Mack-Cali Realty Corp.   6,000     306,000  
See notes to financial statements and notes to portfolio of investments.  

5


  Office – continued            
    Maguire Properties, Inc.   48,000   $ 1,920,000  
    Parkway Properties, Inc.   400     20,404  
    SL Green Realty Corp.   7,000     929,460  
       
 
          15,100,318  
  Other Financial Services 0.0%            
    Friedman Billings Ramsey Group, Inc.   5,000     40,000  
  Retail – 8.5%            
    CBL & Associates Properties, Inc.   24,000     1,040,400  
    Cedar Shopping Centers, Inc.   5,000     79,550  
    Developers Diversified Realty Corp.   2,000     125,900  
    Equity One, Inc.   5,000     133,300  
    Feldman Mall Properties, Inc.   3,000     37,500  
    Glimcher Realty Trust   93,400     2,494,714  
    New Plan Excel Realty Trust   187,780     5,160,194  
    Pennsylvania Real Estate Investment Trust   12,000     472,560  
    Ramco-Gershenson Properties Trust   3,000     114,420  
    Realty Income Corp.   18,200     504,140  
    Simon Property Group, Inc.   2,000     202,580  
    The Mills Corp.   45,100     902,000  
    Urstadt Biddle Properties, Inc.   6,800     129,812  
       
 
          11,397,070  
  Specialty – 4.9%            
    Getty Realty Corp.   32,600     1,007,340  
    Resource Capital Corp.   12,000     203,400  
    Trustreet Properties, Inc.   322,200     5,429,070  
       
 
          6,639,810  
  Storage – 2.2%            
    Sovran Self Storage, Inc.   50,000     2,864,000  
    U-Store-It Trust   5,000     102,750  
       
 
          2,966,750  
Total Real Estate Investment Trusts (Cost $103,536,842)         130,458,006  
See notes to financial statements and notes to portfolio of investments.  

6


  Other – 2.8%            
    American Capital Strategies, Ltd.   34,500   $ 1,595,970  
    Iowa Telecommunication Services, Inc.   55,500     1,093,905  
    Seaspan Corp.   48,200     1,114,384  
Total Other (Cost $3,026,416)         3,804,259  
Total Common Stocks (Cost $106,563,258)         134,262,265  
Preferred Stocks – 33.0%            
Real Estate Investment Trusts – 33.0%            
  Apartments – 1.8%            
    Apartment Investment & Management Co., Series G   32,800     862,640  
    Apartment Investment & Management Co., Series T   60,000     1,527,000  
       
 
          2,389,640  
Diversified – 1.4%            
    Colonial Properties Trust, Series D   10,000     261,200  
    Colonial Properties Trust, Series E   62,910     1,593,510  
       
 
          1,854,710  
Health Care – 6.6%            
    Health Care REIT, Inc., Series G   20,000     620,000  
    LTC Properties, Inc., Series F   160,000     4,024,000  
    OMEGA Healthcare Investors Inc., Series D   160,000     4,277,600  
       
 
          8,921,600  
  Hospitality – 12.0%            
    Ashford Hospitality Trust, Series A   107,900     2,792,452  
    Eagle Hospitality Properties Trust, Inc., Series A   28,000     714,560  
    Equity Inns, Inc., Series B   34,000     895,050  
    FelCor Lodging Trust, Inc., Series A (c)   83,000     2,074,170  
    FelCor Lodging Trust, Inc., Series C   49,200     1,240,332  
    Innkeepers USA Trust, Series C   120,000     3,025,200  
    Strategic Hotels & Resorts, Inc., Series B   54,500     1,410,188  
    Winston Hotels, Inc., Series B   160,000     4,053,600  
       
 
          16,205,552  
  Manufactured Homes – 5.3%            
    Affordable Residential Communities, Series A   280,000     7,084,000  
See notes to financial statements and notes to portfolio of investments.  

7


  Mortgage – 2.7%            
    New Century Financial Corp., Series A   20,000   $ 485,000  
    RAIT Investment Trust, Series A   125,000     3,156,250  
       
 
          3,641,250  
  Office – 0.7%            
    Alexandria Real Estate Equities, Inc., Series B   5,000     125,450  
    Corporate Office Properties Trust, Series J   4,000     103,500  
    Kilroy Realty Corp., Series F   30,000     760,500  
       
 
          989,450  
  Retail – 2.5%            
    CBL & Associates Properties, Inc., Series B   20,000     1,007,000  
    Glimcher Realty Trust, Series F   20,000     521,800  
    Glimcher Realty Trust, Series G   50,000     1,267,500  
    The Mills Corp., Series E   7,100     163,726  
    The Mills Corp., Series G   17,000     373,150  
       
 
          3,333,176  
Total Preferred Stocks (Cost $42,265,067)         44,419,378  
Short Term Investments – 4.4%            
  Other Investment Companies – 4.4%            
    SSgA Money Market Fund, 4.99% (d) (Cost $5,988,968)   5,988,968     5,988,968  
Total Investments – 137.0% (Cost $154,817,293)         184,670,611  
Other assets less liabilities – 0.1%         150,264  
Preferred Shares, at liquidation preference – (37.1)%         (50,000,000 )
Net Assets applicable to common shareholders – 100%       $ 134,820,875  

Notes to Portfolio of Investments

(a)
144A securities. Securities restricted for resale to Qualified Institutional Buyers (4.1% of net assets).

(b)
As of December 31, 2006, this security had not paid a distribution.

(c)
Convertible into common stock.

(d)
Rate reflects 7 day yield as of December 31, 2006.

See notes to financial statements.


8



RMR Real Estate Fund
Financial Statements

Statement of Assets and Liabilities


December 31, 2006

   

Assets      
  Investments in securities, at value (cost $154,817,293)   $ 184,670,611
  Cash     67,365
  Dividends and interest receivable     1,279,823
   
    Total assets     186,017,799
   
Liabilities      
  Distributions payable – common shares     682,400
  Advisory fee payable     94,449
  Payable for investment securities purchased     62,280
  Distributions payable – preferred shares     50,060
  Accrued expenses and other liabilities     307,735
   
    Total liabilities     1,196,924
   
Preferred shares, at liquidation preference      
  Auction preferred shares, Series T;
$.001 par value per share; 2,000 shares issued and
outstanding at $25,000 per share liquidation preference
    50,000,000
   
Net assets attributable to common shares   $ 134,820,875
   
Composition of net assets      
  Common shares, $.001 par value per share;
unlimited number of shares authorized,
6,824,000 shares issued and outstanding
  $ 6,824
  Additional paid-in capital     96,510,797
  Accumulated net realized gain on investment transactions     8,449,936
  Net unrealized appreciation on investments     29,853,318
   
Net assets attributable to common shares   $ 134,820,875
   
Net asset value per share attributable to common shares
(based on 6,824,000 common shares outstanding)
  $ 19.76
   

See notes to financial statements.


9



RMR Real Estate Fund

Financial Statements
– continued

Statement of Operations


 
For the Year Ended December 31, 2006

   
 

 
Investment Income        
  Dividends (Cash distributions, net of capital gain and return of capital distributions, received or due)   $ 8,163,300  
  Interest     365,283  
   
 
    Total investment income     8,528,583  
   
 
Expenses        
  Advisory     1,445,910  
  Excise tax     174,826  
  Preferred share remarketing     122,999  
  Administrative     115,153  
  Audit and legal     83,538  
  Custodian     78,927  
  Shareholder reporting     48,992  
  Compliance and internal audit     41,677  
  Trustees' fees and expenses     20,404  
  Other     97,241  
   
 
    Total expenses     2,229,667  
  Less: expenses waived by the Advisor     (425,268 )
   
 
    Net expenses     1,804,399  
   
 
      Net investment income     6,724,184  
   
 
Realized and unrealized gain on investments        
  Net realized gain on investments     11,075,804  
  Net change in unrealized appreciation on investments     20,905,533  
   
 
  Net realized and unrealized gain on investments     31,981,337  
   
 
  Distributions to preferred shareholders from net investment income     (1,552,028 )
  Distributions to preferred shareholders from net realized gain on investments     (813,812 )
   
 
    Net increase in net assets attributable to common shares resulting from operations   $ 36,339,681  
   
 

See notes to financial statements.


10



RMR Real Estate Fund
Financial Statements
– continued

Statement of Changes in Net Assets


 
 
  Year Ended
December 31,
2006

  Year Ended
December 31,
2005

 

 
Increase (decrease) in net assets resulting from operations              
  Net investment income   $ 6,724,184   $ 4,370,527  
  Net realized gain on investments     11,075,804     6,758,346  
  Net change in unrealized appreciation/(depreciation) on investments     20,905,533     (7,347,940 )
  Distributions to preferred shareholders from:              
    Net investment income     (1,552,028 )   (667,974 )
    Net realized gain on investments     (813,812 )   (928,346 )
   
 
 
      Net increase in net assets attributable to common shares resulting from operations     36,339,681     2,184,613  
   
 
 
  Distributions to common shareholders from:              
    Net investment income     (5,371,982 )   (3,702,553 )
    Net realized gain on investments     (2,816,818 )   (5,168,647 )
   
 
 
    Total increase (decrease) in net assets attributable to common shares     28,150,881     (6,686,587 )
Net assets attributable to common shares              
  Beginning of year     106,669,994     113,356,581  
   
 
 
  End of year   $ 134,820,875   $ 106,669,994  
   
 
 
Common shares issued and repurchased              
  Shares outstanding, beginning of year     6,824,000     6,824,000  
    Shares issued          
   
 
 
  Shares outstanding, end of year     6,824,000     6,824,000  
   
 
 

See notes to financial statements.


11


RMR Real Estate Fund
Financial Highlights

Selected Data For A Common Share Outstanding Throughout Each Period


 
 
  Year Ended
December 31,
2006

  Year Ended
December 31,
2005

  Year Ended
December 31,
2004

  For the
Period
December 18,
2003(a) to
December 31,
2003

 

 
Per Common Share Operating Performance (b)                          
Net asset value, beginning of period   $ 15.63   $ 16.61   $ 14.35   $ 14.33 (c)
   
 
 
 
 
Income from Investment Operations                          
Net investment income (d)(e)     .99     .64     .47     .10  
Net realized and unrealized appreciation/(depreciation) on investments (e)     4.69     (.08 )   3.11     (.05 )
Distributions to preferred shareholders (common stock equivalent basis) from:                    
  Net investment income (e)     (.23 )   (.10 )   (.05 )    
  Net realized gain on investments (e)     (.12 )   (.14 )   (.05 )    
   
 
 
 
 
Net increase in net asset value from operations     5.33     .32     3.48     .05  
Less: Distributions to common shareholders from:                          
  Net investment income (e)     (.79 )   (.54 )   (.53 )    
  Net realized gain on investments (e)     (.41 )   (.76 )   (.57 )    
Common share offering costs charged to capital                 (.03 )
Preferred share offering costs charged to capital             (.12 )    
   
 
 
 
 
Net asset value, end of period   $ 19.76   $ 15.63   $ 16.61   $ 14.35  
   
 
 
 
 
Market price, beginning of period   $ 13.15   $ 14.74   $ 15.00   $ 15.00  
   
 
 
 
 
Market price, end of period   $ 17.48   $ 13.15   $ 14.74   $ 15.00  
   
 
 
 
 
Total Return (f)                          
Total investment return based on:                          
  Market price (g)     43.77 %   (1.96 )%   6.42 %   0.00 %
  Net asset value (g)     35.27 %   2.10 %   24.73 %   0.14 %
Ratios/Supplemental Data:                          
Ratio to average net assets attibutable to common shares of:                          
  Net investment income, before total preferred share
distributions (d)(e)
    5.60 %   4.02 %   3.22 %   27.45% (h)
  Total preferred share distributions     1.97 %   1.47 %   0.67 %   0.00% (h)
  Net investment income, net of preferred share distributions (d)(e)     3.63 %   2.55 %   2.55 %   27.45% (h)
  Expenses, net of fee waivers     1.50 %   1.50 %   1.69 %   2.40% (h)
  Expenses, before fee waivers     1.86 %   1.87 %   2.05 %   2.65% (h)
Portfolio turnover rate     36.20 %   22.15 %   35.52 %   17.49 %
Net assets attributable to common shares, end of period (000s)   $ 134,821   $ 106,670   $ 113,357   $ 95,776  
Preferred shares, liquidation preference ($25,000 per share) (000s)   $ 50,000   $ 50,000   $ 50,000   $  
Asset coverage per preferred share (i)   $ 92,411   $ 78,335   $ 81,679   $  
(a)
Commencement of operations.
(b)
Based on average shares outstanding.
(c)
Net asset value at December 18, 2003, reflects the deduction of the average sales load and offering costs of $0.67 per share paid by the holders of common shares from the $15.00 offering price. We paid a sales load and offering cost of $0.68 per share on 6,660,000 common shares sold to the public and no sales load or offering costs on 7,000 common shares sold to affiliates of the RMR Advisors for $15 per share.
(d)
Amounts are net of expenses waived by RMR Advisors.
(e)
As discussed in Note A (6) to the financial statements, a portion of the distributions we received on our investments are not included in investment income for financial reporting purposes.
(f)
Total returns for periods of less than one year are not annualized.
(g)
Total return based on per share market price 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 market prices on the ex-dividend date. The total return based on net asset value, or NAV, assumes the purchase of common shares at NAV on the first day and sales of common shares at NAV on the last day of the period indicated; distributions are assumed to be reinvested at NAV on the ex-dividend date. Results represent past performance and do not guarantee future results. Total return would have been lower if RMR Advisors had not contractually waived a portion of its investment advisory fee.
(h)
Annualized.
(i)
Asset coverage per share equals net assets attributable to common shares plus the liquidation preference of the preferred shares divided by the total number of preferred shares outstanding at the end of the period.

See notes to financial statements.


12



RMR Real Estate Fund
Notes to Financial Statements

December 31, 2006

Note A

(1)  Organization

RMR Real Estate Fund, or the Fund, was organized as a Massachusetts business trust on July 2, 2002, and is registered under the Investment Company Act of 1940, as amended, as a non-diversified closed-end management investment company. The Fund had no operations prior to December 18, 2003, other than matters relating to the Fund's establishment and registration of the Fund's common shares under the Securities Act of 1933.

(2)  Use of Estimates

Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Fund's management to make estimates and assumptions that may affect the amounts reported in the financial statements and related notes. The actual results could differ from these estimates.

(3)  Portfolio Valuation

Investment securities of the Fund are valued at the latest sales price whenever that price is readily available on that day; securities for which no sales were reported on that day, unless otherwise noted, are valued at the last available bid price on that day. Securities traded primarily on the NASDAQ Stock Market, or NASDAQ, are normally valued by the Fund at the NASDAQ Official Closing Price, or NOCP, provided by NASDAQ each business day. The NOCP is the most recently reported price as of 4:00:06 p.m., eastern time, unless that price is outside the range of the "inside" bid and asked prices (i.e., the bid and asked prices that dealers quote to each other when trading for their own accounts); in that case, NASDAQ will adjust the price to equal the inside bid or asked price, whichever is closer. Because of delays in reporting trades, the NOCP may not be based on the price of the last trade to occur before the market closes. Some fixed income securities may be valued using pricing provided by a pricing service. Any of the Fund's securities which are not readily marketable, which are not traded or which have other characteristics of illiquidity are valued by the Fund at fair value as determined in good faith under the supervision of the Fund's board of trustees. Numerous factors may be considered when determining fair value of a security, including cost at date of purchase, type of security, the nature and duration of restrictions on disposition of the security and whether the issuer of the security being fair valued has other securities of the same type outstanding. Short term debt securities with less than 60 days until maturity may be valued at cost, which when combined with interest accrued, approximates market value.

(4)  Securities Transactions and Investment Income

Securities transactions are recorded on a trade date basis. Dividend income is recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, including accretion of original issue discount, where applicable, and accretion of discount on short term investments, is recorded on the accrual basis. Realized gains and losses from securities transactions are recorded on the basis of identified cost.

(5)  Federal Income Taxes

The Fund has qualified and intends to qualify in the future as a "regulated investment company" and to comply with the applicable provisions of subchapter M of the Internal Revenue Code of 1986, as amended, so


13


that it will generally not be subject to federal income tax. However, the Fund may be subject to a 4% excise tax to the extent the Fund does not distribute substantially all taxable earnings.

(6)  Distributable Earnings

The Fund earns income, net of expenses, daily on its investments. It is the policy of the Fund to pay a stable distribution amount to common shareholders on a monthly basis and distributions to Fund shareholders are declared pursuant to this policy. The Fund paid distributions of $0.10 per common share on January 31, 2007. On February 12, 2007, the Fund declared distributions of $0.10 per common share payable in February, March and April 2007. Distributions to shareholders are recorded on the ex-dividend date. The Fund's distributions may consist of ordinary income (net investment income and short term capital gains), long term capital gains and return of capital. To the extent the Fund's net realized capital gains, if any, can be offset by capital loss carry-forwards, it is the policy of the Fund not to distribute such gains. Distributions to preferred shareholders are determined as described in Note D.

The Fund has substantial investments in real estate investment trusts, or REITs, which are generally not subject to federal income taxes. Distributions that the Fund received from REITs can be classified as ordinary income, capital gain income or return of capital by the REITs that make these distributions to the Fund. The Fund has excluded from its investment income the portions of the distributions received from REITs classified by those REITs as capital gain income and return of capital. The Fund has included in its "net realized gain on investments" that portion of the distributions received from REITs that is classified by those REITs as capital gain income. Similarly, the Fund has credited its "net change in unrealized appreciation on investments" with that portion of the distributions received from REITs that is classified by those REITs as return of capital. The classification of distributions received from the Fund's investments were as follows:

 
  Year ended
December 31,
2006

  Year ended
December 31,
2005

Ordinary income   $ 8,163,300   $ 5,904,080
Capital gain income     1,891,893     2,745,522
Return of capital     2,131,782     2,860,098
   
 
Total distributions received   $ 12,186,975   $ 11,509,700
   
 

The Fund distinguishes between distributions to shareholders on a tax basis and a financial reporting basis. Only distributions in excess of accumulated tax basis earnings and profits are reported in the financial statements as a tax return of capital. Differences in the recognition or classification of income between the financial statements and tax earnings and profits which result in temporary over distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains in the components of net assets on the Statement of Assets and Liabilities.


14



The tax character of distributions made by the Fund during the years ended December 31, 2006 and December 31, 2005, were as follows:

 
  Year ended
December 31,
2006

  Year ended
December 31,
2005

Ordinary income   $ 7,985,219   $ 4,881,039
Net long term capital gains     2,569,421     5,586,481
   
 
    $ 10,554,640   $ 10,467,520
   
 

As of December 31, 2006, the components of distributable earnings on a federal income tax basis were as follows:

Undistributed ordinary income   $
Undistributed net long-term capital gains     8,659,498
Net unrealized appreciation     29,643,756

The differences between the financial reporting basis and tax basis of undistributed net long term capital gains and net unrealized appreciation are due to wash sales of portfolio investments.

The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation as of December 31, 2006, are as follows:

Cost   $ 155,026,855  
   
 
Gross unrealized appreciation   $ 31,319,332  
Gross unrealized depreciation     (1,675,576 )
   
 
Net unrealized appreciation   $ 29,643,756  
   
 

(7)  Concentration of Risk

Under normal market conditions, the Fund's investments will be concentrated in income producing common shares, preferred shares and debt securities, including convertible preferred and debt securities, issued by real estate companies and REITs. The value of Fund shares may fluctuate more than the shares of a fund not concentrated in the real estate industry due to economic, legal, regulatory, technological or other developments affecting the United States real estate industry.

(8)  Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 is effective for fiscal years beginning after December 15, 2006. The Securities and Exchange Commission has since delayed the application of FIN 48 to open and closed end funds to not later than June 29, 2007. FIN 48 prescribes how the Fund should recognize, measure and present in the Fund's financial statements uncertain tax provisions that have been taken or expected to be taken in a tax return. Pursuant to FIN 48 the Fund can recognize a tax benefit only if it is "more likely than not" that a particular tax position will be sustained upon examination or audit. To the extent the "more likely than not" standard has been satisfied the benefits associated with a tax position is measured as the largest


15


amount that is greater than 50% likely of being realized upon settlement. The Fund has evaluated the effect that the adoption of FIN 48 will have on its financial statements and does not anticipate the effect, if any, will be material.

In September 2006, FASB issued Statement of Accounting Standards No. 157, "Fair Value Measurements" (SFAS 157), which is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands required disclosures about fair value measurements. The Fund is currently evaluating the impact, if any, the adoption of SFAS 157 will have on its financial statements.

Note B

Advisory and Administration Agreements and Other Transactions with Affiliates

The Fund has an advisory agreement with RMR Advisors, Inc., or RMR Advisors, to provide the Fund with a continuous investment program, to make day-to-day investment decisions and generally to manage the business affairs of the Fund in accordance with its investment objectives and policies. Pursuant to the agreement, RMR Advisors is compensated at an annual rate of 0.85% of the Fund's average daily managed assets. Managed assets means the total assets of the Fund less liabilities other than any indebtedness entered into for purposes of leverage. For purposes of calculating managed assets, the liquidation preference of preferred shares are not considered liabilities.

RMR Advisors has contractually agreed to waive a portion of its annual fee equal to 0.25% of the Fund's average daily managed assets until December 18, 2008. The Fund incurred net advisory fees of $1,020,642 in 2006.

RMR Advisors, and not the Fund, has contractually agreed to pay the lead underwriter of the Fund's initial public offering, an annual fee equal to 0.15% of the Fund's managed assets. This fee is paid quarterly in arrears during the term of RMR Advisors' advisory agreement and is paid by the RMR Advisors, not the Fund. The aggregate fees paid pursuant to the contract plus reimbursement of legal expenses of the underwriters in that offering will not exceed 4.5% of the total price of the common shares in the initial public offering.

