SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1995
--------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE CHANGE ACT OF 1934
For the transition period from TO
---------------------- --------------------------
Commission file number 1-12700
-----------------------------------------------------------
FRANKLIN REAL ESTATE INCOME FUND
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0185558
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 312-2000
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Common Stock Shares Outstanding as of September 30, 1995, Series A: 3,999,515
Common Stock Shares Outstanding as of September 30, 1995, Series B: 319,308
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FRANKLIN REAL ESTATE INCOME FUND
BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
(Dollars in 000's except per share amounts)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
1995 1994
ASSETS
Rental property:
<S> <C> <C>
Land $10,326 $10,326
Buildings and improvements 29,567 29,606
Equipment - 63
39,893 39,995
Less: accumulated depreciation 5,266 4,535
34,627 35,460
Cash and cash equivalents 1,498 973
Mortgage-backed securities, available for sale 537 532
Deferred rent receivable 769 686
Other assets 614 579
Total assets $38,045 $38,230
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $1,948 $1,981
Tenants' deposits and other liabilities 323 247
Dividends payable 500 500
Total liabilities 2,771 2,728
Stockholders' equity:
Common stock, Series A, without par value. Stated value $10 per share;
10,000,000 shares authorized; 3,999,515 and 3,999,653 shares issued and
outstanding
in 1995 and 1994 35,702 35,703
Common stock, Series B, without par value. Stated
value $10 per share; 500,000 shares authorized;
319,308 shares issued and outstanding in 1995 and 1994 3,193 3,193
Unrealized gain (loss) on mortgage-backed securities 1 (40)
Accumulated dividends in excess of net income (3,622) (3,354)
Total stockholders' equity 35,274 35,502
Total liabilities and stockholders' equity $38,045 $38,230
See notes to financial statements.
</TABLE>
Item 1. Financial Statements
(continued)
FRANKLIN REAL ESTATE INCOME FUND
STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
(Dollars in 000's except per share amounts)
1995 1994
Revenue:
Rent $1,207 $1,111
Interest 21 15
Dividends 2 1
Other 2 6
Total revenue 1,232 1,133
Expenses:
Interest 50 51
Depreciation and amortization 287 284
Operating 402 302
Related party 56 55
Consolidation expense 62 -
General and administrative 39 35
Total expenses 896 727
Net income $ 336 $ 406
Net income per share, based on shares
outstanding of Series A common stock
of 3,999,515 and 4,000,000 in 1995 and 1994 $ .08 $ .10
Dividends per share, based on shares
outstanding of Series A common stock
of 3,999,515 and 4,000,000 in 1995 and 1994 $ .13 $ .13
See notes to financial statements.
Item 1. Financial Statements
(continued)
FRANKLIN REAL ESTATE INCOME FUND
STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
(Dollars in 000's except per share amounts)
1995 1994
Revenue:
Rent $3,468 $3,239
Interest 55 44
Dividends 4 5
Other 10 20
Total revenue 3,537 3,308
Expenses:
Interest 154 124
Depreciation and amortization 862 833
Operating 937 772
Related party 164 154
Consolidation expense 62 -
General and administrative 126 183
Loss on sale of mortgage-backed securities - 68
Total expenses 2,305 2,134
Net income $1,232 $1,174
Net income per share, based on shares
outstanding of Series A common stock
of 3,999,515 and 4,000,000 in 1995 and 1994 $ .31 $ .29
Dividends per share, based on shares
outstanding of Series A common stock
of 3,999,515 and 4,000,000 in 1995 and 1994 $ .38 $ .38
See notes to financial statements.
Item 1. Financial Statements
(continued)
FRANKLIN REAL ESTATE INCOME FUND
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995
(Unaudited)
(Dollars in 000's)
<TABLE>
<CAPTION>
Common Stock
Series A Series B
Accumulated
Unrealized Dividends
Gain/Loss in Excess
on of Net
Shares Amount Shares Amount Securities Income Total
Balance, beginning
<S> <C> <C> <C> <C> <C> <C> <C>
of period 3,999,653 $35,703 319,308 $3,193 $(40) $(3,354) $35,502
Redemption of Series
A common stock (138) (1) - - - - (1)
Unrealized gain on
mortgage-backed securities - - - - 41 - 41
Net income - - - - - 1,232 1,232
Dividends declared - - - - - (1,500) (1,500)
Balance,end of period 3,999,515 $35,702 319,308 $3,193 $1 $(3,622) $35,274
</TABLE>
See notes to financial statements.
