FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994. Commission File No. 0-12708
FRANKLIN SELECT REAL ESTATE INCOME FUND
(Exact Name of Company as Specified in its Charter)
California 94-3095938
- ----------------------------------- -------------------------------------------
(State or other jurisdiction or (I.R.S. Employer Identification number)
incorporation or organization)
P.O. Box 7777, San Mateo, CA 94403-7777 (415) 312-2000
- ----------------------------------- -------------------------------------------
(Address of principal and executive Office)Company's telephone number, including
Area Code
Securities registered pursuant to Section 12(b) of Act:*
Title of each class Name of each exchange on which registered
Common Stock Series A American Stock Exchange
- ----------------------------------- -------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
*On January 14, 1994, the Company registered and listed its Series A common
stock on the American Stock Exchange.
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At January 31, 1995, 5,365,623 shares of the Company's Series A common stock
were held by non-affiliates of the Company. The aggregate market value of the
voting stock held by non-affiliates of the Company, based upon the closing price
of $4.00 as of January 31, 1995, is $21,462,492.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock at December 31, 1994: 5,383,439 shares of Series A common stock and
185,866 shares of Series B common stock.
Documents Incorporated by Reference - Portions of the Company's Annual Report to
Shareholders for the fiscal year ended December 31, 1994, and Proxy Statement
for use in connection with its Annual Meeting of Shareholders to be held on June
13, 1995, are incorporated by reference in Parts I, II, III and IV.
Item 2.
F R A N K L I N S E L E C T R E A L E S T A T E I N C O M E F U N D
R E A L E S T A T E P O R T F O L I O
As of December 31, 1994, the Company had made two real estate investments. In
September, 1989, the Company acquired a 60% undivided interest in the Shores
Office Complex located in Redwood City, California, and in December, 1989, the
Company acquired the Data General Building located in Manhattan Beach,
California. An affiliated real estate investment trust, Franklin Real Estate
Income Fund, owns the remaining 40% interest in the Shores.
The Company's properties are not generally subject to any mortgage, lien or
other encumbrance. The Company currently carries earthquake insurance coverage
for its properties and intends to continue to carry earthquake coverage to the
extent that it is available at economically reasonable rates. However, the
Company's earthquake insurance coverage may, from time to time, be subject to
substantial deductibles.
PORTFOLIO SUMMARY
At December 31, 1994, the Company's properties contained a total of 29 leases.
The following schedule lists the portfolio's lease expiration dates and the
related annual base rental income as of December 31, 1994.
LEASE EXPIRATIONS
- --------------------------------------------------------------------------------
No. of Current % of
Leases Total Annual Current
Year Expiring sq. Ft.1 Base Rent 1 Annual Rent
- --------------------------------------------------------------------------------
1995 7 10,869 $ 231,000 6%
1996 5 16,517 316,000 8%
1997 3 50,981 926,000 24%
1998 5 13,858 289,000 7%
1999 5 71,396 1,446,000 37%
2000 2 11,399 239,000 6%
2008 1 22,400 301,000 8%
2012 1 3,600 148,000 4%
- --------------------------------------------------------------------------------
- ---------------
1 Total Square Feet and Annual Base Rent reflect the Company's 60% interest in
The Shores.
SIGNIFICANT TENANTS
Two of the Company's tenants provide 10% or more of the Company's total
revenues. Both tenants are located at the Data General Building.
- ------------------- ------------ -------------- -------------- ---------------
Annualized % of Current
Total Base Rent Annual Base Lease
Principal Business Sq. Ft. at 12/31/94 Rent Expiration
- ------------------- ------------ -------------- -------------- ---------------
Credit Union 48,123 $872,000 22% 11/30/97
Computer
Manufacturer 47,920 $974,000 25% 1/31/99
- ------------------- ------------ -------------- -------------- ---------------
R E A L E S T A T E P O R T F O L I O
The credit union lease gives the tenant the right to cancel the lease on
November 15, 1996, if it pays the Company a cancellation penalty of $218,000.
Although the tenant has until February 15, 1996, to notify the Company of their
intent to cancel the lease, to date, no such notice has been given, and a
similar right to cancel the lease in 1995 was not exercised by the tenant. The
credit union's main operations occupy a five-story building located adjacent to
the Data General Building. The credit union leases their space from the Company
on a full-service basis.
The computer manufacturer is subject to a triple-net lease, which requires the
tenant to pay their prorata share of real estate taxes, common area expenses and
insurance, in addition to base rent. This lease also provides for two
consecutive five-year renewal options. The tenant currently subleases
approximately 53% of their office space. When their lease expires in 1999, they
are unlikely to renew the subleased space. However, the Company has provided
each of the subtenants with a lease option commencing upon the expiration of
their subleases in 1999. Rental rates under the lease options, if exercised,
will be set at prevailing market rates in 1999.
The Company's portfolio represents in the aggregate 201,570 rentable square
feet. For the years ended December 31, 1992, 1993 and 1994, the following table
shows the number of lease agreements that the Company executed, the rentable
square feet covered by the agreements, and the amount of tenant improvements and
leasing commissions paid by the Company.