RMR Advisors also performs administrative functions for the Fund pursuant to an administration agreement with the Fund. RMR Advisors has entered into a subadministration agreement with State Street Bank and Trust Company, or State Street, to perform substantially all Fund accounting and other administrative services. Under the administration agreement, RMR Advisors is entitled to reimbursement of the cost of providing administrative services. The Fund reimbursed RMR Advisors for $115,153 of subadministrative fees charged by State Street in 2006.

Each trustee who is not a director, officer or employee of RMR Advisors and who is not an "interested person" of the Fund as defined under the Investment Company Act of 1940, as amended, is considered to be a "disinterested trustee". Disinterested trustees are each paid by the Fund an annual fee plus fees for board and committee meetings. The Fund incurred $20,404 of trustee fees and expenses in 2006.

The Fund's board of trustees and separately the disinterested trustees authorized the Fund to make reimbursement payments to RMR Advisors for costs related to the Fund's compliance and internal audit programs. The Fund incurred $41,677 of compliance and internal audit expense in 2006. The Fund also participates in


16



pooled insurance programs with RMR Advisors and other funds managed by RMR Advisors and makes payments of allocated portions of related premiums. The Fund incurred $21,411 of insurance expense in 2006.

Note C

Securities Transactions

During the year ended December 31, 2006, there were purchases and sales transactions (excluding short term securities) of $59,802,815 and $59,305,648, respectively. Brokerage commissions on securities transactions amounted to $64,920 during the year ended December 31, 2006.

Note D

Preferred Shares

The Fund's 2,000 outstanding Series T auction preferred shares have a liquidation preference of $25,000 per share plus an amount equal to accumulated but unpaid distributions. The preferred shares are senior to the Fund's common shares and rank on parity with any other class or series of preferred shares of the Fund as to the payment of periodic distributions, including distribution of assets upon liquidation. If the Fund does not timely cure a failure to (1) maintain asset coverage for the preferred shares as required by rating agencies, or (2) maintain asset coverage, as defined in the Investment Company Act of 1940, as amended, of at least 200%, the preferred shares will be subject to redemption at an amount equal to their liquidation preference plus accumulated but unpaid distributions. The holders of the preferred shares have voting rights equal to the holders of the Fund's common shares and generally vote together with the holders of the common shares as a single class. Holders of the preferred shares, voting as a separate class, also are entitled to elect two of the Fund's trustees. The Fund pays distributions on the preferred shares at a rate set at auctions held generally every seven days. Distributions are generally payable every seven days, on the first business day following the end of a distribution period. The preferred share distribution rate was 5.15% per annum as of December 31, 2006.

Note E

Submission of Proposals to a Vote of Shareholders (unaudited)

The annual meeting of Fund shareholders was held on May 9, 2006. Following is a summary of the proposals submitted to shareholders for vote at the meeting and votes cast:

Proposal

  Votes for
  Votes withheld
  Votes abstained
Common shares            
  Election of Frank J. Bailey as trustee until the 2009 annual meeting.   6,380,655   73,798  
Preferred shares            
  Election of Frank J. Bailey as trustee until the 2009 annual meeting.   391   47  
  Election of Gerard M. Martin as trustee until the 2009 annual meeting.   391   47  

17


Report of Independent Registered Public Accounting Firm

To the Board of Trustees and
Shareholders of RMR Real Estate Fund:

We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RMR Real Estate Fund (the "Fund") as of December 31, 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 December 31, 2006, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers are 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 RMR Real Estate Fund at December 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 the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

SIGNATURE

Boston, Massachusetts
February 16, 2007


18


RMR Hospitality and Real Estate Fund
December 31, 2006

    LOGO

To our shareholders,

In the pages that follow, you will find data summarizing our financial results for 2006 and our financial position as of December 31, 2006.

For 2006, our investment allocation to the sub-sector of mortgage real estate investment trusts, or REITs, increased from 1% to 7% of total investments, our largest sub-sector increase. During the same time period, our allocation to the office sub-sector decreased from 20% to 13% of total investments, the largest sub-sector decrease. These changes reflect our view of the business environments in these sub-sectors, the strengths and weakness of the companies that operate in those sub-sectors and the share prices of individual companies. During 2007, we will continue to monitor market conditions and position our portfolio according to our views of market conditions.

For securities that we held continuously during 2006, our three best performing investments during the period were the common stocks of BNP Residential Properties, Inc., Nationwide Health Properties, Inc. and Health Care Property Investors, Inc., with total returns during this period of 60%, 49% and 45%, respectively. Our three worst performing investments during the same period were common shares of Crescent Real Estate Equities, Inc., preferred shares of LBA Realty, Inc. and common shares of The Mills Corp. with total returns of positive 7%, negative 14% and negative 47%, respectively.

Thank you for your continued support. For more information, please view our website, at www.rmrfunds.com.

Sincerely,

GRAPHIC

Thomas M. O'Brien
President


19


RMR Hospitality and Real Estate Fund
December 31, 2006

    LOGO

Relevant Market Conditions

Hospitality Industry Fundamentals.    We expect the strong operating environment in 2006 to continue into 2007. Most companies operating in the hospitality business are seeing demand growth, which is driving revenues per available room, or RevPAR, a key operating measure in the hospitality industry, higher. Hotel room supply growth is currently increasing but was constrained in 2006 due to high investment cost and the lead time required for development. Private equity investors have eliminated the public securities of several hospitality companies which seems to have been a factor increasing the value of the remaining hospitality companies' securities.

Real Estate Industry Fundamentals    We believe that the operating environment for real estate companies will continue to improve in 2007, although not at the same rate as 2006. We expect vacancy rates to decline, rental rates to improve and funds from operations, or FFO, an important measure of performance for real estate companies, to grow. Most public real estate companies have ample liquidity to make acquisitions to further increase their earnings potential.

Real Estate Industry Technicals.    We believe demand for real estate securities over the long term will continue to increase. Demographic trends in the U.S. include growth in the over age 50 population; we believe that individuals in that age category tend to focus their investments in higher yielding stocks like REITs. Institutions have been increasing their allocations to real estate securities. We believe that demand for real estate made 2006 the biggest merger and acquisition year ever in the real estate securities market.

Fund Strategies, Techniques and Performance

Our primary objective is to earn and pay to our common shareholders a high level of current income by investing in hospitality and real estate companies. Our secondary objective is capital appreciation. There can be no assurance that we will achieve our investment objectives.

During 2006, our total return on net asset value, or NAV (including NAV changes and assuming a hypothetical reinvestment of distributions at NAV) was 25.9%. During that same period, the total return for the MSCI US REIT Total Return Index (an unmanaged index of REIT common stocks) was 35.9% and the total return for the Merrill Lynch REIT Preferred Index (an unmanaged index of REIT preferred stocks) was 9.7%. We believe these two indices are relevant to us because our investments, excluding short term investments, as of December 31, 2006, include 62% REIT common stocks and 30% REIT preferred stocks. The S&P 500 Index (an unmanaged index published as Standard and Poor's Composite Index of 500 common stocks) total return for 2006 was 15.8%.


20



Portfolio holdings by sub-sector as a percentage of investments (as of December 31, 2006) *

 
   
 
Hospitality real estate   31 %
Diversified real estate   17 %
Office real estate   13 %
Health care real estate   10 %
Others, less than 10% each   28 %
Short term investments   1 %
   
 
  Total investments   100 %
   
 
REITs   93 %
Other   6 %
Short term investments   1 %
   
 
  Total investments   100 %
   
 

*
These percentages represent the Fund's portfolio holdings by sub-sector as a percentage of total portfolio holdings and do not agree with the percentages included in the Portfolio of Investments schedule which represent the Fund's portfolio holdings by sub-sector as a percentage of the Fund's total net assets.

21


RMR Hospitality and Real Estate Fund
Portfolio of Investments
– December 31, 2006


Company

  Shares

  Value


Common Stocks – 92.2%          
Real Estate Investment Trusts – 88.9%          
  Apartments – 5.1%          
    Apartment Investment & Management Co.   36,200   $ 2,027,924
    Associated Estates Realty Corp.   5,600     76,944
    BNP Residential Properties, Inc.   16,000     386,400
    Home Properties, Inc.   5,500     325,985
    United Dominion Realty Trust, Inc.   14,100     448,239
       
          3,265,492
  Diversified – 22.2%          
    Centracore Properties Trust   14,150     457,470
    Colonial Properties Trust   81,900     3,839,472
    Cousins Properties, Inc.   10,000     352,700
    Crescent Real Estate Equities Co.   166,500     3,288,375
    iStar Financial, Inc.   6,000     286,920
    Lexington Corporate Properties Trust   107,400     2,407,908
    Liberty Property Trust   26,000     1,277,640
    National Retail Properties, Inc.   89,850     2,062,057
    Newkirk Realty Trust, Inc.   8,000     144,320
    Spirit Finance Corp.   12,500     155,875
    Washington Real Estate Investment Trust   300     12,000
       
          14,284,737
  Health Care – 10.5%          
    Health Care Property Investors, Inc.   6,770     249,271
    Health Care REIT, Inc.   75,740     3,258,335
    Healthcare Realty Trust, Inc.   4,300     170,022
    Medical Properties Trust, Inc.   17,050     260,865
    Nationwide Health Properties, Inc.   86,000     2,598,920
    OMEGA Healthcare Investors, Inc.   2,000     35,440
    Universal Health Realty Income Trust   5,000     194,900
       
          6,767,753
  Hospitality – 10.7%          
    Ashford Hospitality Trust, Inc.   59,000     734,550
    Eagle Hospitality Properties Trust, Inc.   51,000     468,180
    Entertainment Properties Trust   18,800     1,098,672
    Equity Inns, Inc.   31,200     497,952
    FelCor Lodging Trust, Inc.   20,000     436,800
    Hersha Hospitality Trust   38,100     432,054
    Highland Hospitality Corp.   9,000     128,250
    Host Hotels & Resorts, Inc.   4,000     98,200
    Innkeepers USA Trust   38,200     592,100
    LaSalle Hotel Properties   5,200     238,420
See notes to financial statements and notes to portfolio of investments.

22


  Hospitality – continued          
    Strategic Hotels & Resorts, Inc.   2,000   $ 43,580
    Sunstone Hotel Investors, Inc.   8,000     213,840
    Supertel Hospitality, Inc.   250,130     1,733,401
    Winston Hotels, Inc.   10,000     132,500
       
          6,848,499
  Industrial – 9.1%          
    DCT Industrial Trust, Inc.   5,300     62,540
    EastGroup Properties, Inc.   4,000     214,240
    First Industrial Realty Trust, Inc.   104,160     4,884,062
    ProLogis   11,000     668,470
       
          5,829,312
  Manufactured Homes – 0.1%          
    Sun Communities, Inc.   2,000     64,720
  Mortgage – 7.9%          
    Abingdon Investment, Ltd. (a)(b)   200,000     2,000,000
    American Mortgage Acceptance Co.   12,700     214,376
    Arbor Realty Trust, Inc.   1,100     33,099
    Crystal River Capital, Inc.   26,900     686,757
    HomeBanc Corp.   12,500     52,875
    KKR Financial Corp.   5,500     147,345
    New Century Financial Corp.   9,000     284,310
    Newcastle Investment Corp.   17,600     551,232
    NovaStar Financial, Inc.   35,500     946,075
    Thornburg Mortgage, Inc.   7,000     175,910
       
          5,091,979
  Office – 11.3%          
    American Financial Realty Trust   37,500     429,000
    Brandywine Realty Trust   46,400     1,542,800
    Columbia Equity Trust, Inc.   3,000     57,330
    Corporate Office Properties Trust   11,500     580,405
    Douglas Emmett, Inc.   8,300     220,697
    Equity Office Properties Trust   50,000     2,408,500
    Highwoods Properties, Inc.   45,000     1,834,200
    Maguire Properties, Inc.   4,000     160,000
    Parkway Properties, Inc.   300     15,303
       
          7,248,235
  Other Financial Services – 0.1%          
    Friedman Billings Ramsey Group, Inc.   5,000     40,000
See notes to financial statements and notes to portfolio of investments.

23


  Retail – 5.8%          
    CBL & Associates Properties, Inc.   9,000   $ 390,150
    Developers Diversified Realty Corp.   2,000     125,900
    Equity One, Inc.   3,000     79,980
    Glimcher Realty Trust   23,400     625,014
    New Plan Excel Realty Trust   46,270     1,271,500
    Pennsylvania Real Estate Investment Trust   2,000     78,760
    Ramco-Gershenson Properties Trust   3,000     114,420
    Realty Income Corp.   12,200     337,940
    The Mills Corp.   36,100     722,000
    Urstadt Biddle Properties, Inc.   800     15,272
       
          3,760,936
  Specialty – 5.4%          
    Getty Realty Corp.   34,000     1,050,600
    Resource Capital Corp.   2,000     33,900
    Trustreet Properties, Inc.   143,200     2,412,920
       
          3,497,420
  Storage – 0.7%          
    Sovran Self Storage, Inc.   8,100     463,968
Total Real Estate Investment Trusts (Cost $47,255,187)         57,163,051
  Other – 3.3%          
    American Capital Strategies, Ltd.   14,500     670,770
    Iowa Telecommunication Services, Inc.   25,800     508,518
    Seaspan Corp.   33,400     772,208
    Wyndham Worldwide Corp. (b) (c)   6,000     192,120
Total Other (Cost $1,718,980)         2,143,616
Total Common Stocks (Cost $48,974,167)         59,306,667
Preferred Stocks – 42.0%          
Real Estate Investment Trusts – 42.0%          
  Apartments – 1.0%          
    Apartment Investment & Management Co., Series U   24,000     612,480
  Diversified – 2.4%          
    Colonial Properties Trust, Series E   23,067     584,288
    Digital Realty Trust, Inc., Series A   15,000     389,850
    LBA Realty LLC, Series B   30,000     600,000
       
          1,574,138
See notes to financial statements and notes to portfolio of investments.

24


  Health Care – 4.1%          
    Health Care REIT, Inc., Series F   40,000   $ 1,034,800
    Health Care REIT, Inc., Series G   20,000     620,000
    LTC Properties, Inc., Series F   40,000     1,006,000
       
          2,660,800
  Hospitality – 24.3%          
    Ashford Hospitality Trust, Series A   46,000     1,190,480
    Eagle Hospitality Properties Trust, Inc., Series A   28,000     714,560
    FelCor Lodging Trust, Inc., Series C   60,000     1,512,600
    Hersha Hospitality Trust, Series A   44,000     1,155,000
    Highland Hospitality Corp., Series A   170,000     4,311,200
    Host Marriott Corp., Series E   100,000     2,659,000
    Innkeepers USA Trust, Series C   27,000     680,670
    LaSalle Hotel Properties, Series E   5,000     128,525
    LaSalle Hotel Properties, Series G   10,000     254,500
    Strategic Hotels & Resorts, Inc., Series C   20,000     515,000
    Winston Hotels, Inc., Series B   99,000     2,508,165
       
          15,629,700
  Manufactured Homes – 0.4%          
    Affordable Residential Communities, Series A   9,600     242,880
  Mortgage – 1.7%          
    HomeBanc Corp., Series A   25,000     613,750
    New Century Financial Corp., Series A   20,000     485,000
       
          1,098,750
  Office – 7.7%          
    Alexandria Real Estate Equities, Inc., Series C   120,000     3,139,200
    SL Green Realty Corp., Series D   70,000     1,818,250
       
          4,957,450
  Retail – 0.4%          
    The Mills Corp., Series E   1,800     41,508
    The Mills Corp., Series G   10,000     219,500
       
          261,008
Total Preferred Stocks (Cost $26,095,934)         27,037,206
See notes to financial statements and notes to portfolio of investments.

25



 
Company

  Shares or
Principal Amount

  Value

 

 
Debt Securities – 8.4%              
  Hospitality – 8.4%              
    American Real Estate Partners LP, 8.125%, 06/01/2012   $ 2,000,000   $ 2,065,000  
    FelCor Lodging LP, 8.50%, 06/01/2011 (d)     1,600,000     1,704,000  
    Six Flags, Inc., 9.75%, 04/15/2013     1,760,000     1,652,200  
Total Debt Securities (Cost $5,257,516)           5,421,200  
Short Term Investments – 0.9%              
  Other Investment Companies – 0.9%              
    SSgA Money Market Fund, 4.99% (e) (Cost $566,344)     566,344     566,344  
Total Investments – 143.5% (Cost $80,893,961)           92,331,417  
Other assets less liabilities – (0.0)%           (14,448 )
Preferred Shares, at liquidation preference – (43.5)%           (28,000,000 )
Net Assets applicable to common shareholders – 100%         $ 64,316,969  

Notes to Portfolio of Investments

(a)
144A securities. Securities restricted for resale to Qualified Institutional Buyers (3.1% of net assets).
(b)
As of December 31, 2006, this security had not paid a distribution.
(c)
A hospitality company.
(d)
Also a Real Estate Investment Trust.
(e)
Rate reflects 7 day yield as of December 31, 2006.

See notes to financial statements.


26



RMR Hospitality and Real Estate Fund
Financial Statements

Statement of Assets and Liabilities


December 31, 2006

   

Assets      
  Investments in securities, at value (cost $80,893,961)   $ 92,331,417
  Cash     21,055
  Dividends and interest receivable     873,900
   
    Total assets     93,226,372
   
Liabilities      
  Distributions payable – common shares     310,625
  Advisory fee payable     47,476
  Distributions payable – preferred shares     27,765
  Accrued legal expenses     274,380
  Accrued expenses and other liabilities     249,157
   
    Total liabilities     909,403
   
Preferred shares, at liquidation preference      
  Auction preferred shares, Series Th;
$.001 par value per share; 1,120 shares issued and
outstanding at $25,000 per share liquidation preference
    28,000,000
   
Net assets attributable to common shares   $ 64,316,969
   
Composition of net assets      
  Common shares, $.001 par value per share;
unlimited number of shares authorized,
2,485,000 shares issued and outstanding
  $ 2,485
  Additional paid-in capital     46,993,809
  Accumulated net realized gain on investments     5,883,219
  Net unrealized appreciation on investments     11,437,456
   
Net assets attributable to common shares   $ 64,316,969
   
Net asset value per share attributable to common shares
(based on 2,485,000 shares outstanding)
  $ 25.88
   

See notes to financial statements.


27



RMR Hospitality and Real Estate Fund
Financial Statements
– continued

Statement of Operations


 
For the Year Ended December 31, 2006

   
 

 
Investment Income        
  Dividends (Cash distributions, net of capital gain
and return of capital distributions, received or due)
  $ 3,754,791  
  Interest     776,146  
   
 
    Total investment income     4,530,937  
   
 
Expenses        
  Advisory     743,003  
  Legal     707,268  
  Excise tax     136,292  
  Administrative     114,758  
  Preferred share remarketing     68,864  
  Custodian     68,487  
  Audit     55,997  
  Shareholder reporting     43,417  
  Compliance and internal audit     41,677  
  Trustees' fees and expenses     20,055  
  Other     76,185  
   
 
    Total expenses     2,076,003  
  Less: expenses waived by the Advisor     (218,530 )
   
 
    Net expenses     1,857,473  
   
 
      Net investment income     2,673,464  
   
 
Realized and unrealized gain on investments        
  Net realized gain on investments     6,418,390  
  Net change in unrealized appreciation on investments     5,902,770  
   
 
  Net realized and unrealized gain on investment transactions     12,321,160  
   
 
  Distributions to preferred shareholders from net investment income     (748,592 )
  Distributions to preferred shareholders from net realized gain on investments     (579,000 )
   
 
    Net increase in net assets attributable to common shares resulting from operations   $ 13,667,032  
   
 

See notes to financial statements.


28



RMR Hospitality and Real Estate Fund
Financial Statements
– continued

Statement of Changes in Net Assets


 
 
  Year Ended
December 31,
2006

  Year Ended
December 31,
2005

 

 
Increase (decrease) in net assets resulting from operations              
  Net investment income   $ 2,673,464   $ 2,815,626  
  Net realized gain on investments     6,418,390     2,777,962  
  Net change in unrealized appreciation/(depreciation) on investments     5,902,770     (3,222,844 )
  Distributions to preferred shareholders from:              
    Net investment income     (748,592 )   (403,117 )
    Net realized gain on investments     (579,000 )   (265,998 )
   
 
 
      Net increase in net assets attributable to common shares resulting from operations     13,667,032     1,701,629  
   
 
 
  Distributions to common shareholders from:              
    Net investment income     (2,101,833 )   (2,411,208 )
    Net realized gain on investments     (1,625,667 )   (1,626,917 )
Capital shares transactions              
  Net proceeds from sale of preferred shares         10,708,615  
   
 
 
    Net increase from capital share transactions         10,708,615  
  Less: Liquidation preference of preferred shares issued         (11,000,000 )
   
 
 
    Total increase (decrease) in net assets attributable to common shares     9,939,532     (2,627,881 )
Net assets attributable to common shares              
  Beginning of year     54,377,437     57,005,318  
   
 
 
  End of year   $ 64,316,969   $ 54,377,437  
   
 
 
Common shares issued and repurchased              
  Shares outstanding, beginning of year     2,485,000     2,485,000  
    Shares issued          
   
 
 
  Shares outstanding, end of year     2,485,000     2,485,000  
   
 
 

See notes to financial statements.