Item 1. Financial Statements
(continued)
FRANKLIN REAL ESTATE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
(Dollars in 000's)
<TABLE>
<CAPTION>
1995 1994
Cash flows from operating activities:
<S> <C> <C>
Net income $1,232 $1,174
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 862 833
Increase in deferred rent receivable (83) (142)
Decrease in Due from Advisor - 258
Increase in other assets (113) (23)
Increase in tenants' deposits and other liabilities 76 140
Loss on disposition of rental property 100 -
842 1,066
Net cash provided by operating activities 2,074 2,240
Cash flows from investing activities:
Acquisition of rental property - (6,700)
Improvements to rental property (51) (147)
Decrease in investment in mortgage-backed securities 36 3,823
Net cash used in investing activities (15) (3,024)
Cash flows from financing activities:
Dividends paid (1,500) (1,500)
Borrowings under loan payable - 2,000
Principal payments on note payable (33) (7)
Redemption of Series A common stock (1) -
Net cash provided by (used in) financing activities (1,534) 493
Net increase (decrease) in cash and cash equivalents 525 (291)
Cash and cash equivalents, beginning of period 973 1,470
Cash and cash equivalents, end of period $1,498 $1,179
See notes to financial statements.
</TABLE>
FRANKLIN REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1 - ORGANIZATION
Franklin Real Estate Income Fund (the "Company") is a California corporation
formed on August 7, 1987 for the purpose of investing in income-producing real
property. The Company is a real estate investment trust ("REIT") having elected
to qualify as a REIT under the applicable provisions of the Internal Revenue
Code since 1988. Under the Internal Revenue Code and applicable state income tax
law, a qualified REIT is not subject to income tax if at least 95% of its
taxable income is currently distributed to its stockholders and other REIT tests
are met. The Company has distributed at least 95% of its taxable income and
intends to distribute substantially all of its taxable income in the future.
Accordingly, no provision is made for income taxes in these financial
statements.
As of September 30, 1995, the Company's real estate portfolio consisted of the
Mira Loma Shopping Center located in Reno, Nevada; a 40% undivided interest in
the Shores Office Complex located in Redwood City, California; three separate
R&D buildings in the Northport Business Park located in Fremont, California; and
the Glen Cove Center located in Vallejo, California. The Company has also
purchased two small parcels of land located adjacent to the Mira Loma Shopping
Center. The Company has completed its property acquisition phase and no
additional property acquisitions are currently anticipated.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited financial statements contain all adjustments
(consisting of normal recurring accruals) which are necessary, in the opinion of
management, for a fair presentation. The statements, which do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements, should be read in conjunction with
the Company's financial statements for the year ended December 31, 1994.
RECLASSIFICATION
Certain amounts in the 1994 financial statements have been reclassified to
correspond to the 1995 presentation. These reclassifications did not affect
previously reported net income.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company has an agreement with Franklin Properties, Inc. (the "Advisor"), to
administer the day-to-day operations of the Company. Under the terms of the
agreement, which is renewable annually, the Advisor will receive quarterly, an
annualized fee equal to 1% of invested assets and .4% of mortgage investments.
The fee is subordinate to declared dividends to Series A common stock
shareholders totaling at least an 8% per annum non-cumulative non-compounded
return on their adjusted price per share, as defined.
Accordingly, no advisory fee was paid to the Advisor.
At September 30, 1995, cash equivalents included $313,000, which was invested in
Franklin Money Fund, an investment company managed by an affiliate of the
Advisor. Dividends earned from Franklin Money Fund totaled $4,000 for the nine
month period ended September 30, 1995.
FRANKLIN REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
The agreements between the Company and the Advisor, or affiliates, provide for
certain types of compensation and payments including but not limited to the
following, for those services rendered for the nine month period ended September
30, 1995:
Reimbursement for data processing, accounting
and certain other expenses, charged to
related party expense $36,000
Property management fee,
charged to related party expense $128,000
Leasing commission, capitalized and amortized
over the term of the related lease $105,000
Construction supervision fee, capitalized and
amortized over the life of the related investment
or the term of the related lease $1,000
NOTE 4 - COMMON STOCK, WARRANTS AND INCOME PER SHARE
Series A and Series B common stock have the same voting rights. Dividends from
sources other than cash from the sale or refinancing of the Company's property
are to be paid in the following order of priority: first to the Series A
stockholders until they receive an 8% per annum non-cumulative non-compounded
return on their adjusted price per share, as defined; then to the Series A and
Series B stockholders in proportion of their respective number of shares. All
dividends are declared at the discretion of the Directors of the Company. To
date, the Board of Directors has not declared any dividends to be payable to any
shares of outstanding Series B common stock.
Since Series A common stock has not received an 8% per annum non-cumulative
non-compounded return on its adjusted purchase price, and since Series B common
stock does not participate in earnings until such 8% return is received by the
Series A common stock, net income per share is not applicable to Series B common
stock.
