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
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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
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Commission file number 1-12708
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FRANKLIN SELECT REAL ESTATE INCOME FUND
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3095938
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(State or other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 312-2000
N/A
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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: 5,383,297
Common Stock Shares Outstanding as of September 30, 1995, Series B: 185,866
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FRANKLIN SELECT REAL ESTATE INCOME FUND
BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994 (Dollars in 000's
except per share amounts)
(Unaudited) (Audited)
1995 1994
ASSETS
Rental property:
Land $ 9,686 $ 9,686
Buildings and improvements 33,308 33,243
42,994 42,929
Less: accumulated depreciation 6,584 5,536
36,410 37,393
Cash and cash equivalents 3,182 2,423
Mortgage-backed securities, available for sale 5,372 5,484
Deferred rent receivable 1,050 1,022
Other assets 540 582
Total assets $46,554 $46,904
LIABILITIES AND STOCKHOLDERS' EQUITY
Tenants' deposits and other liabilities $ 330 $ 218
Advance rents 14 21
Dividends payable 592 592
Total liabilities 936 831
Stockholders' equity:
Common stock, Series A, without par value. Stated value $10 per share;
50,000,000 shares authorized; 5,383,297 and 5,383,439 shares issued and
outstanding
in 1995 and 1994 48,857 48,858
Common stock, Series B, without par value. Stated value $10 per share;
1,000,000 shares authorized; 185,866 shares issued
and outstanding in 1995 and 1994 1,859 1,859
Unrealized loss on mortgage-backed securities (139) (417)
Accumulated dividends in excess of net income (4,959) (4,227)
Total stockholders' equity 45,618 46,073
Total liabilities and stockholder's equity $46,554 $46,904
See notes to financial statements.
Item 1. Financial Statements
(continued)
FRANKLIN SELECT 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 $1,108 $1,115
Interest 126 99
Dividends 2 2
Total revenue 1,236 1,216
Expenses:
Depreciation and amortization 373 370
Operating 390 414
Related party 113 90
Consolidation expense, net 66 -
General and administrative 51 80
Total expenses 993 954
Net income $ 243 $ 262
Net income per share, based on shares
outstanding of Series A common stock
of 5,383,297 and 5,383,767 in 1995 and 1994 $ .05 $ .05
Dividends per share, based on shares
outstanding of Series A common stock
of 5,383,297 and 5,383,767 in 1995 and 1994 $ .11 $ .10
See notes to financial statements.
Item 1. Financial Statements
(continued)
FRANKLIN SELECT 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 $3,396 $3,343
Interest 358 272
Dividends 5 5
Total revenue 3,759 3,620
Expenses:
Depreciation and amortization 1,119 1,094
Operating 1,050 1,082
Related party 336 268
Consolidation expense, net 66 -
General and administrative 144 208
Loss on sale of mortgage-backed securities - 13
Total expenses 2,715 2,665
Net income $ 1,044 $ 955
Net income per share, based on shares
outstanding of Series A common stock
of 5,383,297 and 5,383,767 in 1995 and 1994 $ .19 $ .18
Dividends per share, based on shares
outstanding of Series A common stock
of 5,383,297 and 5,383,767 in 1995 and 1994 $ .33 $ .30
See notes to financial statements.
Item 1. Financial Statements
(continued)
FRANKLIN SELECT 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
Excess of
Accumulated
Unrealized Dividends
Gain/Loss in Excess
on of Net
Shares Amount Shares Amount Securities Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
beginning of period 5,383,439 $48,858 185,866 $1,859 $ (417) $(4,227) $46,073
Redemption of Series
A Common Stock (142) (1) - - - - (1)
Unrealized gain on
mortgage-backed securities - - - - 278 - 278
Net income - - - - - 1,044 1,044
Dividends Declared - - - - - (1,776) (1,776)
Balance, end of period 5,383,297 $48,857 185,866 $1,859 $(139) $(4,959) $45,618
</TABLE>
See notes to financial statements.