29



RMR Hospitality and Real Estate Fund
Financial Highlights

Selected Data For A Common Share Outstanding Throughout The Period


 
 
  Year Ended
December 31,
2006

  Year Ended
December 31,
2005

  For the
Period
April 27,
2004(a) to
December 31,
2004

 

 
Per Common Share Operating Performance (b)                    
Net asset value, beginning of period   $ 21.88   $ 22.94   $ 19.28 (c)
   
 
 
 
Income from Investment Operations                    
Net investment income (d)(e)     1.08     1.13     .71  
Net realized and unrealized appreciation/(depreciation) on investments (e)     4.95     (.19 )   3.95  
Distributions to preferred shareholders (common stock equivalent basis)                    
  Net investment income (e)     (.30 )   (.16 )   (.06 )
  Net realized gain on investments (e)     (.23 )   (.11 )   (.01 )
   
 
 
 
Net increase in net asset value from operations     5.50     .67     4.59  
Less: Distributions to common shareholders from:                    
  Net investment income (e)     (.85 )   (.96 )   (.65 )
  Net realized gain on investments (e)     (.65 )   (.65 )   (.10 )
Common shares offering costs charged to capital             (.04 )
Preferred shares offering costs charged to capital         (.12 )   (.14 )
   
 
 
 
Net asset value, end of period   $ 25.88   $ 21.88   $ 22.94  
   
 
 
 
Market price, beginning of period   $ 18.21   $ 19.98   $ 20.00  
   
 
 
 
Market price, end of period   $ 22.95   $ 18.21   $ 19.98  
   
 
 
 
Total Return (f)                    
Total investment return based on:                    
  Market price (g)     35.54 %   (0.73 )%   3.93 %
  Net asset value (g)     25.89 %   2.54 %   23.16 %
Ratios/Supplemental Data:                    
Ratio to average net assets attributable to common shares of:                    
  Net investment income, before total preferred share distributions (d)(e)     4.50 %   5.04 %   4.96% (h)
  Total preferred share distributions     2.23 %   1.20 %   0.50% (h)
  Net investment income, net of preferred share distributions (d)(e)     2.27 %   3.84 %   4.46% (h)
  Expenses, net of fee waivers     3.13 %   1.80 %   1.86% (h)
  Expenses, before fee waivers     3.49 %   2.14 %   2.18% (h)
Portfolio turnover rate     45.70 %   23.95 %   20.83 %
Net assets attributable to common shares, end of period (000s)   $ 64,317   $ 54,377   $ 57,005  
Preferred shares, liquidation preference ($25,000 per share) (000s)   $ 28,000   $ 28,000   $ 17,000  
Asset coverage per preferred share (i)   $ 82,426   $ 73,551   $ 108,830  
(a)
Commencement of operations.
(b)
Based on average shares outstanding.
(c)
Net asset value at April 27, 2004, reflects the deduction of the average sales loadand offering costs of $0.72 per share paid by the holders of common shares from the $20.00 offering price. We paid a sales load and offering cost of $0.90 per share on 2,000,000 common shares sold to the public and no sales load or offering costs on 480,000 common shares sold to affiliates of RMR Advisors for $20 per share.
(d)
Amounts are net of expenses waived by RMR Advisors.
(e)
As discussed in Note A (6) to the financial statements, a portion of the distributions we received on our investments are not included in investment income for financial reporting purposes.
(f)
Total returns for periods less than one year are not annualized.
(g)
Total return based on per share market price 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 market prices on the ex-dividend date. The total return based on net asset value, or NAV, assumes the purchase of common shares at NAV on the first day and sales of common shares at NAV on the last day of the period indicated; distributions are assumed to be reinvested at NAV on the ex-dividend date. Results represent past performance and do not guarantee future results. Total return would have been lower if RMR Advisors had not contractually waived a portion of its investment advisory fee.
(h)
Annualized.
(i)
Asset coverage per share equals net assets attributable to common shares plus the liquidation preference of the preferred shares divided by the total number of preferred shares outstanding at the end of the period.

See notes to financial statements.


30



RMR Hospitality and Real Estate Fund
Notes to Financial Statements

December 31, 2006

Note A

(1)  Organization

RMR Hospitality and Real Estate Fund, or the Fund, was organized as a Massachusetts business trust on January 27, 2004, and is registered under the Investment Company Act of 1940, as amended, as a non-diversified closed-end management investment company. The Fund had no operations until April 27, 2004, other than matters relating to the Fund's establishment and registration of the Fund's common shares under the Securities Act of 1933.

(2)  Use of Estimates

Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Fund's management to make estimates and assumptions that may affect the amounts reported in the financial statements and related notes. The actual results could differ from these estimates.

(3)  Portfolio Valuation

Investment securities of the Fund are valued at the latest sales price whenever that price is readily available on that day; securities for which no sales were reported on that day, unless otherwise noted, are valued at the last available bid price on that day. Securities traded primarily on the NASDAQ Stock Market, or NASDAQ, are normally valued by the Fund at the NASDAQ Official Closing Price, or NOCP, provided by NASDAQ each business day. The NOCP is the most recently reported price as of 4:00:06 p.m., eastern time, unless that price is outside the range of the "inside" bid and asked prices (i.e., the bid and asked prices that dealers quote to each other when trading for their own accounts); in that case, NASDAQ will adjust the price to equal the inside bid or asked price, whichever is closer. Because of delays in reporting trades, the NOCP may not be based on the price of the last trade to occur before the market closes. Some fixed income securities may be valued using pricing provided by a pricing service. Any of the Fund's securities which are not readily marketable, which are not traded or which have other characteristics of illiquidity are valued by the Fund at fair value as determined in good faith under the supervision of the Fund's board of trustees. Numerous factors may be considered when determining fair value of a security, including cost at date of purchase, type of security, the nature and duration of restrictions on disposition of the security and whether the issuer of the security being fair valued has other securities of the same type outstanding. Short term debt securities with less than 60 days until maturity may be valued at cost, which when combined with interest accrued, approximates market value.

(4)  Securities Transactions and Investment Income

Securities transactions are recorded on a trade date basis. Dividend income is recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, including accretion of original issue discount, where applicable, and accretion of discount on short term investments, is recorded on the accrual basis. Realized gains and losses from securities transactions are recorded on the basis of identified cost.

(5)  Federal Income Taxes

The Fund has qualified and intends to qualify in the future as a "regulated investment company" and to comply with the applicable provisions of subchapter M of the Internal Revenue Code of 1986, as amended, so


31


that it will generally not be subject to federal income tax. However, the Fund may be subject to a 4% excise tax to the extent the Fund does not distribute substantially all taxable earnings.

(6)  Distributable Earnings

The Fund earns income, net of expenses, daily on its investments. It is the policy of the Fund to pay a stable distribution amount to common shareholders on a monthly basis and distributions to Fund shareholders are declared pursuant to this policy. The Fund paid distributions of $0.125 per common share on January 31, 2007. On February 12, 2007, the Fund declared distributions of $0.125 per common share payable in February, March and April 2007. Distributions to shareholders are recorded on the ex-dividend date. The Fund's distributions may consist of ordinary income (net investment income and short term capital gains), long term capital gains and return of capital. To the extent the Fund's net realized capital gains, if any, can be offset by capital loss carry forwards, it is the policy of the Fund not to distribute such gains. Distributions to preferred shareholders are determined as described in Note D.

The Fund has substantial investments in real estate investment trusts, or REITs, which are generally not subject to federal income taxes. Distributions that the Fund received from REITs can be classified as ordinary income, capital gain income or return of capital by the REITs that make these distributions to the Fund. The Fund has excluded from its investment income the portions of the distributions received from REITs classified by those REITs as capital gain income and return of capital. The Fund has included in its "net realized gain on investments" that portion of the distributions received from REITs that is classified by those REITs as capital gain income. Similarly, the Fund has credited its "net change in unrealized appreciation on investments" with that portion of the distributions received from REITs that is classified by those REITs as return of capital. The classification of distributions received from the Fund's investments were as follows:

 
  Year ended
December 31,
2006

  Year ended
December 31,
2005

Ordinary income   $ 3,754,791   $ 2,798,599
Capital gain income     1,114,453     1,213,155
Return of capital     807,737     659,644
   
 
Total distributions received   $ 5,676,981   $ 4,671,398
   
 

The Fund distinguishes between distributions to shareholders on a tax basis and a financial reporting basis. Only distributions in excess of accumulated tax basis earnings and profits are reported in the financial statements as a tax return of capital. Differences in the recognition or classification of income between the financial statements and tax earnings and profits which result in temporary over distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains in the components of net assets on the Statement of Assets and Liabilities.


32



The tax character of distributions made by the Fund during the years ended December 31, 2006 and December 31, 2005, were as follows:

 
  Year ended
December 31,
2006

  Year ended
December 31,
2005

Ordinary income   $ 3,356,410   $ 3,719,492
Net long term capital gains     1,698,682     987,748
   
 
    $ 5,055,092   $ 4,707,240
   
 

As of December 31, 2006, the components of distributable earnings on a federal income tax basis were as follows:

Undistributed ordinary income   $ 189,134
Undistributed net long term capital gains     5,781,266
Net unrealized appreciation     11,350,276

The differences between the financial reporting basis and tax basis of undistributed ordinary income, undistributed net long term capital gains and net unrealized appreciation are due to wash sales of portfolio investments and excise tax accruals.

The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation as of December 31, 2006, are as follows:

Cost   $ 80,981,141  
   
 
Gross unrealized appreciation   $ 12,782,086  
Gross unrealized depreciation     (1,431,810 )
   
 
Net unrealized appreciation   $ 11,350,276  
   
 

(7)  Concentration of Risk

Under normal market conditions, the Fund's investments are concentrated in income producing common shares, preferred shares and debt securities, including convertible preferred and debt securities, issued by hospitality and real estate companies and REITs. The value of Fund shares may fluctuate more than the shares of a fund not concentrated in the hospitality and real estate industries due to economic, legal, regulatory, technological or other developments affecting the United States hospitality and real estate industries.

(8)  Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 is effective for fiscal years beginning after December 15, 2006. The Securities and Exchange Commission has since delayed the application of FIN 48 to open and closed end funds to not later than June 29, 2007. FIN 48 prescribes how the Fund should recognize, measure and present in the Fund's financial statements uncertain tax provisions that have been taken or expected to be taken in a tax return. Pursuant to FIN 48 the Fund can recognize a tax benefit only if it is "more likely than not" that a particular tax position will be sustained upon examination or audit. To the extent the "more likely


33


than not" standard has been satisfied the benefits associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement. The Fund has evaluated the effect that the adoption of FIN 48 will have on its financial statements and does not anticipate the effect, if any, will be material.

In September 2006, FASB issued Statement of Accounting Standards No. 157, "Fair Value Measurements" (SFAS 157), which is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands required disclosures about fair value measurements. The Fund is currently evaluating the impact, if any, the adoption of SFAS 157 will have on its financial statements.

Note B

Advisory and Administration Agreements and Other Transactions with Affiliates

The Fund has an advisory agreement with RMR Advisors, Inc., or RMR Advisors, to provide the Fund with a continuous investment program, to make day-to-day investment decisions and generally to manage the business affairs of the Fund in accordance with its investment objectives and policies. Pursuant to the agreement, RMR Advisors is compensated at an annual rate of 0.85% of the Fund's average daily managed assets. Managed assets means the total assets of the Fund less liabilities other than any indebtedness entered into for purposes of leverage. For purposes of calculating managed assets, the liquidation preference of preferred shares are not considered liabilities.

RMR Advisors has contractually agreed to waive a portion of its annual fee equal to 0.25% of the Fund's average daily managed assets, until April 27, 2009. The Fund incurred net advisory fees of $524,473 in 2006.

RMR Advisors, and not the Fund, has contractually agreed to pay the lead underwriters of the Fund's initial public offering, an aggregate annual fee equal to 0.15% of the Fund's managed assets. This fee is paid quarterly in arrears during the term of RMR Advisors' advisory agreement and is paid by the RMR Advisors, not the Fund. The aggregate fees paid pursuant to the contract plus reimbursement of legal expenses of the underwriters in that offering will not exceed 4.5% of the total price of the common shares in the initial public offering.

RMR Advisors also performs administrative functions for the Fund pursuant to an administration agreement with the Fund. RMR Advisors has entered into a subadministration agreement with State Street Bank and Trust Company, or State Street, to perform substantially all Fund accounting and other administrative services. Under the administration agreement, RMR Advisors is entitled to reimbursement of the cost of providing administrative services. The Fund reimbursed RMR Advisors for $114,758 of subadministrative fees charged by State Street in 2006.

Each trustee who is not a director, officer or employee of RMR Advisors and who is not an "interested person" of the Fund as defined under the Investment Company Act of 1940, as amended, is considered to be a "disinterested trustee". Disinterested trustees are each paid by the Fund an annual fee plus fees for board and committee meetings. The Fund incurred $20,055 of trustee fees and expenses in 2006.

The Fund's board of trustees and separately the disinterested trustees authorized the Fund to make reimbursement payments to RMR Advisors for costs related to the Fund's compliance and internal audit programs. The Fund incurred $41,677 of compliance and internal audit expense in 2006. The Fund also participates in


34



pooled insurance programs with RMR Advisors and other funds managed by RMR Advisors and makes payments of allocated portions of related premiums. The Fund incurred $17,580 of insurance expense in 2006.

Note C

Securities Transactions

During the year ended December 31, 2006, there were purchases and sales transactions (excluding short term securities) of $39,030,833 and $38,999,084, respectively. Brokerage commissions on securities transactions amounted to $54,247 during the year ended December 31, 2006.

Note D

Preferred Shares

The Fund's 1,120 outstanding Series Th auction preferred shares, have a liquidation preference of $25,000 per share, plus an amount equal to accumulated but unpaid distributions. The preferred shares are senior to the Fund's common shares and rank on parity with any other class or series of preferred shares of the Fund as to the payment of periodic distributions, including distribution of assets upon liquidation. If the Fund does not timely cure a failure to (1) maintain asset coverage for the preferred shares as required by rating agencies, or (2) maintain asset coverage, as defined in the Investment Company Act of 1940, as amended, of at least 200%, the preferred shares will be subject to redemption at an amount equal to their liquidation preference plus accumulated but unpaid distributions. The holders of the preferred shares have voting rights equal to the holders of the Fund's common shares and generally vote together with the holders of the common shares as a single class. Holders of the preferred shares, voting as a separate class, also are entitled to elect two of the Fund's trustees. The Fund pays distributions on the preferred shares at a rate set at auctions held generally every seven days. Distributions are generally payable every seven days, on the first business day following the end of a distribution period. The preferred share distribution rate was 5.10% per annum as of December 31, 2006.


35



Note E

Submission of Proposals to a Vote of Shareholders (unaudited)

The annual meeting of Fund shareholders was held on May 9, 2006. Following is a summary of the proposals submitted to shareholders for vote at the meeting and votes cast:

Proposal

  Votes for
  Votes withheld
  Votes abstained
Common shares            
  Election of Frank J. Bailey as trustee until the 2009 annual meeting.   1,978,830   15,029  
Preferred shares            
  Election of Frank J. Bailey as trustee until the 2009 annual meeting.   152   56  
  Election of Gerard M. Martin as trustee until the 2009 annual meeting.   152   56  

Note F

Litigation

The Fund commenced litigation against Mr. Phillip Goldstein, Bulldog Investors General Partnership, a hedge fund controlled by Mr. Goldstein and various other entities affiliated with Mr. Goldstein (collectively "Bulldog Investors"), on November 13, 2006. The purpose of this litigation is to enforce provisions in the organizational documents of the Fund that restrict the benefits of share ownership to 9.8% of the Fund's outstanding shares by any one shareholder of the Fund or group of shareholders acting together. The Bulldog Investors have contested personal jurisdiction in Massachusetts. A hearing on the matter is currently scheduled for March 22, 2007. During the year ended December 31, 2006, the Fund incurred $697,661 of expenses in connection with the litigation and related matters, which is reflected as a component of legal expense on the statement of operations.


36


Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders
of RMR Hospitality and Real Estate Fund:

We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RMR Hospitality and Real Estate Fund (the "Fund") as of December 31, 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 December 31, 2006, by correspondence with the custodian and brokers. 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 the RMR Hospitality and Real Estate Fund at December 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 the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

SIGNATURE

Boston, Massachusetts
February 16, 2007


37


RMR F.I.R.E. Fund
December 31, 2006

    LOGO

To our shareholders,

In the pages that follow, you will find data summarizing our financial results for the year ended December 31, 2006 and our financial position as of December 31, 2006.

For 2006, our investment allocation to the mortgage sub-sector increased from 7% to 15% of total investments, the largest such increase. During the same time period, our allocation to the diversified real estate sub-sector decreased from 16% to 12% of total investments, the largest such decrease. These changes reflect our view of the business environments in these sub-sectors, the strengths and weaknesses of the companies that operate in those sub-sectors and the share prices of individual companies. During 2007, we will continue to monitor market conditions and position our portfolio according to our views of market conditions.

For securities that we held continuously during 2006, our three best performing investments were the common stocks of Nationwide Health Properties, Inc. and Health Care Property Investors, Inc. and the preferred stock of Affordable Residential Communities with total returns of 47%, 43% and 43%, respectively. Our three worst performing investments during the same period were the preferred stock of LBA Realty Inc., and the common shares of Beverly Hills Bancorp and The Mills Corp. with negative total returns during the same period of 16%, 17% and 47%, respectively.

Thank you for your continued support. For more information, please view our website, at www.rmrfunds.com.

Sincerely,

GRAPHIC

Thomas M. O'Brien
President


38


RMR F.I.R.E. Fund
December 31, 2006

    LOGO

Relevant Market Conditions

Financial Services Industry Fundamentals.    Financial stocks had a good year in 2006. While some investors were concerned with the flat yield curve, a condition in which yields on U.S. treasury bonds are the same, or almost the same, no matter what the maturity of those bonds, and some were fearful of conditions they thought would lead to a substantial decline in the health of the residential real estate and mortgage markets, the potential for a rate cut by the Federal Reserve helped the stocks of financial companies to maintain or improve their values.

While we believe that some concerns still exist today and that the expectation for a Federal Reserve rate cut has been lessened, we believe that 2007 will include a strong U.S. economy, low levels of loan write offs by financial institutions and a generally stable interest rate environment, all of which we consider positive factors for financial stocks.

Financial Services Industry Technicals.    The number of acquisitions in the banking industry has been relatively low over the years prior to 2006. However, last year we did see a pickup in the size of the deals. The acquisitions of Golden West, AmSouth, and Mellon led to a total acquisition value of over $100 billion in 2006. We believe that this industry trend will continue.

Real Estate Industry Fundamentals.    We believe that the operating environment for real estate companies will continue to improve in 2007, although not at the same rate as 2006. We expect vacancy rates to decline, rental rates to improve and funds from operations, or FFO, an important measure of performance for real estate companies, to grow. Most public real estate companies have ample liquidity to make acquisitions to further increase their earnings potential.

Real Estate Industry Technicals.    We believe demand for real estate securities over the long term will continue to increase. Demographic trends in the U.S. include growth in the over age 50 population; we believe that individuals in that age category tend to focus their investments in higher yielding stocks like REITs. Institutions have been increasing their allocations to real estate securities. We believe that demand for real estate made 2006 the biggest merger and acquisition year ever in the real estate securities market.

Fund Strategies, Techniques and Performance

Our investment objective is to provide high total returns to our common shareholders through a combination of capital appreciation and current income. There can be no assurance that we will achieve our investment objective.

During 2006, our total return on net asset value, or NAV (including NAV changes and assuming a hypothetical reinvestment of distributions at NAV) was 21.5%. During the same period the S&P 500 Financial Sector Index (an unmanaged index of financial services common stocks) total return was 19.2%, the total return for the MSCI US REIT Total Return Index (an unmanaged index of REIT common stocks) was


39



35.9% and the Merrill Lynch REIT Preferred Index (an unmanaged index of REIT preferred stocks) was 9.7%. We believe these three indices are relevant to us because our investments, excluding short term investments, as of December 31, 2006, include 20% financial services stocks, 41% REIT common stocks and 38% REIT preferred stocks. The S&P 500 Index (an unmanaged index published as Standard and Poor's Composite Index of 500 common stocks) total return for 2006 was 15.8%.

Portfolio holdings by sub-sector as a percentage of investments
(as of December 31, 2006) *

Banks & Thrifts   10 %
Other Financial Services   9 %
Mortgage REITs   15 %
Retail REITs   14 %
Diversified REITs   12 %
Hospitality REITs   12 %
Other REITs less than 10%   25 %
Other   2 %
Short term investments   1 %
   
 
  Total investments   100 %
   
 
REITs   78 %
Financial Services   19 %
Other   2 %
Short term investments   1 %
   
 
  Total investments   100 %
   
 

*
These percentages represent the Fund's portfolio holdings by sub-sector as a percentage of total portfolio holdings and do not agree with the percentages included in the Portfolio of Investments schedule which represent the Fund's portfolio holdings by sub-sector as a percentage of the Fund's total net assets.

40



Company

  Shares

  Value


Common Stocks – 90.6%          
Financial Services – 26.5%          
  Banks – 8.1%          
    Comerica, Inc.   4,000   $ 234,720
    Farmers Capital Bank Corp.   3,035     103,584
    Fifth Third Bancorp   2,000     81,860
    First Commonwealth Financial Corp.   28,000     376,040
    First Horizon National Corp.   11,400     476,292
    Firstmerit Corp.   12,800     308,992
    FNB Corp.   28,500     520,695
    National City Corp.   17,400     636,144
    Trustco Bank Corp. NY   23,400     260,208
       
          2,998,535
  Thrifts – 7.4%          
    Beverly Hills Bancorp, Inc.   58     481
    Capitol Federal Financial   14,400     553,248
    Flagstar Bancorp, Inc.   25,000     371,000
    New York Community Bancorp, Inc.   72,200     1,162,420
    Washington Mutual, Inc.   14,000     636,860
       
          2,724,009
  Other Financial Services – 11.0%          
    American Capital Strategies, Ltd.   34,500     1,595,970
    CharterMac   44,200     948,974
    Fannie Mae   13,000     772,070
    Friedman Billings Ramsey Group, Inc. *   54,000     432,000
    Radian Group, Inc.   6,000     323,460
       
          4,072,474
Total Financial Services (Cost $10,807,340)         9,795,018
Real Estate – 61.8%          
  Apartments – 2.9%          
    Apartment Investment & Management Co. *   14,000     784,280
    Home Properties, Inc. *   300     17,781
    United Dominion Realty Trust, Inc. *   8,000     254,320
       
          1,056,381
  Diversified – 13.9%          
    Centracore Properties Trust *   9,600     310,368
    Cousins Properties, Inc. *   6,900     243,363
    Crescent Real Estate Equities Co. *   86,900     1,716,275
    iStar Financial, Inc. *   17,000     812,940
    Lexington Corporate Properties Trust *   45,000     1,008,900
    National Retail Properties, Inc. *   38,350     880,133
    Newkirk Realty Trust, Inc. *   8,000     144,320
       
          5,116,299
See notes to financial statements and notes to portfolio of investments.