Warrants were issued with each share of Series A common stock purchased during
the offering period, without additional cost to the stockholders. The number of
warrants issued with each share varied depending upon the number of shares
outstanding at the time the warrants were issued. Warrants covering the exercise
of 2,861,420 additional shares of Series A common stock are outstanding as of
September 30, 1995. Each warrant is exercisable at a price of $10.00 per share
for a 12-month period which commenced on February 1, 1995.
NOTE 5 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NONCASH INFORMATION
For the nine month period ended September 30, 1995, the Company paid interest on
the note payable of $156,000.
FRANKLIN REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 6 - SUBSEQUENT EVENT
On November 2, 1995 the Board of Directors of the Company and of two other real
estate investment trusts that Franklin Properties, Inc. advises, Franklin
Advantage Real Estate Income Fund ("Advantage") and Franklin Select Real Estate
Income Fund ("Select"), authorized the execution of a Merger Agreement and the
filing of a Joint Proxy Statement/Registration Statement with the Securities and
Exchange Commission. The Registration Statement was filed on November 13, 1995.
In the proposed merger, the Company and/or Advantage would be merged into
Select, which would be renamed Franklin Select Realty Trust. The shares of
Select will be offered to shareholders of the Company and Advantage in exchange
for their shares on the basis described in the Joint Proxy
Statement/Registration Statement. The merger is subject to certain conditions
including approval by a majority of the shareholders of Select, the Company,
and/or Advantage. A special meeting of the shareholders of each REIT will be
held to vote on the proposed merger upon the effectiveness of the Registration
Statement and the close of the solicitation period.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
AND RESULTS OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the Financial Statements and Notes
thereto.
FUNDS FROM OPERATIONS
FOR NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in 000's) 1995 1994
Funds Provided By:
Constant Properties (a) $1,842 $1,884
Acquired Property (b) 571 485
Interest and Dividend Income 59 49
Interest Expense (154) (124)
Loss on Sale of Securities - (68)
Company Expenses (224) (219)
Funds from Operations (c) $2,094 $2,007
Reconciliation to Net Income:
Depreciation & Amortization:
Buildings and Improvements (612) (601)
Tenant Improvements (172) (162)
Leasing Commission Amortization (76) (69)
Other Amortization (2) (1)
Net Income: $1,232 $1,174
Dividends Declared $1,500 $1,500
- ---------------
(a) Represents properties which were owned throughout the entire period
January 1, 1994 to September 30 1995, for comparative purposes.
Amounts are net of property management fees.
(b) Represents the operations, net of property management fees, of the
Glen Cove Center, which was purchased on January 31, 1994.
(c) As defined by the National Association of Real Estate Investment
Trusts. The Company believes that funds from operations is an
appropriate supplemental measure of operating performance. However,
funds from operations should not be considered as a substitute for
net income as an indicator of the Company's operating performance,
or for cash flows as a measure of liquidity.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
Net income for the nine month period ended September 30, 1995 increased $58,000,
or 5%, as compared to the same period in 1994 due to the following factors: an
increase in rental revenue of $229,000; an increase in interest and dividends of
$10,000; a decrease in other income of $10,000; an increase in interest expense
of $30,000; an increase in depreciation and amortization of $29,000; an increase
in operating expenses of $165,000; an increase in related party expenses of
$10,000; an increase in consolidation expense of $62,000; a decrease in general
and administrative expense of $57,000, and a decrease in loss on the sale of
mortgage-backed securities of $68,000.
Explanations of the material changes are as follows:
Rental revenue for the nine month period ended September 30, 1995 increased
$229,000, or 7%, primarily due to the recognition of rental income from the Glen
Cove Shopping Center acquired in January 1994 and improved occupancy and rental
rates at the Shores Office Complex. The average occupancy rate of net rentable
square feet for the nine month periods ended September 30, 1995 and 1994 at the
Shores Office Complex was 98% and 91%; at the Northport Buildings 98% and 97%;
at the Mira Loma Shopping Center 81% and 81%; and at the Glen Cove Center 97%
and 95%, respectively.
Total expenses increased for the nine month period ended September 30, 1995 by
$171,000, or 8%, from $2,134,000 in 1994 to $2,305,000. The increase in total
expenses is attributable to the following factors: an increase in interest
expense of $30,000; an increase in depreciation and amortization of $29,000, or
3%; an increase in operating expenses of $165,000, or 21%; an increase in
related party expense of $10,000, or 6%; an increase in consolidation expense of
$62,000 or 100%; a decrease in general and administrative expense of $57,000, or
31%, and a decrease in loss on sale of mortgage-backed securities of $68,000 or
100%.
Interest expense increased $30,000 reflecting the issuance of an unsecured loan
payable in January, 1994, related to the acquisition of the Glen Cove Center.
This loan was converted into a secured mortgage note in June, 1994.
