SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1995
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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 June 30, 1995, Series A: 3,999,514
Common Stock Shares Outstanding as of June 30, 1995, Series B: 319,308
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.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1994
Net income for the six month period ended June 30, 1995 increased $128,000, or
17%, as compared to the same period in 1994 due to the following factors: an
increase in rental revenue of $133,000; an increase in interest and dividends of
$3,000; a decrease in other income of $6,000; an increase in interest expense of
$31,000; an increase in depreciation and amortization of $26,000; an increase in
operating expenses of $65,000; an increase in related party expenses of $9,000;
a decrease in general and administrative expense of $61,000, 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 six month period ended June 30, 1995 increased $133,000,
or 6%, primarily due to the recognition of rental income from the Glen Cove
Shopping Center acquired on January 31, 1994 and improved occupancy and rental
rates at the Shores Office Complex. The average occupancy rate of net rentable
square feet for the six month periods ended June 30, 1995 and 1994 at the Shores
Office Complex was 98% and 93%; at the Northport Buildings 98% and 97%, and at
the Mira Loma Shopping Center 81% and 82%, respectively. Average occupancy
during 1995 at the Glen Cove Center was 97%.
Total expenses increased for the six month period ended June 30, 1995 by $2,000,
or .1%, from $1,407,000 in 1994 to $1,409,000. The increase in total expenses is
attributable to the following factors: an increase in interest expense of
$31,000; an increase in depreciation and amortization of $26,000, or 5%; an
increase in operating expenses of $65,000, or 14%; an increase in related party
expense of $9,000, or 9%; a decrease in general and administrative expense of
$61,000, or 41%, and a decrease in loss on sale of mortgage-backed securities of
$68,000 or 100%.
Interest expense increased $31,000 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 $26,000 and operating expenses increased
$65,000 reflecting the acquisition of rental property in January, 1994 and
increased bad debt expense at one of the Fund's properties.
Related party expense increased $9,000 as a result of an increase in property
management fees due to the increases in rental revenue at the Partnership's
properties.
General and administrative expense decreased $61,000 due to a decrease in
non-recurring consulting fees and legal expenses.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
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.
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 June 30, 1995, the Company's cash reserves, including
mortgage backed securities, aggregated $1,746,000.
As of June 30, 1995, one of the Company's properties was subject to secured
financing with an outstanding balance of approximately $1,959,000. 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.
Net cash flow provided by operating activities for the six month period ended
June 30, 1995 decreased $199,000 to $1,275,000 compared to the same period in
1994. Although net income increased $128,000 in 1995, cash flow was reduced
primarily due to the collection of a $258,000 receivable in 1994 which increased
that year's cash flow, and due to an increase in leasing commissions paid by the
Company in 1995
Funds from Operations for the six month period ended June 30, 1995 increased
$154,000, or 12%, to $1,471,000 compared to the same period in 1994. The
increase is primarily due to the improvement in net income as described under
"Results of Operations" above. The Company believes that Funds from Operations
is helpful in understanding a property portfolio in that such calculation
reflects income from operating activities and the properties' ability to support
general operating expenses and interest expense before the impact of certain
activities, such as gains and losses from property sales and changes in the
accounts receivable and accounts payable. However, it does not measure whether
income is sufficient to fund all of the Company's cash needs including principal
amortization, capital improvements and distributions to shareholders. Funds from
Operations should not be considered an alternative to net income or any other
GAAP measurement of performance or as an alternative to cash flows from
operating, investing, or financing activities as a measure of liquidity. As
defined by the National Association of Real Estate Investment Trusts, Funds from
Operations is net income ( computed in accordance with GAAP ), excluding gains
or losses from debt restructuring and sales of property, plus depreciation and
amortization, and after adjustment for unconsolidated joint ventures.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (Continued)
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 cash flows 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 six-month period ended June 30, 1995, the Company declared dividends
totaling $1,000,000.
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: JANUARY 11, 1996