41


  Health Care – 9.5%          
    Health Care Property Investors, Inc. *   16,850   $ 620,417
    Health Care REIT, Inc. *   34,904     1,501,570
    Healthcare Realty Trust, Inc. *   13,500     533,790
    Nationwide Health Properties, Inc. *   26,400     797,808
    OMEGA Healthcare Investors, Inc. *   2,000     35,440
       
          3,489,025
  Hospitality – 1.3%          
    Eagle Hospitality Properties Trust, Inc. *   36,500     335,070
    LaSalle Hotel Properties *   3,300     151,305
       
          486,375
  Industrial – 4.3%          
    DCT Industrial Trust, Inc. *   2,200     25,960
    First Industrial Realty Trust, Inc. *   33,700     1,580,193
       
          1,606,153
  Manufactured Homes – 2.4%          
    Sun Communities, Inc. *   27,000     873,720
  Mortgage – 13.0%          
    Abingdon Investment, Ltd. (a)(b)   100,000     1,000,000
    Accredited Home Lenders Holding Co. (a)   4,000     109,120
    Alesco Financial, Inc. *   133,400     1,427,380
    American Mortgage Acceptance Co. *   7,400     124,912
    HomeBanc Corp. *   7,500     31,725
    KKR Financial Corp. *   2,500     66,975
    New Century Financial Corp. *   13,000     410,670
    Newcastle Investment Corp. *   22,500     704,700
    NovaStar Financial, Inc. *   34,500     919,425
       
          4,794,907
  Office – 0.3%          
    American Financial Realty Trust *   9,000     102,960
    Parkway Properties, Inc. *   300     15,303
       
          118,263
See notes to financial statements and notes to portfolio of investments.

42


  Retail – 10.6%          
    CBL & Associates Properties, Inc. *   13,000   $ 563,550
    Developers Diversified Realty Corp. *   2,000     125,900
    Equity One, Inc. *   3,000     79,980
    Glimcher Realty Trust *   55,300     1,477,063
    New Plan Excel Realty Trust *   40,650     1,117,062
    Realty Income Corp. *   200     5,540
    The Mills Corp. *   28,100     562,000
       
          3,931,095
  Specialty – 3.6%          
    Getty Realty Corp. *   4,000     123,600
    Resource Capital Corp. *   2,000     33,900
    Trustreet Properties, Inc. *   69,300     1,167,705
       
          1,325,205
Total Real Estate (Cost $21,441,857)         22,797,423
  Other – 2.3%          
    Iowa Telecommunication Services, Inc.   42,500     837,675
Total Other (Cost $721,192)         837,675
Total Common Stocks (Cost $32,970,389)         33,430,116
Preferred Stocks – 60.6%          
Real Estate – 57.8%          
  Apartments – 10.0%          
    Apartment Investment & Management Co., Series U *   32,500     829,400
    Apartment Investment & Management Co., Series V *   27,700     711,890
    Apartment Investment & Management Co., Series Y *   65,000     1,657,500
    Home Properties, Inc., Series F *   18,800     477,708
       
          3,676,498
  Diversified – 5.2%          
    Cousins Properties, Inc., Series B *   20,000     510,600
    Digital Realty Trust, Inc., Series A *   20,000     519,800
    LBA Realty LLC, Series B *   45,000     900,000
       
          1,930,400
  Health Care – 3.3%          
    Health Care REIT, Inc., Series F *   26,900     695,903
    OMEGA Healthcare Investors Inc., Series D *   19,000     507,965
       
          1,203,868
See notes to financial statements and notes to portfolio of investments.

43


  Hospitality – 16.5%          
    Eagle Hospitality Properties Trust, Inc., Series A *   14,000   $ 357,280
    Entertainment Properties Trust, Series B *   40,000     1,011,200
    Equity Inns, Inc., Series B *   50,000     1,316,250
    FelCor Lodging Trust, Inc., Series C *   64,000     1,613,440
    Host Marriott Corp., Series E *   10,000     265,900
    LaSalle Hotel Properties, Series A *   36,000     914,400
    Strategic Hotels & Resorts, Inc., Series B *   13,700     354,487
    Winston Hotels, Inc., Series B *   10,900     276,152
       
          6,109,109
  Manufactured Homes – 0.5%          
    Affordable Residential Communities, Series A *   6,900     174,570
  Mortgage – 9.7%          
    HomeBanc Corp., Series A *   10,000     245,500
    MFA Mortgage Investments, Inc., Series A *   13,800     346,794
    New Century Financial Corp., Series A *   20,000     485,000
    RAIT Investment Trust, Series B *   59,000     1,524,855
    Thornburg Mortgage, Inc., Series C *   40,000     999,600
       
          3,601,749
  Office – 2.2%          
    Alexandria Real Estate Equities, Inc., Series C *   31,600     826,656
  Retail – 10.4%          
    CBL & Associates Properties, Inc., Series D *   10,000     256,000
    Glimcher Realty Trust, Series F *   26,500     691,385
    Glimcher Realty Trust, Series G *   41,000     1,039,350
    Ramco-Gershenson Properties Trust, Series B *   36,000     973,800
    Taubman Centers, Inc., Series G *   15,000     394,500
    The Mills Corp., Series E *   9,500     219,070
    The Mills Corp., Series G *   11,500     252,425
       
          3,826,530
Total Real Estate (Cost $21,598,748)         21,349,380
Financial Services – 2.8%          
    Corts-UNUM Provident Financial Trust   38,000     1,022,580
Total Financial Services (Cost $982,300)         1,022,580
Total Preferred Stocks (Cost $22,581,048)         22,371,960
Short Term Investments – 2.4%          
  Other Investment Companies – 2.4%          
    SSgA Money Market Fund, 4.99% (c) (Cost $876,480)   876,480     876,480
See notes to financial statements and notes to portfolio of investments.

44



 
Company

   
  Value

 

 
Total Investments – 153.6% (Cost $56,427,917)       $ 56,678,556  
Other assets less liabilities – 0.6%         233,059  
Preferred Shares, at liquidation preference – (54.2)%         (20,000,000 )
Net Assets applicable to common shareholders – 100%       $ 36,911,615  

Notes to Portfolio of Investments

*
Real Estate Investment Trust, or REIT
(a)
As of December 31, 2006, this security had not paid a distribution.
(b)
144A securities. Securities restricted for resale to Qualified Institutional Buyers (2.7% of net assets).
(c)
Rate reflects 7 day yield as of December 31, 2006.

See notes to financial statements.


45



RMR F.I.R.E. Fund
Financial Statements

Statement of Assets and Liabilities


December 31, 2006

   

Assets      
  Investments in securities, at value (cost $56,427,917)   $ 56,678,556
  Cash     47,798
  Dividends and interest receivable     595,240
   
    Total assets     57,321,594
   
Liabilities      
  Distributions payable – common shares     216,664
  Advisory fees payable     29,088
  Distributions payable – preferred shares     19,832
  Accrued expenses and other liabilities     144,395
   
    Total liabilities     409,979
   
Preferred shares, at liquidation preference      
  Auction preferred shares, Series W;
$.001 par value per share; 800 shares issued and
outstanding at $25,000 per share liquidation preference
    20,000,000
   
Net assets attributable to common shares   $ 36,911,615
   
Composition of net assets      
  Common shares, $.001 par value per share;
unlimited number of shares authorized,
1,484,000 shares issued and outstanding
  $ 1,484
  Additional paid-in capital     35,173,277
  Accumulated net realized gain on investments     1,486,215
  Net unrealized appreciation on investments     250,639
   
Net assets attributable to common shares   $ 36,911,615
   
Net asset value per share attributable to common shares
(based on 1,484,000 common shares outstanding)
  $ 24.87
   

See notes to financial statements.


46



RMR F.I.R.E. Fund
Financial Statements
– continued

Statement of Operations


 
For the Year Ended December 31, 2006

   
 

 
Investment Income        
  Dividends (Cash distributions, net of capital gain
and return of capital distributions, received or due)
  $ 3,287,880  
  Interest     67,066  
   
 
    Total investment income     3,354,946  
   
 
Expenses        
  Advisory     460,884  
  Administrative     114,758  
  Audit and legal     68,335  
  Custodian     62,304  
  Preferred share remarketing     49,730  
  Compliance and internal audit     41,898  
  Excise tax     35,397  
  Trustees' fees and expenses     20,977  
  Shareholder reporting     15,545  
  Other     82,903  
   
 
    Total expenses     952,731  
  Less: expenses waived by the Advisor     (135,553 )
   
 
    Net expenses     817,178  
   
 
      Net investment income     2,537,768  
   
 
Realized and unrealized gain on investments        
  Net realized gain on investments     2,091,017  
  Net change in unrealized appreciation on investments     3,090,835  
   
 
  Net realized and unrealized gain on investment transactions     5,181,852  
   
 
  Distributions to preferred shareholders from net investment income     (690,977 )
  Distributions to preferred shareholders from net realized gain on investments     (261,999 )
   
 
    Net increase in net assets attributable to common shares resulting from operations   $ 6,766,644  
   
 

See notes to financial statements.


47



RMR F.I.R.E. Fund
Financial Statements
– continued

Statement of Changes in Net Assets


 
 
  Year Ended
December 31,
2006

  Year Ended
December 31,
2005

 

 
Increase (decrease) in net assets resulting from operations              
  Net investment income   $ 2,537,768   $ 1,904,958  
  Net realized gain on investments     2,091,017     1,463,461  
  Net change in unrealized appreciation/(depreciation) on investments     3,090,835     (2,981,612 )
  Distributions to preferred shareholders from:              
    Net investment income     (690,977 )   (417,797 )
    Net realized gain on investments     (261,999 )   (217,867 )
   
 
 
      Net increase (decrease) in net assets attributable to common shares resulting from operations     6,766,644     (248,857 )
  Distributions to common shareholders from:              
    Net investment income     (1,885,168 )   (1,621,681 )
    Net realized gain on investments     (714,800 )   (978,287 )
   
 
 
    Total increase (decrease) in net assets attributable to common shares     4,166,676     (2,848,825 )
Net assets attributable to common shares              
  Beginning of year     32,744,939     35,593,764  
   
 
 
  End of year   $ 36,911,615   $ 32,744,939  
   
 
 
Common shares issued and repurchased              
  Shares outstanding, beginning of year     1,484,000     1,484,000  
    Shares issued          
   
 
 
  Shares outstanding, end of year     1,484,000     1,484,000  
   
 
 

See notes to financial statements.


48


Selected Data For A Common Share Outstanding Throughout Each Period


 
 
  Year Ended
December 31,
2006

  Year Ended
December 31,
2005

  For the Period
November 22,
2004 (a) to
December 31,
2004

 

 
Per Common Share Operating Performance (b)                    
Net asset value, beginning of period   $ 22.07   $ 23.99   $ 24.03 (c)
   
 
 
 
Income from Investment Operations                    
Net investment income (d)(e)     1.71     1.28     .10  
Net realized and unrealized appreciation/(depreciation) on investments (e)     3.49     (1.01 )   .17  
Distributions to preferred shareholders (common stock equivalent basis) from:                    
  Net investment income (e)     (.47 )   (.28 )   (.02 )
  Net realized gain on investments (e)     (.18 )   (.15 )    
   
 
 
 
Net increase (decrease) in net asset value from operations     4.55     (.16 )   .25  
Less: Distributions to common shareholders from:                    
  Net investment income (e)     (1.27 )   (1.09 )    
  Net realized gain on investments (e)     (.48 )   (.67 )    

Common share offering costs charged to capital

 

 


 

 


 

 

(.04

)
Preferred share offering costs charged to capital             (.25 )
   
 
 
 
Net asset value, end of period   $ 24.87   $ 22.07   $ 23.99  
   
 
 
 
Market price, beginning of period   $ 18.99   $ 24.05   $ 25.00  
   
 
 
 
Market price, end of period   $ 22.20   $ 18.99   $ 24.05  
   
 
 
 

 
Total Return (f)                    
Total investment return based on:                    
  Market price (g)     27.44 %   (14.00 )%   (3.80 )%
  Net asset value (g)     21.54 %   (0.64 )%   (0.17 )%

 
Ratios/Supplemental Data:                    
Ratio to average net assets attributable to common shares of:                    
  Net investment income, before total preferred share distributions (d)(e)     7.42 %   5.64 %   3.92 %(h)
  Total preferred share distributions     2.78 %   1.88 %   0.58 %(h)
  Net investment income, net of preferred share distributions (d)(e)     4.64 %   3.76 %   3.34 %(h)
  Expenses, net of fee waivers     2.39 %   2.63 %   3.45 %(h)
  Expenses, before fee waivers     2.78 %   3.03 %   3.73 %(h)
Portfolio turnover rate     59.48 %   64.96 %   0.00 %
Net assets attributable to common shares, end of period (000s)   $ 36,912   $ 32,745   $ 35,594  
Preferred shares, liquidation preference ($25,000 per share) (000s)   $ 20,000   $ 20,000   $ 20,000  
Asset coverage ratio per preferred share (i)   $ 71,140   $ 65,931   $ 69,493  
(a)
Commencement of operations.
(b)
Based on average shares outstanding.
(c)
Net asset value at November 22, 2004, reflects the deduction of the average sales load and offering costs of $0.97 per share paid by the holders of common share from the $25.00 offering price. We paid a sales load and offering cost of $1.125 per share on 1,280,000 common shares sold to the public and no sales load or offering costs on 200,000 common shares sold to affiliates of RMR Advisors for $25 per share.
(d)
Amounts are net of expenses waived by RMR Advisors.
(e)
As discussed in Note A (6) to the financial statements, a portion of the distributions we received on our investments are not included in investment income for financial reporting purposes.
(f)
Total returns for periods less than one year are not annualized.
(g)
Total return based on per share market price 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 market prices on the ex-dividend date. The total return based on net asset value, or NAV, assumes the purchase of common shares at NAV on the first day and sales of common shares at NAV on the last day of the period indicated; distributions are assumed to be reinvested at NAV on the ex-dividend date. Results represent past performance and do not guarantee future results. Total return would have been lower if RMR Advisors had not contractually waived a portion of its investment advisory fee.
(h)
Annualized.
(i)
Asset coverage per share equals net assets attributable to common shares plus the liquidation preference of the preferred shares divided by the total number of preferred shares outstanding at the end of the period.

See notes to financial statements.


49



RMR F.I.R.E. Fund
Notes to Financial Statements

December 31, 2006

Note A

(1)  Organization

RMR F.I.R.E. Fund, or the Fund, was organized as a Massachusetts business trust on August 6, 2004, and is registered under the Investment Company Act of 1940, as amended, as a non-diversified closed-end management investment company. The Fund had no operations until November 22, 2004, other than matters relating to the Fund's establishment and registration of the Fund's common shares under the Securities Act of 1933.

(2)  Use of Estimates

Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Fund's management to make estimates and assumptions that may affect the amounts reported in the financial statements and related notes. The actual results could differ from these estimates.

(3)  Portfolio Valuation

Investment securities of the Fund are valued at the latest sales price whenever that price is readily available on that day; securities for which no sales were reported on that day, unless otherwise noted, are valued at the last available bid price on that day. Securities traded primarily on the NASDAQ Stock Market, or NASDAQ, are normally valued by the Fund at the NASDAQ Official Closing Price, or NOCP, provided by NASDAQ each business day. The NOCP is the most recently reported price as of 4:00:06 p.m., eastern time, unless that price is outside the range of the "inside" bid and asked prices (i.e., the bid and asked prices that dealers quote to each other when trading for their own accounts); in that case, NASDAQ will adjust the price to equal the inside bid or asked price, whichever is closer. Because of delays in reporting trades, the NOCP may not be based on the price of the last trade to occur before the market closes. Some fixed income securities may be valued using pricing provided by a pricing service. Any of the Fund's securities which are not readily marketable, which are not traded or which have other characteristics of illiquidity are valued by the Fund at fair value as determined in good faith under the supervision of the Fund's board of trustees. Numerous factors may be considered when determining fair value of a security, including cost at date of purchase, type of security, the nature and duration of restrictions on disposition of the security and whether the issuer of the security being fair valued has other securities of the same type outstanding. Short term debt securities with less than 60 days until maturity may be valued at cost, which when combined with interest accrued, approximates market value.

(4)  Securities Transactions and Investment Income

Securities transactions are recorded on a trade date basis. Dividend income is recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, including accretion of original issue discount, where applicable, and accretion of discount on short term investments, is recorded on the accrual basis. Realized gains and losses from securities transactions are recorded on the basis of identified cost.

(5)  Federal Income Taxes

The Fund has qualified and intends to qualify in the future as a "regulated investment company" and to comply with the applicable provisions of subchapter M of the Internal Revenue Code of 1986, as amended, so


50


that it will generally not be subject to federal income tax. However, the Fund may be subject to a 4% excise tax to the extent the Fund does not distribute substantially all taxable earnings.

(6)  Distributable Earnings

The Fund earns income, net of expenses, daily on its investments. It is the policy of the Fund to pay a stable distribution amount to common shareholders on a monthly basis and distributions to Fund shareholders are declared pursuant to this policy. The Fund paid distributions of $0.146 per common share on January 31, 2007. On February 12, 2007, the Fund declared distributions of $0.146 per common share payable in February, March and April 2007. Distributions to shareholders are recorded on the ex-dividend date. The Fund's distributions may consist of ordinary income (net investment income and short term capital gains), long term capital gains and return of capital. To the extent the Fund's net realized capital gains, if any, can be offset by capital loss carry-forwards, it is the policy of the Fund not to distribute such gains. Distributions to preferred shareholders are determined as described in Note D.

The Fund has substantial investments in real estate investment trusts, or REITs, which are generally not subject to federal income taxes. Distributions that the Fund received from REITs can be classified as ordinary income, capital gain income or return of capital by the REITs that make these distributions to the Fund. The Fund has excluded from its investment income the portions of the distributions received from REITs classified by those REITs as capital gain income and return of capital. The Fund has included in its "net realized gain on investments" that portion of the distributions received from REITs that is classified by those REITs as capital gain income. Similarly, the Fund has credited its "net change in unrealized appreciation on investments" with that portion of the distributions received from REITs that is classified by those REITs as return of capital. The classification of distributions received from the Fund's investments were as follows:

 
  Year ended
December 31,
2006

  Year ended
December 31,
2005

Ordinary income   $ 3,287,880   $ 2,731,785
Capital gain income     662,485     671,118
Return of capital     419,306     467,376
   
 
Total distributions received   $ 4,369,671   $ 3,870,279
   
 

The Fund distinguishes between distributions to shareholders on a tax basis and a financial reporting basis. Only distributions in excess of accumulated tax basis earnings and profits are reported in the financial statements as a tax return of capital. Differences in the recognition or classification of income between the financial statements and tax earnings and profits which result in temporary over distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains in the components of net assets on the Statement of Assets and Liabilities.


51



The tax character of distributions made by the Fund during the years ended December 31, 2006 and December 31, 2005, were as follows:

 
  Year ended
December 31,
2006

  Year ended
December 31,
2005

Ordinary income   $ 3,122,947   $ 2,901,902
Net long term capital gains     429,997     333,730
   
 
    $ 3,552,944   $ 3,235,632
   
 

As of December 31, 2006, the components of distributable earnings on a federal income tax basis were as follows:

Undistributed ordinary income   $ 254,525
Undistributed net long term capital gains     1,325,656
Net unrealized appreciation     156,672

The differences between the financial reporting basis and tax basis of undistributed ordinary income, undistributed net long term capital gains and net realized appreciation are due to wash sales of portfolio investments and excise tax accruals.

The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation as of December 31, 2006, are as follows:

Cost   $ 56,521,884  
   
 
Gross unrealized appreciation   $ 2,754,625  
Gross unrealized depreciation     (2,597,953 )
   
 
Net unrealized appreciation   $ 156,672  
   
 

(7)  Concentration of Risk

Under normal market conditions, the Fund's investments will be concentrated in income producing common shares and preferred shares issued by F.I.R.E. companies. F.I.R.E. is a commonly used acronym for the combined financial services, insurance and real estate companies. The value of Fund shares may fluctuate more than the shares of a fund not concentrated in the F.I.R.E. industries due to economic, legal, regulatory, technological or other developments affecting the United States F.I.R.E. industries.

(8)  Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 is effective for fiscal years beginning after December 15, 2006. The Securities and Exchange Commission has since delayed the application of FIN 48 to open and closed end funds to not later than June 29, 2007. FIN 48 prescribes how the Fund should recognize, measure and present in the Fund's financial statements uncertain tax provisions that have been taken or expected to be taken in a tax return. Pursuant to FIN 48 the Fund can recognize a tax benefit only if it is "more likely than not" that a particular tax position will be sustained upon examination or audit. To the extent the "more likely than not" standard has been satisfied the benefits associated with a tax position is measured as the largest


52


amount that is greater than 50% likely of being realized upon settlement. The Fund has evaluated the effect that the adoption of FIN 48 will have on its financial statements and does not anticipate the effect, if any, will be material.

In September 2006, FASB issued Statement of Accounting Standards No. 157, "Fair Value Measurements"    (SFAS 157), which is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands required disclosures about fair value measurements. The Fund is currently evaluating the impact, if any, the adoption of SFAS 157 will have on its financial statements.