Item 1. Financial Statements
(continued)
FRANKLIN SELECT REAL ESTATE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
(Dollars in 000's)
1995 1994
Cash flows from operating activities:
Net income $1,044 $ 955
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,119 1,094
Increase in deferred rent receivable (28) (26)
Decrease in Due from Advisor - 129
Increase in other assets (29) -
Increase in tenants' deposits and other
liabilities 112 80
Decrease in advance rents (7) (23)
1,167 1,254
Net cash provided by operating activities 2,211 2,209
Cash flow from investing activities:
Improvements to rental property (65) (104)
(Increase) decrease in investment in
mortgage-backed securities 390 (579)
Net cash provided by (used in) investing activities 325 (683)
Cash flow from financing activities:
Redemption of Series A common stock (1) -
Dividends paid (1,776) (1,076)
Net cash used in financing activities (1,777) (1,076)
Net increase in cash and cash equivalents 759 450
Cash and cash equivalents, beginning of period 2,423 1,763
Cash and cash equivalents, end of period $3,182 $2,213
See notes to financial statements.
FRANKLIN SELECT REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1 - ORGANIZATION
Franklin Select Real Estate Income Fund (the "Company") is a California
corporation formed on January 5, 1989 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 1989. 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 a 60%
undivided interest in the Shores Office Complex, a three-building office complex
located in Redwood City, California, and a fee interest in the Data General
Building located in Manhattan Beach, California.
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. On October 1, 1994, the
Company and the Advisor amended the agreement. Under the terms of the amended
agreement, which is renewable annually, the Advisor will receive quarterly an
annualized fee equal to .5% of the Company's gross real estate assets, defined
generally as the book value of the assets before depreciation. The fee will be
reduced to .4% for gross real estate assets exceeding $200 million.
Prior to October 1, 1994, the Advisor received quarterly an annualized fee equal
to 1% of invested assets and .4% of mortgage investments. One half of the fee
was subordinate to declaring dividends to Series A common stock shareholders
totaling at least 7% per annum on their adjusted price per share, as defined.
At September 30, 1995, cash equivalents included $219,000 invested in Franklin
Money Fund, an investment company managed by an affiliate of the Advisor.
Dividends earned from the Franklin Money Fund totaled $5,000 for the nine month
period ended September 30, 1995.
FRANKLIN SELECT 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:
Advisory fee expense, charged to related party expense $161,000
Reimbursement for data processing, accounting
and certain other expenses, charged to
related party expense $22,000
Property management fee, charged to related party expense $153,000
Leasing commission, capitalized and amortized
over the term of the related lease $39,000
Construction supervision fee, capitalized
and amortized over the life of the related
investment or the term of the related lease $2,000
NOTE 4 - COMMON STOCK AND INCOME PER SHARE
In connection with the conversion of the Company from a finite-life real estate
investment trust to an infinite life real estate investment trust in 1994 (the
"Conversion"), the Company issued to the Advisor an exchange right (the
"Exchange Right") to exchange its Series B common stock for Series A common
stock on a one-for-one basis. The Option is exercisable only when the Series A
shares achieve a trading price on the stock exchange equal to or greater than
$10.35 per share for at least 20 consecutive trading days. The rate of exchange
and the target price will be subject to change under certain circumstances as
provided in the Exchange Right Agreement. No dividends may be paid on the Series
B shares prior to exercise of the Option. After exercise of the Option, the
Advisor, like any other shareholder, will receive dividends on its Series A
shares.
Prior to the Conversion, no dividends were ever paid on the Series B common
stock. Series A and Series B common stock have the same voting rights. Dividends
on Series A common stock are declared at the discretion of the Board of
Directors.
NOTE 5 - 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 Real
Estate Income Fund ("FREIF") and Franklin Advantage Real Estate Income Fund
("Advantage"), 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 FREIF and/or Advantage would be merged into the
Company, which would be renamed Franklin Select Realty Trust. The shares of the
Company will be offered to shareholders of the FREIF 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 the Company, FREIF,
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 the nine months ended September 30,
(Dollars in 000's) 1995 1994
Funds Provided By:
Properties (a) $2,193 $2,113
Interest and Dividend Income 363 222
Company Expenses (393) (328)
Funds from Operations (b) $2,163 $2,062
Reconciliation to Net Income:
Depreciation and Amortization:
Buildings and Improvements (653) (652)
Tenant Improvements (395) (369)
Leasing Commission Amortization (70) (66)
Other Amortization (1) (7)
Loss on sale of mortgage-backed securities - (13)
Net Income: $1,044 $ 955
Dividends Declared $1,776 $1,614
(a) Property operations are net of property management fees.