Depreciation and amortization increased $29,000 reflecting tenant improvment
costs at the Shores Office Complex related to new leases commencing in late 1994
and the acquisition of rental property in January, 1994.
Related party expense increased $10,000 as a result of an increase in property
management fees due to the increases in rental revenue at the Company's
properties.
Consolidation expense of $62,000 relates to the proposed consolidation.
General and administrative expense decreased $57,000 due to a decrease in
non-recurring consulting fees and legal expenses.
Loss on sale of mortgage-backed securities decreased $68,000 due to the sale of
mortgage-backed securities in January, 1994. The proceeds were used to invest in
rental property.
Operating expenses increased $165,000 due to an increase in utility and
insurance expense at the Company's properties and to a $100,000 writeoff of
building and equipment related to ceasing operations at the Mira Loma Car Wash
in August, 1995. The land will be paved and used as additional parking space at
the Mira Loma Shopping Center.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of capital for the acquisition of properties was
the proceeds from the initial public offering of its stock. The Company
completed its property acquisition phase in 1994 and no further acquisitions are
anticipated. The Company's funds from operations have been its principal source
of capital for property improvements, leasing costs and the payments of
quarterly dividends. At September 30, 1995, the Company's cash reserves,
including mortgage backed securities, aggregated $2,035,000.
As of September 30, 1995, one of the Company's properties was subject to secured
financing with an outstanding balance of approximately $1,948,000. Otherwise,
the Company's properties are owned free of any indebtedness. Interest on the
note accrues at a variable rate of 1.5% in excess of the Union Bank Reference
Rate. Monthly installments of principal and interest commenced August 1, 1994,
and continue until maturity of the note on May 1, 1999. Principal installments
are payable in the amount of $3,700 per month. The note may be prepaid in whole
or in part at any time without penalty.
For the foreseeable future, management believes that the Company's current
sources of capital will continue to be adequate to meet both its operating
requirements and the payment of dividends.
IMPACT OF INFLATION
The Company's management believes that inflation may have a positive effect on
the Company's property portfolio, but this effect generally will not be fully
realized until such properties are sold or exchanged. On some leases, the
Company collects overage rents based on increased sales and increased base
rentals as a result of cost of living adjustments. The Company's policy of
negotiating leases which incorporate operating expense "pass-through" provisions
is intended to protect the Company against increased operating costs resulting
from inflation.
DIVIDENDS
Dividends are declared quarterly at the discretion of the Board of Directors.
The Company's present dividend policy is to at least annually evaluate the
current dividend rate in light of anticipated tenant turnover over the next two
or three years, the estimated level of associated improvements and leasing
commissions, planned capital expenditures, any debt service requirements and the
Company's other working capital requirements. After balancing these
considerations, and considering the Company's earnings and cash flow, the level
of its liquid reserves and other relevant factors, the Company seeks to
establish a dividend rate which:
i) provides a stable dividend which is sustainable
despite short term fluctuations in property cash
flows;
ii) maximizes the amount of funds from operations paid
out as dividends consistent with the above listed
objective; and
iii)complies with the Internal Revenue Code requirement that a REIT
annually pay out as dividends not less than 95% of its taxable
income.
For the nine-month period ended September 30, 1995, the Company declared
dividends totaling $1,500,000.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
AND RESULTS OF OPERATIONS
On November 2, 1995 the Board of Directors of the Company and of two other real
estate investment trusts that Franklin Properties, Inc. advises, Franklin
Advantage Real Estate Income Fund ("Advantage") and Franklin Select Real Estate
Income Fund ("Select"), authorized the execution of a Merger Agreement and the
filing of a Joint Proxy Statement/Registration Statement with the Securities and
Exchange Commission. The Registration Statement was filed on November 13, 1995.
In the proposed merger, the Company and/or Advantage would be merged into
Select, which would be renamed Franklin Select Realty Trust. The shares of
Select will be offered to shareholders of the Company and Advantage in exchange
for their shares on the basis described in the Joint Proxy
Statement/Registration Statement. The merger is subject to certain conditions
including approval by a majority of the shareholders of Select, the Company,
and/or Advantage. A special meeting of the shareholders of each REIT will be
held to vote on the proposed merger upon the effectiveness of the Registration
Statement and the close of the solicitation period.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Not applicable
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended September 30, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN REAL ESTATE INCOME FUND
By: /S/ DAVID P. GOSS
David P. Goss
Chief Executive Officer
Date: NOVEMBER 10, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,498
<SECURITIES> 537
<RECEIVABLES> 537
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 39,893
<DEPRECIATION> 5,266
<TOTAL-ASSETS> 38,045
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 38,895
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 38,045
<SALES> 0
<TOTAL-REVENUES> 1,232
<CGS> 0
<TOTAL-COSTS> 846
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 336
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