Note B

Advisory and Administration Agreements and Other Transactions with Affiliates

The Fund has an advisory agreement with RMR Advisors, Inc., or RMR Advisors, to provide the Fund with a continuous investment program, to make day-to-day investment decisions and generally to manage the business affairs of the Fund in accordance with its investment objectives and policies. Pursuant to this agreement, RMR Advisors is compensated at an annual rate of 0.85% of the Fund's average daily managed assets. Managed assets means the total assets of the Fund less liabilities other than any indebtedness entered for purposes of leverage. For purposes of calculating managed assets, the liquidation preference of preferred shares are not considered liabilities.

RMR Advisors has contractually agreed to waive a portion of its annual fee equal to 0.25% of the Fund's average daily managed assets, until November 22, 2009. The Fund incurred net advisory fees of $325,331 in 2006.

RMR Advisors, and not the Fund, has contractually agreed to pay the lead underwriter of the Fund's initial public offering, an annual fee equal to 0.15% of the Fund's managed assets. This fee is paid quarterly in arrears during the term of RMR Advisors' advisory agreement and is paid by the RMR Advisors, not the Fund. The aggregate fees paid pursuant to the contract plus reimbursement of legal expenses of the underwriters in that offering will not exceed 4.5% of the total price of the common shares in the initial public offering.

RMR Advisors also performs administrative functions for the Fund pursuant to an administration agreement with the Fund. RMR Advisors has entered into a subadministration agreement with State Street Bank and Trust Company, or State Street, to perform substantially all Fund accounting and other administrative services. Under the administration agreement, RMR Advisors is entitled to reimbursement of the cost of providing administrative services. The Fund reimbursed RMR Advisors for $114,758 of subadministrative fees charged by State Street in 2006.

Each trustee who is not a director, officer or employee of RMR Advisors and who is not an "interested person" of the Fund as defined under the Investment Company Act of 1940, as amended, is considered to be a "disinterested trustee". Disinterested trustees are each paid by the Fund an annual fee plus fees for board and committee meetings. The Fund incurred $20,977 of trustee fees and expenses in 2006.

The Fund's board of trustees and separately the disinterested trustees authorized the Fund to make reimbursement payments to RMR Advisors for costs related to the Fund's compliance and internal audit programs. The Fund incurred $41,898 of compliance and internal audit expense in 2006. The Fund also participates in


53



pooled insurance programs with RMR Advisors and other funds managed by RMR Advisors and makes payments of allocated portions of related premiums. The Fund incurred $22,797 of insurance expense in 2006.

Note C

Securities Transactions

During the year ended December 31, 2006, there were purchases and sales transactions (excluding short term securities) of $32,339,782 and $31,485,516, respectively. Brokerage commissions on securities transactions amounted to $48,267 during the year ended December 31, 2006.

Note D

Preferred Shares

The Fund's 800 outstanding Series W auction preferred shares have a liquidation preference of $25,000 per share plus an amount equal to accumulated but unpaid distributions. The preferred shares are senior to the Fund's common shares and rank on parity with any other class or series of preferred shares of the Fund as to the payment of periodic distributions, including distribution of assets upon liquidation. If the Fund does not timely cure a failure to (1) maintain asset coverage for the preferred shares as required by rating agencies, or (2) maintain asset coverage, as defined in the Investment Company Act of 1940, as amended, of at least 200%, the preferred shares will be subject to redemption at an amount equal to their liquidation preference plus accumulated but unpaid distributions. The holders of the preferred shares have voting rights equal to the holders of the Fund's common shares and generally vote together with the holders of the common shares as a single class. Holders of the preferred shares, voting as a separate class, also are entitled to elect two of the Fund's trustees. The Fund pays distributions on the preferred shares at a rate set at auctions held generally every seven days. Distributions are generally payable every seven days, on the first business day following the end of a distribution period. The preferred share distribution rate was 5.15% per annum as of December 31, 2006.

Note E

Submission of Proposals to a Vote of Shareholders (unaudited)

The annual meeting of Fund shareholders was held on May 9, 2006. Following is a summary of the proposals submitted to shareholders for vote at the meeting and the votes cast:

Proposal

  Votes for
  Votes withheld
  Votes abstained
Common shares            
  Election of Frank J. Bailey as trustee until the 2009 annual meeting   1,440,285   13,029  
Preferred shares            
  Election of Frank J. Bailey as trustee until the 2009 annual meeting   134   13  
  Election of Gerard M. Martin as trustee until the 2009 annual meeting   134   13  

54


Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders
of RMR F.I.R.E. Fund:

We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RMR F.I.R.E. Fund (the "Fund") as of December 31, 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 December 31, 2006, by correspondence with the custodian and brokers. 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 the RMR F.I.R.E. Fund at December 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 financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

SIGNATURE

Boston, Massachusetts
February 16, 2007


55


RMR Preferred Dividend Fund
December 31, 2006


 

 

LOGO

To our shareholders,

In the pages that follow, you will find data summarizing our financial results for the year ended December 31, 2006, and our financial position as of December 31, 2006.

During 2006, our allocation to the sub-sector of mortgage real estate investment trusts, or REITs, increased from 17% to 23% of total investments, our largest sub-sector increase. During the same time period, our allocation to the diversified sub-sector decreased from 13% to 8% of total investments, our largest sub-sector decrease. These changes reflect our view of the business environments in these sub-sectors, the strengths and weaknesses of the companies that operate in those sub-sectors and the share prices of individual companies. During 2007, we will continue to monitor market conditions and position our portfolio according to our view of market conditions.

For securities that we held continuously during 2006, our three best performing investments were the preferred stock of General Motors Corp., Affordable Residential Communities and Ford Motor Co. with total returns during this period of 48%, 43% and 29%, respectively. Our three worst performing investments during the same period were the preferred securities series G, Series E and Series C of The Mills Corp. with total returns during the period of positive 5%, negative 4% and negative 3%, respectively.

Thank you for your continued support. For more information, please view our website, at www.rmrfunds.com.

Sincerely,

GRAPHIC

Thomas M. O'Brien
President


56


RMR Preferred Dividend Fund
December 31, 2006

    LOGO

Relevant Market Conditions

Real Estate Industry Fundamentals.    We believe that the operating environment for real estate companies will continue to improve in 2007, although not at the same rate as 2006. We expect vacancy rates to decline, rental rates to improve and funds from operations, or FFO, an important measure of performance for real estate companies, to grow. Most public real estate companies have ample liquidity to make acquisitions to further increase their earnings potential.

Real Estate Industry Technicals.    We believe demand for real estate securities over the long term will continue to increase. Demographic trends in the U.S. include growth in the over age 50 population; we believe that individuals in that age category tend to focus their investments in higher yielding stocks like REITs. Institutions have been increasing their allocations to real estate securities. Demand for real estate made 2006 the biggest merger and acquisition year in the real estate securities market.

Fund Strategies, Techniques and Performance

Our primary investment objective is to provide our common shareholders high current income. Our secondary investment objective is capital appreciation. There can be no assurance that we will achieve our investment objectives.

During 2006 our total return on net asset value, or NAV, was 17.5%. During that same period, the total return for the Merrill Lynch REIT Preferred Index (an unmanaged index of REIT preferred stocks) was 9.7%. We believe this index is relevant to us because our investments as of December 31, 2006, excluding short term investments, include 80% REIT preferred stocks. The S&P 500 Index (an unmanaged index published as Standard and Poor's Composite Index of 500 Stocks) total return for 2006 was 15.8%.

Portfolio holdings by sub-sector as a percentage of investments
(as of December 31, 2006) *

  Hospitality real estate   30 %
  Mortgage real estate   23 %
  Retail real estate   12 %
  Other, less than 10%   33 %
  Short term investments   2 %
   
 
    Total investments   100 %
   
 
  REITs   83 %
  Other   15 %
  Short term investments   2 %
   
 
    Total investments   100 %
   
 

*
These percentages represent the Fund's portfolio holdings by sub-sector as a percentage of total portfolio holdings and do not agree with the percentages included in the Portfolio of Investments schedule which represent the Fund's portfolio holdings by sub-sector as a percentage of the Fund's total net assets.

57


RMR Preferred Dividend Fund
Portfolio of Investments
– December 31, 2006


Company

  Shares

  Value


Preferred Stocks – 120.5%
Real Estate Investment Trusts – 113.7%
         
  Apartments – 5.2%          
    Apartment Investment & Management Co., Series G   56,400   $ 1,483,320
    Associated Estates Realty Corp., Series B   39,800     1,040,770
    United Dominion Realty Trust, Inc., Series B   800     20,368
       
          2,544,458
  Diversified – 12.2%          
    Crescent Real Estate Equities Co., Series B   163,700     4,419,082
    Digital Realty Trust, Inc., Series A   40,000     1,039,600
    LBA Realty LLC, Series B   25,000     500,000
       
          5,958,682
  Health Care – 0.4%          
    LTC Properties, Inc., Series F   4,000     100,600
    OMEGA Healthcare Investors Inc., Series D   3,200     85,552
       
          186,152
  Hospitality – 43.8%          
    Ashford Hospitality Trust, Series A   58,000     1,501,040
    Eagle Hospitality Properties Trust, Inc., Series A   95,000     2,424,400
    Entertainment Properties Trust, Series A   145,200     3,688,080
    Equity Inns, Inc., Series B   83,800     2,206,035
    FelCor Lodging Trust, Inc., Series C   167,400     4,220,154
    Hersha Hospitality Trust, Series A   99,500     2,611,875
    Highland Hospitality Corp., Series A   120,000     3,043,200
    Host Marriott Corp., Series E   15,000     398,850
    LaSalle Hotel Properties, Series A   25,100     637,540
    Strategic Hotels & Resorts, Inc., Series B   6,800     175,950
    Strategic Hotels & Resorts, Inc., Series C   4,000     103,000
    Sunstone Hotel Investors, Inc., Series A   12,500     318,750
       
          21,328,874
  Manufactured Homes – 5.0%          
    Affordable Residential Communities, Series A   97,200     2,459,160
  Mortgage – 26.1%          
    Accredited Mortgage Loan REIT Trust, Series A   1,500     37,440
    American Home Mortgage Investment Corp., Series A   92,000     2,487,680
    Anthracite Capital, Inc., Series C   3,000     80,220
    Impac Mortgage Holdings, Inc., Series B   54,900     1,358,775
    Impac Mortgage Holdings, Inc., Series C   57,400     1,356,936
    MFA Mortgage Investments, Inc., Series A   40,000     1,005,200
    New Century Financial Corp., Series A   120,000     2,910,000
    New Century Financial Corp., Series B   12,000     299,880
    Newcastle Investment Corp., Series B   120,000     3,100,800
    Thornburg Mortgage, Inc., Series C   2,500     62,475
       
          12,699,406
  Office – 2.9%          
  Alexandria Real Estate Equities, Inc., Series B   17,600     441,584
  DRA CRT Acquisition Corp., Series A   40,060     991,485
       
          1,433,069
See notes to financial statements and notes to portfolio of investments.

58



 
Company

  Shares or Principal
Amount

  Value

 

 
Preferred Stocks – continued
Real Estate Investment Trusts – continued
             
  Retail – 18.1%              
    CBL & Associates Properties, Inc., Series B     14,600   $ 735,110  
    Glimcher Realty Trust, Series F     30,000     782,700  
    Pennsylvania Real Estate Investment Trust, Series A     59,000     3,203,700  
    The Mills Corp., Series B     6,000     139,800  
    The Mills Corp., Series C     107,500     2,481,100  
    The Mills Corp., Series E     13,600     313,616  
    The Mills Corp., Series G     52,500     1,152,375  
         
 
            8,808,401  
Total Real Estate Investment Trusts (Cost $56,517,059)           55,418,202  
  Other – 6.8%              
    Ford Motor Co., 6/15/43 Series     9,400     169,670  
    General Motors Corp., 5/15/48 Series     26,100     499,032  
    Great Atlantic & Pacific Tea Co., 8/01/39 Series     87,800     2,252,070  
    Red Line Hotels Corp., 2/19/44 Series     15,925     420,977  
Total Other (Cost $3,333,721)           3,341,749  
Total Preferred Stocks (Cost $59,850,780)           58,759,951  
  Common Stocks – 8.8%              
  Real Estate Investment Trusts – 7.6%              
  Mortgage – 7.6%              
    Abingdon Investment, Ltd. (a)(b)     150,000     1,500,000  
    Alesco Financial, Inc.     133,500     1,428,450  
    Crystal River Capital, Inc.     9,900     252,747  
    HomeBanc Corp.     6,500     27,495  
    NovaStar Financial, Inc.     19,500     519,675  
         
 
            3,728,367  
Total Real Estate Investment Trusts (Cost $3,459,029)           3,728,367  
  Other – 1.2%              
    Iowa Telecommunication Services, Inc. (Cost $548,107)     29,500     581,445  
Total Common Stocks (Cost $4,007,136)           4,309,812  
  Debt Securities – 13.5%              
    Ford Motor Co., 7.75%, 06/15/2043   $ 2,210,000     1,646,450  
    Ford Motor Co., 8.90%, 01/15/2032     557,000     499,907  
    General Motors Corp., 8.375%, 07/15/2033     2,000,000     1,850,000  
    Six Flags, Inc., 9.75%, 04/15/2013     2,740,000     2,572,175  
Total Debt Securities (Cost $6,509,813)           6,568,532  
Short Term Investments – 2.8%              
  Other Investment Companies – 2.8%              
    SSgA Money Market Fund, 4.99% (c) (Cost $1,341,216)     1,341,216     1,341,216  
Total Investments – 145.6% (Cost $71,708,945)           70,979,511  
Other assets less liabilities – 0.5%           260,076  
Preferred Shares, at liquidation preference – (46.1)%           (22,500,000 )
Net Assets – 100%         $ 48,739,587  

Notes to Portfolio of Investments

(a)
144A securities. Securities restricted for resale to Qualified Institutional Buyers (3.1% of net assets).
(b)
As of December 31, 2006, this security had not paid a distribution.
(c)
Rate reflects 7 day yield as of December 31, 2006.

See notes to financial statements.


59



RMR Preferred Dividend Fund
Financial Statements

Statement of Assets and Liabilities


 
December 31, 2006

   
 

 
Assets        
  Investments in securities, at value (cost $71,708,945)   $ 70,979,511  
  Cash     69,227  
  Dividends and interest receivable     718,793  
   
 
    Total assets     71,767,531  
   
 
Liabilities        
  Distributions payable – common shares     391,978  
  Distributions payable – preferred shares     22,311  
  Advisory fee payable     18,169  
  Accrued expenses and other liabilities     95,486  
   
 
    Total liabilities     527,944  
   
 
Preferred shares, at liquidation preference        
  Auction preferred shares, Series M;
$.001 par value per share; 900 shares issued and
outstanding at $25,000 per share liquidation preference
    22,500,000  
   
 
Net assets attributable to common shares   $ 48,739,587  
   
 
Composition of net assets        
  Common shares, $.001 par value per share;
unlimited number of shares authorized,
2,613,188 shares issued and outstanding
  $ 2,613  
  Additional paid-in capital     49,416,752  
  Accumulated net realized gain on investments     49,656  
  Net unrealized depreciation on investments     (729,434 )
   
 
Net assets attributable to common shares   $ 48,739,587  
   
 
Net asset value per share attributable to common shares
(based on 2,613,188 common shares outstanding)
  $ 18.65  
   
 

See notes to financial statements.


60



RMR Preferred Dividend Fund

Financial Statements
– continued

Statement of Operations


 
For the Year Ended December 31, 2006

   
 

 
Investment Income        
  Dividends (Cash distributions, net of capital gain and return of capital distributions, received or due)   $ 4,838,453  
  Interest     776,409  
   
 
    Total investment income     5,614,862  
   
 
Expenses        
  Advisory     591,532  
  Administrative     114,750  
  Audit and legal     85,952  
  Custodian     56,921  
  Preferred share remarketing fee     55,945  
  Compliance and internal audit     42,021  
  Shareholder reporting     21,498  
  Trustees' fees and expenses     20,293  
  Other     77,154  
   
 
    Total expenses     1,066,066  
  Less: expenses waived by the Advisor     (382,756 )
   
 
    Net expenses     683,310  
   
 
      Net investment income     4,931,552  
   
 
Realized and unrealized gain on investments        
  Net realized gain on investments     832,486  
  Net change in unrealized appreciation on investments     2,897,321  
   
 
  Net realized and unrealized gain on investment transactions     3,729,807  
   
 
  Distributions to preferred shareholders from net investment income     (902,855 )
  Distributions to preferred shareholders from net realized gain on investments     (147,481 )
   
 
    Net increase in net assets attributable to common shares resulting from operations   $ 7,611,023  
   
 

See notes to financial statements.


61



RMR Preferred Dividend Fund
Financial Statements
– continued

Statement of Changes in Net Assets


 
 
  Year Ended
December 31,
2006

  For the Period
May 25,
2005(a) to
December 31,
2005

 

 
Increase (decrease) in net assets resulting from operations              
  Net investment income   $ 4,931,552   $ 2,327,865  
  Net realized gain on investment transactions     832,486     428,154  
  Net change in unrealized appreciation/(depreciation) on investments     2,897,321     (3,626,755 )
  Distributions to preferred shareholders from:              
    Net investment income     (902,855 )   (339,732 )
    Net realized gain on investments     (147,481 )   (58,005 )
   
 
 
      Net increase (decrease) in net assets attributable to common shares resulting from operations     7,611,023     (1,268,473 )
   
 
 
  Distributions to common shareholders from:              
    Net investment income     (4,028,697 )   (1,988,133 )
    Net realized gain on investments     (658,083 )   (339,447 )
Capital shares transactions              
  Net proceeds from sale of common shares         49,138,250  
  Net proceeds from reinvestment of distributions     435,418     171,883  
  Net proceeds from sale of preferred shares         22,065,846  
   
 
 
    Net increase from capital transactions     435,418     71,375,979  
  Less: Liquidation preference of preferred shares issued         (22,500,000 )
   
 
 
    Total increase in net assets attributable to common shares     3,359,661     45,279,926  
Net assets attributable to common shares              
  Beginning of period     45,379,926     100,000  
   
 
 
  End of period   $ 48,739,587   $ 45,379,926  
   
 
 
Common shares issued and repurchased              
  Shares outstanding, beginning of period     2,589,311     5,000  
    Shares sold         2,575,000  
    Shares issued (reinvestment of distributions)     23,877     9,311  
   
 
 
  Shares outstanding, end of period     2,613,188     2,589,311  
   
 
 

(a) Commencement of operations.
See notes to financial statements.


62


RMR Preferred Dividend Fund
Financial Highlights

Selected Data For A Common Share Outstanding Throughout Each Period


 
 
  Year Ended December 31,
2006

  For the Period May 25, 2005(a) to December 31,
2005

 

 
Per Common Share Operating Performance              
Net asset value, beginning of period   $ 17.53   $ 19.09  (c)
   
 
 
Income from Investment Operations              
Net investment income (b)(d)(e)     1.90     .93  
Net realized and unrealized appreciation/(depreciation) on investments (e)     1.43     (1.22 )
Distributions to preferred shareholders (common stock equivalent basis) from:              
  Net investment income (e)     (.35 )   (.14 )
  Net realized gain on investments (e)     (.06 )   (.02 )
   
 
 
Net decrease in net asset value from operations     2.92     (.45 )
Less: Distributions to common shareholders from:              
  Net investment income (e)     (1.55 )   (.77 )
  Net realized gain on investments (e)     (.25 )   (.13 )
Common share offering costs charged to capital         (.04 )
Preferred share offering costs charged to capital         (.17 )
   
 
 
Net asset value, end of period   $ 18.65   $ 17.53  
   
 
 
Market price, beginning of period   $ 16.35   $ 20.00  
   
 
 
Market price, end of period   $ 20.75   $ 16.35  
   
 
 
Total Return (f)              
Total investment return based on:              
  Market price (g)     39.90 %   14.10 %
  Net asset value (g)     17.48 %   3.50 %

 
Ratios/Supplemental Data:              
Ratio to average net assets attributable to common shares of:              
  Net investment income, before total preferred share distributions (d)(e)     10.47 %   8.22 % (h)
  Total preferred share distributions     2.23 %   1.40 % (h)
  Net investment income, net of preferred share distributions (d)(e)     8.24 %   6.82 % (h)
  Expenses, net of fee waivers     1.45 %   1.54 % (h)
  Expenses, before fee waivers     2.26 %   2.29 % (h)
Portfolio turnover rate     23.60 %   5.60 %
Net assets attributable to common shares, end of period (000s)   $ 48,740   $ 45,380  
Preferred shares, liquidation preference ($25,000 per share), end of period (000s)   $ 22,500   $ 22,500  
Asset coverage per preferred share (i)   $ 79,156   $ 75,422  
(a)
Commencement of operations.
(b)
Based on average shares outstanding.
(c)
Net asset value at May 25, 2005, reflects the deduction of the average sales load and offering costs of $0.91 per share paid by the holders of common shares from the $20.00 offering price. We paid a sales load and offering cost of $0.94 per share on 2,237,500 common shares sold to the public and no sales load or offering costs on 67,500 common shares sold to affiliates of RMR Advisors for $20 per share.
(d)
Amounts are net of expenses waived by RMR Advisors.
(e)
As discussed in Note A (6) to the financial statements, a portion of the distributions we received on our investments are not included in investment income for financial reporting purposes.
(f)
Total returns for periods less than one year are not annualized.
(g)
Total return based on per share market price assumes the purchase of common shares at the market price on the first day and sale 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 market prices on the ex-dividend date. The total return based on net asset value, or NAV, assumes the purchase of common shares at NAV on the first day and the sale of common shares at NAV on the last day of the period indicated; distributions are assumed to be reinvested at NAV on the ex-dividend date. Results represent past performance and do not guarantee future results. Total return would have been lower if RMR Advisors had not contractually waived a portion of its investment advisory fee.
(h)
Annualized.
(i)
Asset coverage per share equals net assets attributable to common shares plus the liquidation preference of the preferred shares divided by the total number of preferred shares outstanding at the end of the period.