(b) 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.
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 $89,000,
or 9%, compared to 1994 due to the following factors: an increase in rental
revenue of $53,000; an increase in interest and dividends of $86,000; an
increase in depreciation and amortization of $25,000; a decrease in operating
expenses of $32,000; an increase in related party expenses of $68,000; an
increase in consolidation expense of $66,000; a decrease in general and
administrative expense of $64,000 and a decrease in loss on sale of
mortgage-backed securities of $13,000. Explanations of the material changes are
as follows:
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Rental revenue for the nine month period ended September 30, 1995 increased
$53,000, or 2%, primarily due to increased rental revenue at the Shores Office
Complex, as a result of an increase in average occupancy and rental rates. The
average occupancy rate at the Shores Office Complex during the nine month
periods ended September 30, 1995 and 1994 was 98% and 91%, respectively. The
occupancy rate at the Data General Building was 100% for both periods.
Interest and dividend income for the nine month period ended September 30, 1995
increased $86,000, or 31%, due to higher yields realized on investments in
mortgage-backed securities.
Total expenses for the nine month period ended September 30, 1995, increased by
$50,000, or 2%, from $2,665,000 in 1994 to $2,715,000. The increase in total
expenses is attributable to the following factors: an increase in depreciation
and amortization of $25,000, or 2%; a decrease in operating expenses of $32,000,
or 3%; an increase in related party expenses of $68,000, or 25%; an increase in
consolidation expense of $66,000, or 100%; a decrease in general and
administrative expense of $64,000, or 31%; and a decrease in loss on sale of
mortgage-backed securities of $13,000.
Depreciation and amortization increased $25,000 for the nine month period ended
September 30, 1995, reflecting tenant improvement costs at the Shores Office
Complex related to new leases commencing in late 1994.
Operating expenses for the nine month period ended September 30, 1995 decreased
$32,000, primarily due to a decrease in property tax expense at the Data General
Building.
Related party expense for the nine month period ended September 30, 1995
increased $68,000, primarily due to an increase in advisory fees.
Consolidation expense for the nine month period ended September 30, 1995 of
$66,000 relates to the proposed consolidation.
General and administrative expense for the nine month period ended September 30,
1995 decreased $64,000 due to non-recurring costs associated with listing the
Company's stock on the American Stock Exchange in January 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of capital for the acquisition and major
renovation of properties has been the proceeds from the initial public offering
of its stock. The Company's funds from operations have been its principal source
of capital for minor property improvements, leasing costs and the payment of
quarterly dividends. At September 30, 1995, the Company's cash reserves,
including mortgage-backed securities, aggregated $8,554,000.
The Company is currently examining the possibility of raising additional capital
through arranging debt financing on its existing portfolio. Any capital raised
in this manner would be used to acquire additional properties and for other
corporate purposes.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (Continued)
As of September 30, 1995, the Company had no formal borrowing arrangements with
a bank and has no long-term debt. Each of the Company's properties is owned free
and clear of mortgage indebtedness.
Management continues to evaluate other properties for acquisition by the
Company. In the short-term and in the long term, 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. 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.
During the nine-month period ended September 30, 1995, the Company declared
dividends totaling $1,776,000.
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 Real
Estate Income Fund ("FREIF") and Franklin Advantage Real Estate Income Fund
("Advantage"), 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 FREIF and/or Advantage would be merged into the
Company, which would be renamed Franklin Select Realty Trust. The shares of the
Company will be offered to shareholders of the FREIF 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 the Company, FREIF,
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 SELECT 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> 3,182
<SECURITIES> 5,372
<RECEIVABLES> 1,050
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 42,994
<DEPRECIATION> 6,584
<TOTAL-ASSETS> 46,554
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 50,716
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 46,554
<SALES> 0
<TOTAL-REVENUES> 1,236
<CGS> 0
<TOTAL-COSTS> 993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 243
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