See notes to financial statements.


63



RMR Preferred Dividend Fund
Notes to Financial Statements

December 31, 2006

Note A

(1)  Organization

RMR Preferred Dividend Fund, or the Fund, was organized as a Massachusetts business trust on November 8, 2004, and is registered under the Investment Company Act of 1940, as amended, as a non-diversified closed end management investment company. The Fund had no operations until May 25, 2005, other than matters relating to the Fund's establishment, registration of the Fund's common shares under the Securities Act of 1933, and the sale of 5,000 common shares for $100,000 to RMR Advisors, Inc., or RMR Advisors. On May 25, 2005, the Fund sold 2,300,000 common shares in an initial public offering including 62,500 common shares sold to affiliates of RMR Advisors. Proceeds to the Fund were $43,896,750 after deducting underwriting commissions and $89,500 of offering expenses. There were no underwriting commissions or offering expenses paid on common shares sold to the affiliates of RMR Advisors. On July 11, 2005, the Fund sold 275,000 common shares pursuant to an over allotment agreement with the underwriters for net proceeds of $5,241,500 after deducting underwriting commissions and $11,000 of offering expenses. The Fund also issued an additional 23,877 shares during the year ended December 31, 2006 and 9,311 shares during the period ended December 31, 2005, for total consideration of $435,418 and $171,833 respectively, pursuant to the dividend reinvestment plan.

(2)  Use of Estimates

Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Fund's management to make estimates and assumptions that may affect the amounts reported in the financial statements and related notes. The actual results could differ from these estimates.

(3)  Portfolio Valuation

Investment securities of the Fund are valued at the latest sales price whenever that price is readily available on that day; securities for which no sales were reported on that day, unless otherwise noted, are valued at the last available bid price on that day. Securities traded primarily on the NASDAQ Stock Market, or NASDAQ, are normally valued by the Fund at the NASDAQ Official Closing Price, or NOCP, provided by NASDAQ each business day. The NOCP is the most recently reported price as of 4:00:06 p.m., eastern time, unless that price is outside the range of the "inside" bid and asked prices (i.e., the bid and asked prices that dealers quote to each other when trading for their own accounts); in that case, NASDAQ will adjust the price to equal the inside bid or asked price, whichever is closer. Because of delays in reporting trades, the NOCP may not be based on the price of the last trade to occur before the market closes. Some fixed income securities may be valued using pricing provided by a pricing service. Any of the Fund's securities which are not readily marketable, which are not traded or which have other characteristics of illiquidity are valued by the Fund at fair value as determined in good faith under the supervision of the Fund's board of trustees. Numerous factors may be considered when determining fair value of a security, including cost at date of purchase, type of security, the nature and duration of restrictions on disposition of the security and whether the issuer of the security being fair valued has other securities of the same type outstanding. Short term debt securities with less than 60 days until maturity may be valued at cost, which when combined with interest accrued, approximates market value.


64


(4)  Securities Transactions and Investment Income

Securities transactions are recorded on a trade date basis. Dividend income is recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, including accretion of original issue discount, where applicable, and accretion of discount on short term investments, is recorded on the accrual basis. Realized gains and losses from securities transactions are recorded on the basis of identified cost.

(5)  Federal Income Taxes

The Fund has qualified and intends to qualify in the future as a "regulated investment company" and to comply with the applicable provisions of subchapter M of the Internal Revenue Code of 1986, as amended, so that it will generally not be subject to federal income tax. However, the Fund may be subject to a 4% excise tax to the extent the Fund does not distribute substantially all taxable earnings.

(6)  Distributable Earnings

The Fund earns income, net of expenses, daily on its investments. It is the policy of the Fund to pay a stable distribution amount to common shareholders on a monthly basis and distributions to Fund shareholders are declared pursuant to this policy. The Fund paid distributions of $0.15 per common share on January 31, 2007. On February 12, 2007, the Fund declared distributions of $0.15 per common share payable in February, March and April 2007. Distributions to shareholders are recorded on the ex-dividend date. The Fund's distributions may consist of ordinary income (net investment income and short term capital gains), long term capital gains and return of capital. To the extent the Fund's net realized capital gains, if any, can be offset by capital loss carry-forwards, it is the policy of the Fund not to distribute such gains. Distributions to preferred shareholders are determined as described in Note D.

The Fund has substantial investments in real estate investment trusts, or REITs, which are generally not subject to federal income taxes. Distributions that the Fund received from REITs can be classified as ordinary income, capital gain income or return of capital by the REITs that make these distributions to the Fund. The Fund has excluded from its investment income the portions of the distributions received from REITs classified by those REITs as capital gain income and return of capital. The Fund has included in its "net realized gain on investments" that portion of the distributions received from REITs that is classified by those REITs as capital gain income. Similarly, the Fund has credited its "net change in unrealized appreciation on investments" with that portion of the distributions received from REITs that is classified by those REITs as return of capital. The classification of distributions received from the Fund's investments were as follows:

 
  Year ended
December 31,
2006

  Period May 25,
2005 to
December 31,
2005

Ordinary income   $ 4,838,453   $ 2,181,412
Capital gain income     807,195     423,722
Return of capital     70,154     78,311
   
 
Total distributions received   $ 5,715,802   $ 2,683,445
   
 

The Fund distinguishes between distributions to shareholders on a tax basis and a financial reporting basis. Only distributions in excess of accumulated tax basis earnings and profits are reported in the financial


65



statements as a tax return of capital. Differences in the recognition or classification of income between the financial statements and tax earnings and profits which result in temporary over distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains in the components of net assets on the Statement of Assets and Liabilities.

The tax character of distributions made by the Fund during the year ended December 31, 2006 and the period ended December 31, 2005, were as follows:

 
  Year ended
December 31,
2006

  Period May 25,
2005 to
December 31,
2005

Ordinary income   $ 5,034,390   $ 2,333,684
Net long term capital gains     702,726     391,633
   
 
    $ 5,737,116   $ 2,725,317
   
 

As of December 31, 2006, the components of distributable earnings on a federal income tax basis were as follows:

Undistributed ordinary income   $  
Undistributed net long term capital gains     58,133  
Net unrealized depreciation     (737,912 )

The differences between the financial reporting basis and tax basis of undistributed net long term capital gain and net unrealized depreciation are due to wash sales of portfolio investments.

The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation as of December 31, 2006, are as follows:

Cost   $ 71,717,423  
   
 
Gross unrealized appreciation   $ 1,126,811  
Gross unrealized depreciation     (1,864,723 )
   
 
Net unrealized depreciation   $ (737,912 )
   
 

(7)  Concentration of Risk

Under normal market conditions, the Fund's investments will be concentrated in preferred securities issued by real estate investment trusts. The value of Fund shares may fluctuate more than the shares of a fund not concentrated in the real estate industry due to economic, legal, regulatory, technological or other developments affecting the United States real estate industry.

(8)  Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 is effective for fiscal years beginning after December 15, 2006. The Securities and Exchange Commission has since delayed the application of FIN 48 to open and closed end funds to not later than June 29, 2007. FIN 48 prescribes how the Fund should recognize, measure


66


and present in the Fund's financial statements uncertain tax provisions that have been taken or expected to be taken in a tax return. Pursuant to FIN 48 the Fund can recognize a tax benefit only if it is "more likely than not" that a particular tax position will be sustained upon examination or audit. To the extent the "more likely than not" standard has been satisfied the benefits associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement. The Fund has evaluated the effect that the adoption of FIN 48 will have on its financial statements and does not anticipate the effect, if any, will be material.

In September 2006, FASB issued Statement of Accounting Standards No. 157, "Fair Value Measurements"    (SFAS 157), which is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands required disclosures about fair value measurements. The Fund is currently evaluating the impact, if any, the adoption of SFAS 157 will have on its financial statements.

Note B

Advisory and Administration Agreements and Other Transactions with Affiliates

The Fund has an advisory agreement with RMR Advisors, Inc., or RMR Advisors, to provide the Fund with a continuous investment program, to make day-to-day investment decisions and generally to manage the business affairs of the Fund in accordance with its investment objectives and policies. Pursuant to this agreement, RMR Advisors is compensated at an annual rate of 0.85% of the Fund's average daily managed assets. Managed assets means the total assets of the Fund less liabilities other than any indebtedness entered into for purposes of leverage. For purposes of calculating managed assets the liquidation preference of preferred shares are not considered liabilities.

RMR Advisors has contractually agreed to waive a portion of its annual fee equal to 0.55% of the Fund's average daily managed assets, until May 24, 2010. The Fund incurred net advisory fees of $208,776 in 2006.

RMR Advisors also performs administrative functions for the Fund pursuant to an administration agreement with the Fund. RMR Advisors has entered into a subadministration agreement with State Street Bank and Trust Company, or State Street, to perform substantially all Fund accounting and other administrative services. Under the administration agreement, RMR Advisors is entitled to reimbursement of the cost of providing administrative services. The Fund reimbursed RMR Advisors for $114,750 of subadministrative fees charged by State Street in 2006.

Each trustee who is not a director, officer or employee of RMR Advisors and who is not an "interested person" of the Fund as defined under the Investment Company Act of 1940, as amended, is considered to be a "disinterested trustee". Disinterested trustees are each paid by the Fund an annual fee plus fees for board and committee meetings. The Fund incurred $20,293 of trustee fees and expenses in 2006.

The Fund's board of trustees and separately the disinterested trustees authorized the Fund to make reimbursement payments to RMR Advisors for costs related to the Fund's compliance and internal audit programs. The Fund incurred $42,021 of compliance and internal audit expense in 2006. The Fund also participates in pooled insurance programs with RMR Advisors and other funds managed by RMR Advisors and makes payments of allocated portions of related premiums. The Fund incurred $17,511 of insurance expense in 2006.


67



Note C

Securities Transactions

During the year ended December 31, 2006, there were purchases and sales transactions (excluding short term securities) of $15,953,841 and $16,159,809, respectively. Brokerage commissions on securities transactions amounted to $18,436 during the year ended December 31, 2006.

Note D

Preferred Shares

The Fund's 900 outstanding Series M auction preferred shares have a liquidation preference of $25,000 per share plus an amount equal to accumulated plus unpaid distributions. The preferred shares are senior to the Fund's common shares and rank on parity with any other class or series of preferred shares of the Fund as to the payment of periodic distributions, including distribution of assets upon liquidation. If the Fund does not timely cure a failure to (1) maintain asset coverage for the preferred shares as required by rating agencies, or (2) maintain asset coverage, as defined in the Investment Company Act of 1940, as amended, of at least 200%, the preferred shares will be subject to redemption at an amount equal to their liquidation preference plus accumulated but unpaid distributions. The holders of the preferred shares have voting rights equal to the holders of the Fund's common shares and will generally vote together with the holders of the Fund's common shares as a single class. Holders of the preferred shares, voting as a separate class, also are entitled to elect two of the Fund's trustees. The Fund pays distributions on the preferred shares at a rate set at auctions held generally every seven days. Distributions are generally payable every seven days, on the first business day following the end of a distribution period. The preferred share distribution rate was 5.10% per annum as of December 31, 2006.

Note E

Submission of Proposals to a Vote of Shareholders (unaudited)

The annual meeting of Fund shareholders was held on May 9, 2006. Following is a summary of the proposals submitted to shareholders for vote at the meeting and votes cast:

Proposal

  Votes for
  Votes withheld
  Votes abstained
Common shares            
  Election of Frank J. Bailey as trustee until the 2009 annual meeting.   2,491,311   29,891  
Preferred shares            
  Election of Frank J. Bailey as trustee until the 2009 annual meeting.   95   14  
  Election of Gerard M. Martin as trustee until the 2009 annual meeting.   95   14  

68


Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders
of RMR Preferred Dividend Fund:

We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RMR Preferred Dividend Fund (the "Fund") as of December 31, 2006, and the related statement of operations for the year then ended, and the statement of changes in net assets and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with 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 December 31, 2006, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RMR Preferred Dividend Fund at December 31, 2006, the results of its operations for the year then ended, and the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

SIGNATURE

Boston, Massachusetts
February 16, 2007


69


RMR Asia Pacific Real Estate Fund
December 31, 2006

    LOGO

To our shareholders,

In the pages that follow, you will find data summarizing our financial results for the period from May 25, 2006, the date we commenced operations, through December 31, 2006, and our financial position as of December 31, 2006.

Although our fund has been in operation for only a short time, we have taken the steps to build what we believe will be a sound long term investment portfolio.

Thank you for your continued support. For more information, please view our website, at www.rmrfunds.com.

Sincerely,

GRAPHIC

Thomas M. O'Brien
President


70


RMR Asia Pacific Real Estate Fund
December 31, 2006

    LOGO

Relevant Market Conditions

Real Estate Industry Fundamentals.    Strong economic growth in the Asia Pacific region will support those real estate markets in 2007. Annual GDP growth in China remains at 10% and Japan continues to recover from an extended slump. Employment and income growth are supporting demand for quality commercial and residential real estate. Office markets in the major cities of the region are experiencing low vacancy and rising rents. The outlook remains good as the new supply of buildings is moderate. Residential markets are improving in most cities, with strong demand and rising prices. Retail property continues to perform well despite high energy prices.

Real Estate Industry Technicals.    We expect continued strong demand for real estate investments in the Asia Pacific region. High savings rates have contributed to the situation where the cost of debt is quite low in countries such as Japan, Singapore and Hong Kong. This results in an attractive spread between property yields and the cost of finance. The introduction of REIT laws to countries in Asia also has continued, with thirteen REITs listed in Japan in 2006 and eight in Singapore. We expect this trend to continue, with new REIT laws being considered in the Philippines. The tax efficiency of the REIT structure along with better transparency and focused management should encourage higher stock market valuations.

Fund Strategies, Techniques and Performance

Our primary investment objective is capital appreciation. There can be no assurance that we will achieve our investment objective.

During the period from May 25, 2006, through December 31, 2006, our total return on net asset value, or NAV, was 23.9%. During that same period, the total return for the EPRA NAREIT Asia Index (an unmanaged index of Asia Pacific real estate common stocks) was 23.3%. We believe this index is relevant to us because all our investments as of December 31, 2006, excluding short term investments, were in securities of real estate companies in countries covered by this index. The S&P 500 Index (an unmanaged index published as Standard and Poor's Composite Index of 500 common stocks) total return for the same period was 12.7%.


71



Portfolio holdings by sub-sector as a percentage of investments
(as of December 31, 2006)

  Diversified   57 %
  Office   19 %
  Retail   16 %
  Other, less than 10%   7 %
  Short term investments   1 %
   
 
    Total investments   100 %
   
 
  Real Estate   99 %
  Short term investments   1 %
   
 
    Total investments   100 %
   
 

Portfolio holdings by country (as of December 31, 2006)

  Japan   38 %
  Hong Kong   29 %
  Australia   18 %
  Other, less than 10%   14 %
  Short term investments   1 %
   
 
    Total   100 %
   
 

72


RMR Asia Pacific Real Estate Fund
Portfolio of Investments
– December 31, 2006


Company

  Shares

  Value


Common Stocks – 99.5%
Australia – 17.7%
         
  Diversified – 9.1%          
    Australand Property Group   850,000   $ 1,338,540
    FKP Property Group   122,240     634,905
    GPT Group *   210,000     928,276
    Multiplex Group *   90,000     283,456
    Valad Property Group   460,000     575,515
       
          3,760,692
  Hospitality – 1.4%          
    Grand Hotel Group *   530,000     571,055
  Office – 5.6%          
    Macquarie Goodman Group   390,000     2,339,634
  Apartments – 1.6%          
    Peet, Ltd.   218,643     669,633
Total Australia (Cost $6,126,465)         7,341,014
Hong Kong – 29.5%          
  Diversified – 12.3%          
    Greentown China Holdings, Ltd (a)   304,150     566,202
    Hongkong Land Holdings, Ltd.   430,983     1,715,312
    Hopson Development Holdings, Ltd.   170,000     480,825
    Hysan Development Co., Ltd   405,000     1,059,583
    Shun TAK Holdings, Ltd.   840,000     1,285,114
       
          5,107,036
  Hospitality – 3.7%          
    Sun Hung Kai Properties, Ltd.   135,000     1,551,624
  Office – 2.8%          
    Champion Real Estate Investment Trust (a)*   2,000,000     966,792
    Great Eagle Holdings, Ltd.   62,865     181,039
       
          1,147,831
  Retail – 10.7%          
    Hang Lung Properties, Ltd.   960,000     2,401,759
    The Link REIT *   980,000     2,025,944
       
          4,427,703
Total Hong Kong (Cost $11,016,441)         12,234,194
See notes to financial statements and notes to portfolio of investments.

73



Company

  Shares

  Value


Common Stocks – continued          
Japan – 38.3%          
  Diversified – 26.5%          
    Mitsubishi Estate Co., Ltd.   155,000   $ 4,011,596
    Mitsui Fudosan Co., Ltd   125,000     3,051,342
    Sumitomo Realty & Development Co., Ltd.   123,000     3,948,238
       
          11,011,176
  Office – 8.2%          
    Nippon Commercial Investment Corp. (a)*   30     122,768
    NTT Urban Development Corp.   1,200     2,319,231
    Tokyu REIT, Inc. *   110     961,304
       
          3,403,303
  Retail – 3.6%          
    Diamond City Co., Ltd.   33,000     1,483,551
Total Japan (Cost $12,608,000)         15,898,030
New Zealand – 2.3%          
  Office – 2.3%          
    AMP NZ Office Trust   1,020,000     934,233
Total New Zealand (Cost $744,777)         934,233
Philippines – 0.7%          
  Diversified – 0.7%          
    Megaworld Corp.   5,700,000     281,223
    Megaworld Corp. Rights, expiring 1/7/09 (a)   2,280,000     27,425
       
          308,648
Total Philippines (Cost $256,834)         308,648
Singapore – 9.3%          
  Diversified – 8.8%          
    Allco Commercial Real Estate Investment Trust *   750,000     542,787
    Capitacommercial Trust *   685,000     1,170,139
    Capitaland, Ltd.   240,000     970,171
    Suntec Real Estate Investment Trust *   813,157     964,920
       
          3,648,017
  Retail – 0.5%          
    CapitaRetail China Trust (a)*   150,000     205,379
Total Singapore (Cost $2,915,965)         3,853,396
See notes to financial statements and notes to portfolio of investments.

74



 
Company

  Shares

  Value

 

 
Common Stocks – continued            
Thailand – 1.7%            
  Retail – 1.7%            
    Central Pattana Public Co., Ltd.   1,130,000   $ 720,395  
Total Thailand (Cost $603,376)         720,395  
Total Common Stocks (Cost $34,271,858)         41,289,910  
Short Term Investments – 0.8%            
  Other Investment Companies – 0.8%            
    SSgA Money Market Fund, 4.99% (b) (Cost $319,338)   319,338     319,338  
Total Investments – 100.3% (Cost $34,591,196)         41,609,248  
Other assets less liabilities – (0.3)%         (97,159 )
Net Assets – 100%       $ 41,512,089  

Notes to Portfolio of Investments

*
Company is organized as a real estate investment trust as defined by the laws of its country of domicile.
(a)
As of December 31, 2006, this security had not paid a distribution.
(b)
Rate reflects 7 day yield as of December 31, 2006.

See notes to financial statements.


75



RMR Asia Pacific Real Estate Fund
Financial Statements

Statement of Assets and Liabilities


December 31, 2006

   

Assets      
  Investments in securities, at value (cost $34,591,196)   $ 41,609,248
  Cash     954
  Dividends and interest receivable     82,644
   
    Total assets     41,692,846
   
Liabilities      
  Advisory fee payable     25,776
  Accrued expenses and other liabilities     154,981
   
    Total liabilities     180,757
   
Net assets   $ 41,512,089
   
Composition of net assets      
  $.001 par value per share;
unlimited number of shares authorized,
1,755,000 shares issued and outstanding
  $ 1,755
  Additional paid-in capital     33,437,837
  Undistributed net investment income     857,421
  Accumulated net realized gain on investments and foreign currency     196,569
  Net unrealized appreciation on investments     7,018,052
  Net unrealized appreciation on foreign currency transactions     455
   
Net assets   $ 41,512,089
   
Net asset value per share
(based on 1,755,000 shares outstanding)
  $ 23.65
   

See notes to financial statements.


76



RMR Asia Pacific Real Estate Fund
Financial Statements
– continued

Statement of Operations


 
For the Period May 25, 2006(a) to December 31, 2006

   
 

 
Investment Income        
  Dividends (Cash distributions received or due, net of foreign taxes withheld of $81,470)   $ 777,743  
  Interest     58,653  
   
 
    Total investment income     836,396  
   
 
Expenses        
  Advisory     214,765  
  Administrative     65,117  
  Audit and legal     64,000  
  Excise tax     53,008  
  Custodian     40,803  
  Compliance and internal audit     22,049  
  Shareholder reporting     20,000  
  Trustees' fees and expenses     15,176  
  Other     42,018  
   
 
    Total expenses     536,936  
  Less: expenses waived by the Advisor     (53,691 )
   
 
    Net expenses     483,245  
   
 
      Net investment income     353,151  
   
 
Realized and unrealized gain (loss) on investment and foreign currency transactions        
  Net realized gain on investments (net of foreign capital gains taxes of $11,677)     654,444  
  Net realized loss on foreign currency transactions     (6,613 )
  Net change in unrealized appreciation on investments     7,018,507  
   
 
    Net increase in net assets resulting from operations   $ 8,019,489  
   
 

(a) Commencement of operations.


See notes to financial statements.


77



RMR Asia Pacific Real Estate Fund
Financial Statements
– continued

Statement of Changes in Net Assets


 
  For the Period
May 25,
2006(a) to
December 31,
2006


Increase in net assets resulting from operations      
  Net investment income   $ 353,151
  Net realized gain on investment transactions and foreign currency transactions     647,831
  Net change in unrealized appreciation/(depreciation) on investments     7,018,507
   
    Net increase in net assets resulting from operations     8,019,489
   
Capital shares transactions      
  Net proceeds from sale of common shares     33,392,600
  Cost of shares redeemed    
   
    Net increase from capital transactions     33,392,600
   
    Total increase in net assets attributable to common shares     41,412,089
Net assets      
  Beginning of period     100,000
   
  End of period (including undistributed net investment income of $857,421)   $ 41,512,089
   
Common shares      
  Shares outstanding, beginning of period     5,000
    Shares issued     1,750,000
   
  Shares outstanding, end of period     1,755,000
   

(a) Commencement of operations.
See notes to financial statements.


78


RMR Asia Pacific Real Estate Fund
Financial Highlights

Selected Data For A Common Share Outstanding Throughout The Period


 
 
  For the Period
May 25,
2006(a) to
December 31,
2006

 

 
Per Common Share Operating Performance (b)        
Net asset value, beginning of period   $ 19.08 (c)
   
 
Income from Investment Operations        
Net investment income (d)     .21  
Net realized and unrealized appreciation/(depreciation) on investments     4.40  
   
 
Net increase in net asset value from operations     4.61  
Common share offering costs charged to capital     (.04 )
   
 
Net asset value, end of period   $ 23.65  
   
 
Market price, beginning of period   $ 20.00  
   
 
Market price, end of period   $ 23.41  
   
 
Total Return (e)        
Total investment return based on:        
  Market price (f)     17.05 %
  Net asset value (f)     23.95 %
Ratios/Supplemental Data:        
Ratio to average net assets attributable to common shares (g) of:        
  Net investment income (d)     1.64 %
  Expenses, net of fee waivers     2.25 %
  Expenses, before fee waivers     2.50 %
Portfolio turnover rate     27.61 %
Net assets attributable to common shares, end of period (000s)   $ 41,512  
(a)
Commencement of operations.
(b)
Based on average shares outstanding.
(c)
Net asset value at May 25, 2006, reflects the deduction of the average sales load and offering costs of $0.92 per share paid by the holders of common shares from the $20.00 offering price. We paid a sales load and offering cost of $0.94 per share on 1,710,000 common shares sold to the public and no sales load or offering costs on 40,000 common shares sold to affiliates of RMR Advisors for $20 per share.
(d)
Amounts are net of expenses waived by RMR Advisors.
(e)
Total returns for periods less than one year are not annualized.
(f)
Total return based on per share market price 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 market prices on the ex-dividend date. The total return based on net asset value, or NAV, assumes the purchase of common shares at NAV on the first day and sales of common shares at NAV on the last day of the period indicated; distributions are assumed to be reinvested at NAV on the ex-dividend date. Results represent past performance and do not guarantee future results. Total return would have been lower if RMR Advisors had not contractually waived a portion of its investment advisory fee.
(g)
Annualized.

See notes to financial statements.


79



RMR Asia Pacific Real Estate Fund
Notes to Financial Statements

December 31, 2006

Note A

(1)  Organization

RMR Asia Pacific Real Estate Fund, or the Fund, was organized as a Massachusetts business trust on February 14, 2006, and is registered under the Investment Company Act of 1940, as amended, as a non-diversified closed-end management investment company. The Fund had no operations prior to May 25, 2006, other than matters relating to the Fund's establishment, registration of the Fund's common shares under the Securities Act of 1933, and the sale of 5,000 common shares for $100,000 to RMR Advisors, Inc., or RMR Advisors. On May 25, 2006, the Fund sold 1,750,000 common shares in an initial public offering including 40,000 shares sold to affiliates of RMR Advisors. Proceeds to the Fund were $33,392,600 after deducting underwriting commissions and $68,400 of offering expenses. There was no underwriting commission or offering expenses paid on shares sold to the affiliates of RMR Advisors.

(2)  Use of Estimates

Preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires the Fund's management to make estimates and assumptions that may affect the amounts reported in the financial statements and related notes. The actual results could differ from these estimates.

(3)  Portfolio Valuation

Investment securities of the Fund are valued at the latest sales price reflected on the consolidated tape of the exchange that reflects the principal market for such securities whenever that price is readily available on that day; securities for which no sales were reported on that day, unless otherwise noted, are valued at the last available bid price on that day. Any of the Fund's securities which are not readily marketable, which are not traded or which have other characteristics of illiquidity are valued by the Fund at fair value as determined in good faith under the supervision of the Fund's board of trustees. Numerous factors may be considered when determining fair value of a security, including cost at date of purchase, type of security, the nature and duration of restrictions on disposition of the security and whether the issuer of the security being fair valued has other securities of the same type outstanding. Short-term debt securities with less than 60 days until maturity may be valued at cost, which when combined with interest accrued, approximates market value.

Some foreign markets close before the close of customary trading sessions on the American Stock Exchange or AMEX (normally 4:00 p.m. eastern time). Occasionally, events occur after the principal foreign exchange on which the foreign securities trade has closed but before the AMEX closes and the Fund determines net asset value, or NAV, that could affect the value of the securities the Fund owns or cause their prices to be unreliable. If these events are expected to materially affect the Fund's NAV, the prices of such securities are adjusted to reflect their estimated fair value as of the close of the AMEX, as determined in good faith under procedures established by the Fund's board of trustees.

(4)  Securities Transactions and Investment Income

Securities transactions are recorded on a trade date basis. Dividend income is recorded on the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, including accretion of original issue discount, where applicable, and


80


accretion of discount on short term investments, is recorded on the accrual basis. Realized gains and losses from securities transactions are recorded on the basis of identified cost.

(5)  Income Taxes

The Fund has qualified and intends to qualify in the future as a "regulated investment company" and to comply with the applicable provisions of subchapter M of the Internal Revenue Code of 1986, as amended, so that it will generally not be subject to United States federal income tax. However, the Fund may be subject to a 4% excise tax to the extent the Fund does not distribute substantially all taxable earnings.

Some Asia Pacific governments may subject the Fund's investment income and securities sales to withholding or other taxes. For the period ended December 31, 2006, $81,470 of foreign taxes have been withheld from distributions to the Fund and recorded as a reduction of dividend income and $11,677 of foreign taxes have been withheld from the proceeds of sale of securities and recorded as a reduction of net realized gains on investments.

(6)  Distributable Earnings

The Fund earns income, net of expenses, daily on its investments. It is the policy of the Fund to make distributions of its income at least annually in amounts at least equal to the amount necessary to maintain its status as a registered investment company. As of December 31, 2006, the Fund had not declared or paid distributions to shareholders. Distributions to shareholders are recorded on the ex-dividend date. The Fund's distributions may consist of ordinary income (net investment income and short term capital gains), long term capital gains and return of capital. To the extent the Fund's net realized capital gains, if any, can be offset by capital loss carry-forwards, it is the policy of the Fund not to distribute such gains.

The Fund distinguishes between distributions to shareholders on a tax basis and a financial reporting basis. Only distributions in excess of accumulated tax basis earnings and profits are reported in the financial statements as a tax return of capital. Differences in the recognition or classification of income between the financial statements and tax earnings and profits which result in temporary over distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains in the components of net assets on the Statement of Assets and Liabilities.

As of December 31, 2006, the components of distributable earnings on a federal income tax basis were as follows:

Undistributed ordinary income   $ 2,418,890
Undistributed net long term capital gains    
Net unrealized appreciation   $ 5,653,607

The differences between the financial reporting basis and tax basis of undistributed ordinary income and unrealized appreciation is due to mark to market and adjustments to the Fund's investments in passive foreign investment companies as well as excise tax accruals.


81



The cost of investments for federal income tax purposes, gross unrealized appreciation and unrealized depreciation as of December 31, 2006, are as follows:

Cost   $ 35,956,096  
   
 
Gross unrealized appreciation   $ 5,745,375  
Gross unrealized depreciation     (92,223 )
   
 
Net unrealized appreciation   $ 5,653,152  
   
 

(7)  Concentration of Risk

Under normal market conditions, the Fund's investments will be concentrated in common shares, preferred shares and debt securities, including convertible preferred and debt securities, issued by Asia Pacific real estate companies and REITs. The value of Fund shares may fluctuate more than the shares of a fund not concentrated in the real estate industry or in the Asia Pacific region due to economic, legal, regulatory, technological or other developments affecting the Asia Pacific real estate industry and securities market.

(8)  Foreign Securities Risk

As compared to U.S. securities, foreign securities may be issued by companies which provide less financial and other information, and which are subject to less developed and difficult to access legal systems, less stringent accounting, auditing and financial reporting standards or different governmental regulations. As compared to U.S. securities markets, foreign securities markets may have different settlement procedures, may have higher transaction costs, may be conducted in a less regulated manner, are generally smaller and may be less liquid and more volatile than securities markets in the U.S. The value of foreign securities may also decline or be unstable because of political, social or economic events or instability outside of the U.S.

(9)  Foreign Currency Translations

The accounting records of the Fund are maintained in U.S. dollars. Portfolio securities and other assets and liabilities denominated in a foreign currency are translated daily into U.S. dollars at the prevailing rates of exchange. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rates on the respective transaction dates.

The Fund does not isolate the portion of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in their market prices. Such fluctuations are included in net realized and unrealized gain (loss) on investments. Net realized gain (loss) on foreign currency transactions represents net foreign currency gain (loss) from forward currency contracts, disposition of foreign currencies, currency gain (loss) realized between the trade and settlement dates on securities transactions, and the difference between the amount of dividends, interest and foreign withholding taxes recorded on the Fund's accounting records and the U.S. dollar equivalent amounts actually received or paid. Net unrealized foreign currency appreciation/(depreciation) arises from changes in the value of assets and liabilities, other than investments in securities, as a result of changes in exchange rates.

(10) Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 is effective for fiscal years beginning after December 15,


82


2006. The Securities and Exchange Commission has since delayed the application of FIN 48 to open and closed end funds to not later than June 29, 2007. FIN 48 prescribes how the Fund should recognize, measure and present in the Fund's financial statements uncertain tax provisions that have been taken or expected to be taken in a tax return. Pursuant to FIN 48 the Fund can recognize a tax benefit only if it is "more likely than not" that a particular tax position will be sustained upon examination or audit. To the extent the "more likely than not" standard has been satisfied the benefits associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement. The Fund has evaluated the effect that the adoption of FIN 48 will have on its financial statements and does not anticipate the effect, if any, will be material.

In September 2006, FASB issued Statement of Accounting Standards No. 157, "Fair Value Measurements"    (SFAS 157), which is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands required disclosures about fair value measurements. The Fund is currently evaluating the impact, if any, the adoption of SFAS 157 will have on its financial statements.

Note B

Advisory, Subadvisory and Administration Agreements and Other Transactions with Affiliates

The Fund has an advisory agreement with RMR Advisors, to provide the Fund with a continuous investment program, oversee the subadvisor and generally manage the business affairs of the Fund in accordance with its investment objectives and policies. Pursuant to the agreement, RMR Advisors is compensated at an annual rate of 1% of the Fund's average daily net assets.

RMR Advisors has contractually agreed to waive a portion of its annual fee equal to 0.25% of the Fund's average daily managed assets until May 25, 2011. The Fund incurred net advisory fees of $161,074 during the period ended December 31, 2006.

RMR Advisors has entered into a subadvisory agreement with MacarthurCook Investment Managers Ltd., or MacarthurCook, to make day-to-day investment decisions and generally to manage the business affairs of the Fund in accordance with its investment objectives and policies. Pursuant to the agreement, RMR Advisors, and not the Fund, will pay the subadvisor a monthly fee equal to an annual rate of 0.375% of the Fund's average daily managed assets. MacarthurCook has agreed to waive a portion of the fee payable by RMR Advisors such that until May 25, 2011, the fee payable will be equal to 0.25% of the Fund's average daily managed assets.

RMR Advisors also performs administrative functions for the Fund pursuant to an administration agreement with the Fund. RMR Advisors has entered into a subadministration agreement with State Street Bank and Trust Company, or State Street, to perform substantially all Fund accounting and other administrative services. Under the administration agreement, RMR Advisors is entitled to reimbursement of the cost of providing administrative services. The Fund reimbursed RMR Advisors for $65,117 of subadministrative fees charged by State Street for the period ended December 31, 2006.

Each trustee who is not a director, officer or employee of RMR Advisors and who is not an "interested person" of the Fund as defined under the Investment Company Act of 1940, as amended, is considered to be a "disinterested trustee". Disinterested trustees are each paid by the Fund an annual fee plus fees for board and


83



committee meetings. The Fund incurred $15,176 of trustee fees and expenses during the period ended December 31, 2006.

The Fund's board of trustees and separately the disinterested trustees authorized the Fund to make reimbursement payments to RMR Advisors for costs related to the Fund's compliance and internal audit programs. The Fund incurred $22,049 of compliance and internal audit expense during the period ended December 31, 2006. The Fund also participates in pooled insurance programs with RMR Advisors and other funds managed by RMR Advisors and makes payments of allocated portions of related premiums. The Fund incurred $11,203 of insurance expense during the period ended December 31, 2006.

Note C

Securities Transactions

During the period ended December 31, 2006, there were purchases and sales transactions (excluding short term securities) of $42,364,335 and $8,758,599, respectively. Brokerage commissions on securities transactions amounted to $95,472 during the period ended December 31, 2006.


84


Report of Independent Registered Public Accounting Firm

To the Board of Trustees and Shareholders
of RMR Asia Pacific Real Estate Fund:

We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of RMR Asia Pacific Real Estate Fund (the "Fund") as of December 31, 2006, and the related statements of operations, changes in net assets and financial highlights for the period from May 25, 2006 (commencement of operations) to December 31, 2006. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.

We conducted our audit in accordance with 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 December 31, 2006, by correspondence with the custodian. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of RMR Asia Pacific Real Estate Fund at December 31, 2006, the results of its operations, changes in its net assets and financial highlights for the period from May 25, 2006 (commencement of operations) to December 31, 2006, in conformity with U.S. generally accepted accounting principles.

SIGNATURE

Boston, Massachusetts
February 16, 2007


85


RMR Real Estate Fund

RMR Hospitality and Real Estate Fund

RMR F.I.R.E. Fund

RMR Preferred Dividend Fund

RMR Asia Pacific Real Estate Fund

Dividend Reinvestment Plan

The board of trustees of each of RMR Real Estate Fund, RMR Hospitality and Real Estate Fund, RMR F.I.R.E. Fund, RMR Preferred Dividend Fund and RMR Asia Pacific Real Estate Fund, Massachusetts business trusts (each a "Fund" and collectively "the Funds"), have adopted a Dividend Reinvestment and Cash Purchase Plan (each, a "Plan"), sometimes referred to as an opt-out plan. You will have all your cash distributions invested in common shares automatically unless you elect to receive cash. As part of each Plan, you will have the opportunity to purchase additional common shares by submitting a cash payment for the purchase of such shares (the "Cash Purchase Option"). Your cash payment, if any, for the additional shares may not exceed $10,000 per quarter, per Plan and must be for a minimum of $100 per quarter. Wells Fargo Bank N.A. is the plan agent and paying agent for each plan. The plan agent will receive your distributions and additional cash payments under the Cash Purchase Option and either purchase common shares in the open market for your account or directly from the applicable Fund. If you elect not to participate in a Plan, you will receive all cash distributions in cash paid by check mailed to you (or, generally, if your shares are held in street name, to your broker) by the paying agent.

The number of common shares of each Fund you will receive if you do not opt out of a Plan will be determined as follows:

(1)
If, on a distribution payment date for a Fund, the market price per common share plus estimated per share brokerage commissions applicable to an open market purchase of common shares is below the net asset value per common share on that payment date, the plan agent will receive the distribution in cash and, together with your additional cash payments, if any, will purchase common shares of that Fund in the open market, on the AMEX or elsewhere, for your account prior to the next ex-dividend date. It is possible that the market price for a Fund's common shares may increase before the plan agent has completed its purchases. Therefore, the average purchase price per share paid by the plan agent may exceed the market price at the time of valuation, resulting in the purchase of fewer shares than if the distribution had been paid to you in common shares newly issued by a Fund. In the event it appears that the plan agent will not be able to complete the open market purchases prior to the next ex-dividend date, each Fund will determine whether to issue the remaining shares at the greater of (i) net asset value per common share at the time of purchase or (ii) 100% of the per common share market price at the time of purchase. Interest will not be paid on any uninvested amounts.

(2)
If, on the distribution payment date for a Fund, the market price per common share plus estimated per share brokerage commissions applicable to an open market purchase of common shares is at or above the net asset value per common share on that payment date, the appropriate Fund will issue new shares for your account, at a price equal to the greater of (i) net asset value per common share on that payment date or (ii) 95% of the per common share market price on that payment date.

(3)
The plan agent maintains all shareholder accounts in each Plan (including all shares purchased under the Cash Purchase Option) and provides written confirmation of all transactions in the accounts, including information you may need for tax records. Common shares in your account will be held by the Plan agent in non-certificated form. Any proxy you receive will include all common shares you have received or purchased under a Plan.

86


You may withdraw from any Plan at any time by giving written notice to the plan agent. If you withdraw or a Plan is terminated, the plan agent will transfer the shares in your account to you (which may include a cash payment for any fraction of a share in your account). If you wish, the plan agent will sell your shares and send you the proceeds, minus brokerage commissions to be paid by you.

The Plan agent is not authorized to make any purchases of shares for your account if doing so will result in your owning shares in excess of 9.8% of the total shares outstanding in each Fund. Dividends or cash purchase option payments which may result in such prohibited transactions will be paid to you in cash.

The plan agent's administrative fees will be paid by the Funds. There will be no brokerage commission charged with respect to common shares issued directly by any Fund. Each participant will pay a pro rata share of brokerage commissions incurred by the plan agent when it makes open market purchases of a Fund's shares pursuant to a Plan including the Cash Purchase Option.

Any Fund may amend or terminate its Plan or the Cash Purchase Option if its board of trustees determines the change is appropriate. However, no additional charges will be imposed upon participants by amendment to a Plan except after prior notice to participants.

Participation in a Plan will not relieve you of any federal, state or local income tax that may be payable (or required to be withheld) as a result of distributions you receive which are credited to your account under a Plan rather than paid in cash. Automatic reinvestment of distributions in a Fund's common shares will not relieve you of tax obligations arising from your receipt of that Fund's distributions even though you do not receive any cash.

All correspondence * about any Plan should be directed to Wells Fargo Shareowner Services, P.O. Box 64856, St. Paul, MN 55164-0856 or by telephone at 1-866-877-6331 and by overnight mail to Wells Fargo Bank N.A., 161 North Concord Exchange, South St. Paul, MN 55075.

*
Shareholders who hold shares of a Fund in "street name", that is, through a broker, financial advisor or other intermediary should not contract the Administrator with Plan correspondence, opt-out cash purchase option or other requests. If you own your shares in street name, you must instead contact your broker, financial advisor or intermediary.

87


RMR Real Estate Fund
RMR Hospitality and Real Estate Fund
RMR F.I.R.E. Fund
RMR Preferred Dividend Fund
RMR Asia Pacific Real Estate Fund
Trustees

Name,
address*
(Age)

  Position(s)
held with each fund and current term and length of time served (approx. number of years served)

  Principal occupation(s)
during past five years
and other public company directorships
held by trustee**

  Number of portfolios in fund complex overseen by trustee
Interested Trustees***            
Gerard M. Martin
(72)
  Class II trustee to serve until 2009.
RMR (5); RHR (3);
RFR (3); RDR (2) and RAP (1).
  Director of Reit Management & Research LLC – 1986 to present; director and vice president of RMR Advisors – 2002 to present; managing director of Five Star Quality Care, Inc. – 2001 to present; managing trustee of Senior Housing Properties Trust – 1999 to present; managing trustee of Hospitality Properties Trust – 1995 to 2007; managing trustee of HRPT Properties Trust – 1986 to 2006.   5

Barry M. Portnoy
(61)

 

Class III trustee to serve until 2007.
RMR (5); RHR (3);
RFR (3); RDR (2) and RAP (1).

 

Chairman of Reit Management & Research LLC – 1986 to present; Chairman of RMR Advisors – 2002 to present; portfolio manager of each of the RMR Funds other than RMR Asia Pacific Real Estate Fund – inception to present; managing director of Five Star Quality Care, Inc. – 2001 to present; managing trustee of Senior Housing Properties Trust – 1999 to present; managing trustee of Hospitality Properties Trust – 1995 to present; managing trustee of HRPT Properties Trust – 1986 to present; managing director of TravelCenters of America LLC – 2006 to present.

 

5
Disinterested Trustees            
John L. Harrington
(70)
  Class I trustee to serve until 2008.
RMR (5); RHR (3);
RFR (3); RDR (2) and RAP (1).
  Chairman of the Board and trustee of the Yawkey Foundation (a charitable trust) – 2002 to 2003 and 2007 to present; President, Executive Director and trustee of the Yawkey Foundation – 1982 to 2006; trustee of the JRY Trust – 1982 to present; Principal of Bingham McCutchen Sports Consulting LLC – 2007 to present; Chief Executive Officer and General Partner of the Boston Red Sox Baseball Club – 1973 to 2001; President of Boston Trust Management Corp. – 1981 to 2006; trustee of Hospitality Properties Trust – 1995 to present; director of Five Star Quality Care, Inc. – 2001 to 2003; trustee of Senior Housing Properties Trust – 1999 to present.   5

Frank J. Bailey
(51)

 

Class II trustee to serve until 2009.
RMR (5); RHR (3);
RFR (3); RDR (2) and RAP (1).

 

Partner in the Boston law firm of Sherin and Lodgen LLP; trustee of Hospitality Properties Trust – 2003 to present; trustee of Senior Housing Properties Trust – 2002 to present; director of Appleseed Foundation, Washington, D.C. – 1997 to present.

 

5

Arthur G. Koumantzelis
(76)

 

Class III trustee to serve until 2007.
RMR (5); RHR (3);
RFR (3); RDR (2) and RAP (1).

 

President and Chief Executive Officer of Gainesborough Investments LLC – 1998 to present; trustee of Hospitality Properties Trust – 1995 to 2007; director of TravelCenters of America LLC – 2007 to present; director of Five Star Quality Care, Inc. – 2001 to present; trustee of Senior Housing Properties Trust – 1999 to 2003.

 

5

88


RMR Real Estate Fund
RMR Hospitality and Real Estate Fund
RMR F.I.R.E. Fund
RMR Preferred Dividend Fund
RMR Asia Pacific Real Estate Fund
Executive Officers

Name,
address*
(Age)

  Position(s) held with each fund, term of office and length of time served (approx. number of
years served)

  Principal occupation(s) during past five years**
Thomas M. O'Brien
(40)
  President: RMR (5);
RHR (3); RFR (3); RDR (2) and RAP (1).
  President and director of RMR Advisors – 2002 to present; portfolio manager of each of the RMR Funds other than RMR Asia Pacific Real Estate Fund – inception to present; Senior Vice President of Reit Management & Research LLC – 2006 to present; Vice President of Reit Management & Research LLC – 1996 to 2006; managing director of TravelCenters of America LLC – 2006 to present; Executive Vice President, Hospitality Properties Trust – 2002 to 2003; Treasurer and Chief Financial Officer, Hospitality Properties Trust – 1996 to 2002.

Mark L. Kleifges
(46)

 

Treasurer: RMR (5); RHR (3); RFR (3); RDR (3) and RAP (1).

 

Senior Vice President of Reit Management & Research LLC – 2006 to present; Vice President of Reit Management & Research LLC – 2002 to 2006; Treasurer of RMR Advisors – 2004 to present; Vice President of RMR Advisors – 2003 to 2004; Treasurer and Chief Financial Officer, Hospitality Properties Trust – 2002 to present; Partner, Arthur Andersen LLP – 1993 to 2002.

Jennifer B. Clark
(45)

 

Secretary: RMR (5); RHR (3); RFR (3); RDR (2) and RAP (1).

 

Senior Vice President and General Counsel of Reit Management & Research LLC – 2006 to present; Vice President and General Counsel of Reit Management & Research LLC – 1999 to 2006; Vice President, Secretary and Chief Legal Officer of RMR Advisors – 2002 to present; Senior Vice President of HRPT Properties Trust – 1999 to present.

James J. McKelvey
(48)

 

Vice President: RMR (5); RHR (3); RFR (3); RDR (2) and RAP (1).

 

Vice President of RMR Advisors – 2004 to present; portfolio manager of RMR Real Estate Fund and RMR Hospitality and Real Estate Fund – 2004 to present; portfolio manager of RMR F.I.R.E. Fund and RMR Preferred Dividend Fund – inception to present; portfolio manager and senior research officer for John Hancock Funds – 1997 to 2004.

John C. Popeo
(46)

 

Vice President: RMR (5); RHR (3); RFR (3); RDR (2) and RAP (1).

 

Chief Financial Officer, Senior Vice President and Treasurer of Reit Management & Research LLC – 2006 to present; Treasurer of Reit Management & Research LLC – 1997 to 2006; Treasurer of RMR Real Estate Fund – 2002 to 2004; Vice President of RMR Advisors – 2004 to present; Treasurer of RMR Advisors – 2002 to 2004; Treasurer, Chief Financial Officer and Secretary of HRPT Properties Trust – 1999 to present.

89



Adam D. Portnoy
(36)

 

Vice President: RMR (5); RHR (3); RFR (3); RDR (2) and RAP (1).

 

President and Chief Executive Officer of Reit Management & Research LLC – 2006 to present; Vice President of Reit Management & Research LLC – 2003 to 2006; Vice President of RMR Advisors – 2003 to present; Managing Trustee of HRPT Properties Trust – 2006 to present; Managing Trustee of Hospitality Properties Trust – 2007 to present; Executive Vice President of HRPT Properties Trust – 2003 to 2006; Senior Investment Officer, International Finance Corporation, a member of the World Bank Group – 2001 to 2003.

William J. Sheehan
(62)

 

Chief Compliance Officer and Director of Internal Audit: RMR (5); RHR (3); RFR (3); RDR (2) and RAP (1).

 

Director of Internal Audit of RMR Funds and Chief Compliance Officer of RMR Funds and of RMR Advisors – 2004 to present; Director of Internal Audit of HRPT Properties Trust, Hospitality Properties Trust, Senior Housing Properties Trust and Five Star Quality Care, Inc. – 2003 to present; Director of Internal Audit of TravelCenters of America LLC – 2007 to present; trustee of Hospitality Properties Trust – 1995 to 2003; Executive Vice President, Ian Schrager Hotels LLC – 1999 to 2003.

*
The business address of each listed person is 400 Centre Street, Newton, Massachusetts 02458.
**
RMR, RHR, RFR, RDR and RAP are collectively referred to as RMR Funds.
***
Interested trustees indicate a trustee who is an "interested person" of the Fund within the meaning of the Investment Company Act of 1940, as amended.

Each Fund's Statement of Additional Information includes additional information about the trustees and is available without charge upon request by calling us at 1-866-790-8165 or 1-617-332-9530.


90


RMR Real Estate Fund
RMR Hospitality and Real Estate Fund
RMR F.I.R.E. Fund
RMR Preferred Dividend Fund
RMR Asia Pacific Real Estate Fund
December 31, 2006

For the purposes of the following, RMR Real Estate Fund (RMR), RMR Hospitality and Real Estate Fund (RHR), RMR F.I.R.E. Fund (RFR), RMR Preferred Dividend Fund (RDR) and RMR Asia Pacific Real Estate Fund (RAP) are each referred to as a "Trust" or collectively as the "Trusts".

Consideration of the Investment Advisory Agreements for RMR, RHR, RFR and RDR

RMR Advisors serves as the investment advisor to each of RMR, RHR, RFR and RDR. On October 6, 2006, the boards of trustees (each a "board and collectively the "boards") of each Trust renewed these investment advisory agreements for a period of one year to expire on December 12, 2007.

In making their determination to renew each investment advisory agreement, each board, including the disinterested trustees, considered all of the factors described below.

Each board considered the benefits of retaining RMR Advisors as investment advisor. Each board's considerations included, among others: the nature, scope and quality of services that RMR Advisors has provided and is expected to provide; the advisory and other fees to be paid; the fact that RMR Advisors has agreed to waive a portion of its fees during the first five years of each of the Trust's existence in order to reduce the Trust's operating expenses; the quality and depth of personnel of RMR Advisors' organization; the capacity and future commitment of RMR Advisors to perform its duties; the financial condition and profitability of RMR Advisors; the experience and expertise of RMR Advisors as an investment adviser; the performance of each Trust as compared to similar Funds; the level of fees paid to RMR Advisors as compared to similar funds; the potential for economies of scale; and any indirect benefits derived by RMR Advisors' from its relationship with theTrusts.

Each board considered the level and depth of knowledge of RMR Advisors. In evaluating the quality of services provided by RMR Advisors, each board took into account its familiarity with RMR Advisors' management through board meetings, conversations and reports. Each board also took into account RMR Advisors' compliance policies and procedures.

Each board compared the advisory fees and the total expense ratio of each Trust with various comparative fund data. In addition to considering each Trust's recent performance, each board noted its reviews on a quarterly basis, information about each Trust's performance result, portfolio composition and investment strategies.

In considering the renewal of the investment advisory agreement, each board, including the disinterested trustees, did not identify any single factor as controlling. Based on each board's evaluation of all the factors that it deemed to be relevant, each board, including the disinterested trustees of each board, concluded that: RMR Advisors has demonstrated that it possesses the capability and resources to perform the duties required of it under the investment advisory agreement for each Trust; RMR Advisors maintains an appropriate compliance program; performance of each Trust is reasonable in relation to the performance of funds with similar investment objectives; and the advisory fee rate for each Trust is fair and reasonable, given the scope and quality of the services to be provided by RMR Advisors.


91



Privacy Policy

Each of the Funds is committed to maintain shareholder privacy and to safeguard shareholder nonpublic personal information.

The Funds do not receive any nonpublic personal information relating to shareholders who purchase Fund shares through an intermediary that acts as the record owner of the shares. If a shareholder is the record owner of any Fund's shares, that Fund may receive nonpublic personal information on shareholder account documents or otherwise and also has access to specific information regarding shareholder Fund share transactions, either directly or through the Fund's transfer agent.

The Funds do not disclose any nonpublic personal information about shareholders or any former shareholders to anyone, except as permitted by law or as is necessary to service shareholder accounts. The Funds restrict access to nonpublic personal information about shareholders to employees of the Funds and RMR Advisors with a legitimate business need for the information.

Proxy Voting Policies and Procedures

A description of the policies and procedures that are used to vote proxies relating to each Fund's portfolio securities is available: (1) without charge, upon request, by calling us at 1-866-790-8165; and (2) as an exhibit to each Fund's annual report on Form N-CSR, which is available on the website of the U.S. Securities and Exchange Commission (the "Commission") at http://www.sec.gov. Information regarding how proxies received by each Fund during the most recent 12 month period ended June 30, 2006, have been voted is available (1) without charge, on request, by calling us at 1-866-790-3165, or (2) by visiting the Commission's website at http://www.sec.gov and accessing each Fund's Form N-PX.

Procedures for the Submission of Confidential and Anonymous Concerns or Complaints about Accounting, Internal Accounting Controls or Auditing Matters

The Funds are committed to compliance with all applicable securities laws and regulations, accounting standards, accounting controls and audit practices and have established procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters. Any shareholder or other interested party who desires to communicate with our independent trustees or any other trustees, individually or as a group, may do so by filling out a report at the "Contact Us" section of our website (www.rmrfunds.com), by calling our toll-free confidential message system at 866-511-5038, or by writing to the party for whom the communication is intended, care of our director of internal audit, RMR Funds, 400 Centre Street, Newton, MA 02458. Our director of internal audit will then deliver any communication to the appropriate party or parties.

Portfolio Holdings Reports

Each Fund files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q, which are available on the Commission's website at http://www.sec.gov. The Funds' Forms N-Q may also be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. Each Fund provides additional data at its website at www.rmrfunds.com.


92



Certifications

Each Fund's principal executive officer and principal financial officer certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 and filed with the Fund's N-CSR are available on the Securities and Exchange Commission's website at http://www.sec.gov.

Required Disclosure of Certain Federal Income Tax Information (unaudited)

For federal income tax purposes, the following information is furnished with respect to the distributions paid by the Funds during the year ended December 31, 2006.

 
  Dividend Received
Deduction (1)

  Long Term Capital
Gains Distribution

  Qualified Income
Distribution

RMR Real Estate Fund   30.05 % $ 2,569,421   $ 567,302
RMR Hospitality and Real Estate Fund   25.60 % $ 1,698,682   $ 278,927
RMR F.I.R.E. Fund   45.98 % $ 429,997   $ 769,454
RMR Preferred Dividend Fund   39.60 % $ 702,726   $ 519,260
(1)
Applies both to common and preferred shares

Shareholders of the Funds have been or will be advised on Internal Revenue Service Form 1099 DIV as to the federal tax status of the distributions received from each Fund during calendar year 2006. Shareholders are advised to consult with their own tax advisors as to the federal, state and local tax status of the distributions received from the Funds.

Annual Meeting

An annual meeting of shareholders of RHR will be held at 9:30 AM on Thursday March 8, 2007, at 400 Centre Street, Newton, Massachusetts. A proxy statement has been mailed to the RHR shareholders of record as of December 11, 2006, each of whom is invited to attend.

An annual meeting of shareholders of RMR, RFR, RDR and RAP will be held at 9:30 A.M. on Tuesday May 8, 2007, at 400 Centre Street, Newton, Massachusetts. A joint proxy statement related to the annual meetings will be mailed to shareholders of record as of February 9, 2007, each of whom is invited to attend.


93



 

 

 


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Item 2. Code of Ethics.


Item 3. Audit Committee Financial Expert.

(a)(1)   The registrant's board of trustees has determined that the registrant has at least one member serving on the registrant's audit committee (the "Audit Committee") that possesses the attributes identified in Item 3 of Form N-CSR to qualify as an "audit committee financial expert."

(a)(2)

 

The name of the Audit Committee financial expert is Arthur G. Koumantzelis. Mr. Koumantzelis has been deemed to be "independent" as that term is defined in Item 3(a)(2) of Form N-CSR.


Item 4. Principal Accountant Fees and Services.

(a)   Audit Fees: The aggregate fees billed by the registrant's independent accountant for audit services were $35,000 for the fiscal year ended December 31, 2006, and $34,000 for the fiscal year ended December 31, 2005.

(b)

 

Audit-Related Fees: The aggregate fees billed by the registrant's independent accountant for audit related services were $12,000 for the fiscal year ended December 31, 2006, and $12,000 for the fiscal year ended December 31, 2005. The nature of the services were: (1) issuance of agreed upon procedures reports to rating agencies.

(c)

 

Tax Fees: The aggregate fees billed by the registrant's independent accountant for tax compliance services were $8,400 for the fiscal year ended December 31, 2006, and $8,000 for the fiscal year ended December 31, 2005. The nature of the services were the review of the registrant's federal and state tax returns.

(d)

 

All Other Fees: There were no other fees billed by the registrant's independent accountant for the fiscal years ended December 31, 2006 and December 31, 2005.
     


(e)(1)

 

Audit Committee Pre-Approval Policies and Procedures: The registrant's Audit Committee is required to pre-approve all audit and non-audit services provided by the independent accountant to the registrant and certain affiliated persons of the registrant. In considering a requested approval, the Audit Committee will consider whether the proposed services are consistent with the rules of the Securities and Exchange Commission ("SEC") on the independent accountant's independence. The Audit Committee will also consider whether the independent accountant is best positioned to provide the most effective and efficient service, considering its familiarity with the registrant's business, people, culture, accounting systems, risk profile and other factors, and whether the service might enhance the registrant's ability to manage or control risk or improve audit quality. All factors will be considered as a whole, and no one factor will necessarily be determinative. The Audit Committee may delegate approval authority to its chair or one or more of its members who are not "interested persons" as defined by Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "1940 Act"). The member or members to whom such authority is delegated will report, for informational purposes only, any approvals to the Audit Committee at its next regularly scheduled quarterly meeting. This policy does not delegate the Audit Committee's responsibilities to approve services performed by the independent accountant to the registrant's officers or advisor. The Audit Committee may, with respect to a category of services, generally approve services, subject to any general limitations and restrictions it may determine, and subject further to specific approval by a delegated member or members of the Audit Committee.

(e)(2)

 

Percentages of Services: None.

(f)

 

Not applicable.

(g)

 

There were no non-audit fees billed by the independent accountant for services rendered to the registrant or RMR Advisors, Inc., the registrant's investment advisor (the "Advisor"), for the fiscal years ended December 31, 2006 and December 31, 2005, except for tax compliance services rendered to the registrant.

(h)

 

Not applicable.


Item 5. Disclosure of Audit Committees for Listed Companies.

(a)
The registrant has a separately-designated Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The members of the registrant's Audit Committee are Frank J. Bailey, John L. Harrington and Arthur G. Koumantzelis.

(b)
Not applicable.


Item 6. Schedule of Investments

        The information required under Item 6 is included as part of the report to shareholders filed under Item 1 of this Form N-CSR.


Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed End Management Investment Companies.

        Attached to this Form N-CSR as Exhibit 12(c) is a copy of the proxy voting policies and procedures for the registrant.


Item 8. Portfolio Managers of Closed End Management Investment Companies.

        The registrant's portfolio managers are:


        The portfolio managers generally function as a team. Generally, Mr. Portnoy provides strategic guidance to the team, while Messrs. O'Brien and McKelvey are in charge of substantially all of the day to day operations, research and trading functions.

        The registrant's portfolio managers together manage RHR, RFR and RDR, registered investment companies that have an aggregate of $220 million of managed assets as of December 31, 2006. Each RMR Fund pays an advisory fee to the Advisor solely on the basis of assets under management. None of the portfolio managers currently manage other pooled investment vehicles or other accounts.

        CONFLICTS OF INTEREST:    Actual or potential conflicts of interest may arise when a portfolio manager has management responsibilities with respect to more than one fund. For example, a portfolio manager may identify a limited investment opportunity that may be appropriate for the Fund as well as for the other funds he manages. A conflict of interest also might arise where a portfolio manager has a larger personal investment in one fund than in another. A portfolio manager may purchase a particular security for one or more funds while selling the security for one or more other funds; this could have a detrimental effect on the price or volume of the securities purchased or sold by a fund. A portfolio manager might devote unequal time and attention to the funds he manages. The Advisor believes that the risk of a material conflict of interest developing is limited because (i) the funds are generally managed in a similar fashion, (ii) the Advisor has adopted policies requiring the equitable allocation of trade orders for a particular security among participating funds, and (iii) the advisory fee and portfolio managers' compensation are not affected by the amount of time required to manage each fund. As a result, the Advisor does not believe that any of these potential sources of conflicts of interest will affect the portfolio managers' professional judgment in managing the funds.

        COMPENSATION:    Mr. Barry Portnoy is a 55% owner of the Advisor and, through December 31, 2006, has not received a salary or other compensation from the Advisor except to the extent of his distributions from the Advisor and his interest in the Advisor's profits, if any.

        The other portfolio managers, Messrs. O'Brien and McKelvey, are paid based upon the discretion of the board of directors of the Advisor. The Advisor's board of directors consists of Messrs. Barry M.



Portnoy, Gerard M. Martin and Thomas M. O'Brien. Compensation of Messrs. O'Brien and McKelvey includes base salary, annual cash bonus and they have the opportunity to participate in other employee benefit plans available to all of the employees of the Advisor. The level of compensation is not based upon a formula with reference to fund performance or the value of fund assets; however these factors, among others, may be considered by individual directors of the Advisor. Other factors which may be considered in setting the compensation of portfolio managers are their historical levels of compensation and levels of compensation paid for similar services or to persons with similar responsibilities in the market generally and in the geographic area where the Advisor is located. Mr. O'Brien devotes a portion of his business time to providing services as a portfolio manager or officer of the Advisor and funds managed by the Advisor; however, he also dedicates a portion of his business time to providing services to affiliates of the Advisor and Reit Management. Therefore, in addition to compensation paid by the Advisor, Mr. O'Brien receives compensation for separate services to these affiliates. Mr. Portnoy also receives compensation for his services to those affiliates.

        OWNERSHIP OF SECURITIES:    The following table sets forth, for each portfolio manager, the aggregate dollar range of the registrant's equity securities beneficially owned as of December 31, 2006.

Name of Portfolio Manager

  Dollar Range of Equity
Securities in the Fund
as of
December 31, 2006.

James J. McKelvey   None
Thomas M. O'Brien   Over $100,000
Barry M. Portnoy   Over $100,000


Item 9. Purchases of Equity Securities by Closed End Management Investment Company and Affiliated Purchasers.

        During the fiscal year ended December 31, 2006, there were no purchases made by or on behalf of the registrant or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the Exchange Act (17 CFR 240.10b-18(a)(3)), of shares of the registrant's equity securities that are registered by the registrant pursuant to Section 12 of the Exchange Act.


Item 10. Submission of Matters to a Vote of Security Holders.

        There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant's board of trustees.


Item 11. Controls and Procedures.

(a)
The registrant's principal executive officer and principal financial officer have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act) are effective, as of a date within 90 days of the filing date of this report, based on their evaluation of these controls and procedures.

(b)
There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by the report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.


Item 12. Exhibits.

(a)(2)   Certifications of principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the 1940 Act are attached hereto.

(b)

 

Certifications of principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.

(c)

 

Copy of the proxy voting policies and procedures.


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.

RMR REAL ESTATE FUND

By:

 

/s/  
THOMAS M. O'BRIEN      
Thomas M. O'Brien
President
Date: February 28, 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/  
THOMAS M. O'BRIEN      
Thomas M. O'Brien
President
Date: February 28, 2007

By:

 

/s/  
MARK L. KLEIFGES      
Mark L. Kleifges
Treasurer
Date: February 28, 2007



QuickLinks

NOTICE CONCERNING LIMITED LIABILITY
RMR Real Estate Fund Financial Statements
RMR Real Estate Fund Financial Statements – continued
RMR Real Estate Fund Financial Statements – continued
RMR Real Estate Fund Notes to Financial Statements December 31, 2006
RMR Hospitality and Real Estate Fund Financial Statements
RMR Hospitality and Real Estate Fund Financial Statements – continued
RMR Hospitality and Real Estate Fund Financial Statements – continued
RMR Hospitality and Real Estate Fund Financial Highlights
RMR Hospitality and Real Estate Fund Notes to Financial Statements December 31, 2006
RMR F.I.R.E. Fund Financial Statements
RMR F.I.R.E. Fund Financial Statements – continued
RMR F.I.R.E. Fund Financial Statements – continued
RMR F.I.R.E. Fund Notes to Financial Statements December 31, 2006
RMR Preferred Dividend Fund Financial Statements
RMR Preferred Dividend Fund Financial Statements – continued
RMR Preferred Dividend Fund Financial Statements – continued
RMR Preferred Dividend Fund Notes to Financial Statements December 31, 2006
RMR Asia Pacific Real Estate Fund Financial Statements
RMR Asia Pacific Real Estate Fund Financial Statements – continued
RMR Asia Pacific Real Estate Fund Financial Statements – continued
RMR Asia Pacific Real Estate Fund Notes to Financial Statements December 31, 2006
SIGNATURES