<TABLE>
<CAPTION>
LEASING ACTIVITY
- ------- ---------- ---------- ------------- --------------- -------------- --------------
No. of Tenant Leasing
Leases % of Improvements Commissions
Year Executed Sq. Ft. Portfolio Paid Paid Total
- ------- ---------- ---------- ------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1992 12 80,908 40% $1,456,000 $150,000 $1,606,000
1993 14 49,427 25% 1,262,000 260,000 1,522,000
1994 13 38,322 19% 254,000 127,000 381,000
- ------- ---------- ---------- ------------- --------------- -------------- --------------
</TABLE>
The comparatively large amounts of tenant improvements incurred by the Company
in 1992 and 1993 were due to the conversion of three floors of the Data General
Building from an engineering research use to fully finished offices and a
fitness facility. The Company incurred significant one-time costs to demolish
the space back to the building shell, and install new improvements including
sprinkler systems, demising walls, drop ceilings and complete office finish.
Therefore, when the five-year lease covering two of the converted floors expires
in November, 1997, management expects that the tenant improvement costs, if any,
to renew or replace the tenant will be substantially less per square foot than
the costs incurred in 1992 and 1993.
At December 31, 1994, the Company's properties were 100% leased, which compares
to 96% leased at the end of 1993. The following tables indicate the occupancy
rates for each of the Company's properties and the average annual rental rates
of the Company's leases at December 31 of each year.
R E A L E S T A T E P O R T F O L I O
OCCUPANCY RATES
Data The Shores
Year General Overall
118,443 83,1271 201,570
Sq. Ft. Sq. Ft.
1990 92% 97% 100%
1991 95% 98% 100%
1992 84% 82% 81%
1993 90% 96% 100%
1994 100% 100% 100%
1 Reflects the Company's 60% interest in the Shores Office Complex.
AVERAGE ANNUAL RENTAL RATES/SQ. FT.2
- -----------------------------------------
Year Data General3 The Shores
- -----------------------------------------
1990 $15.82 $24.20
1991 $15.90 $24.77
1992 $15.93 $21.29
1993 $17.33 $21.94
1994 $17.24 $21.52
- -----------------------------------------
- -
- ---------------
2. The average annual rental rates represent effective base rental
income, as recorded on a GAAP basis for each year, excluding the
amortization of lease buy-out payments, if any, divided by the
average monthly occupied square feet.
3 The average annual rental rates at December 31, 1990, and 1991
for Data General represented triple-net leases, while the rates
shown for 1992 through 1994 are a combination of triple-net and
full-service leases.
THE SHORES OFFICE COMPLEX OFFICE 138,546 SQ. FT. REDWOOD SHORES, CA.
On September 1, 1989, the Company purchased a 60% undivided fee interest in the
Shores Office Complex (the "Shores"). An affiliated real estate investment
trust, Franklin Real Estate Income Fund ("FREIF"), acquired the remaining 40%
fee interest as co-owner. This office complex consists of three buildings
located at 100 Marine World Parkway, 1 Twin Dolphin Drive and 3 Twin Dolphin
Drive, Redwood City, San Mateo County, California. The Company and FREIF
acquired the Shores as tenants in common and have entered into a Co-Ownership
Agreement which defines their respective rights and obligations with respect to
the property.
R E A L E S T A T E P O R T F O L I O
Located in the Redwood Shores community of Redwood City, California and near the
midpoint of the San Francisco Peninsula approximately 25 miles south of San
Francisco, the Shores is part of a 1,465 acre master-planned, mixed-use
development. Approximately 250 acres are devoted to commercial development
including office buildings, shopping centers, medical buildings, and hotels. The
remainder of Redwood Shores comprises residential properties, a 250 acre lagoon,
and 200 acres of reserved open space. The area contains other existing and
planned buildings which can be considered competitive with the Shores. The
Company believes that the average effective rents provided by existing leases at
the Shores are at current market rates for comparable space in the Redwood
Shores area.
During 1992 and continuing into 1993, the Redwood Shores office market
experienced a decline in rental rates, resulting from over-building and the
economic recession. These factors had a substantial impact on the Shores' cash
flow. The property's operating income declined as leases and renewals were
signed at lower rental rates, and while the Company incurred additional costs
associated with replacing tenants. However, late in 1993 the market stabilized,
and by the end of 1994 the area's vacancy rate had declined to less than 2%. As
a result, effective market rental rates increased about 9% during 1994 and rent
concessions have substantially ended. The Company believes that the long-term
outlook for the Redwood Shores office market remains favorable. There are no
competitive buildings currently under construction in the immediate vicinity,
and the area continues to attract potential tenants. Rental rates are increasing
and, with no speculative construction in progress, management expects this trend
to continue in 1995.
DATA GENERAL BUILDING OFFICE 118,443 SQ. FT. MANHATTAN BEACH, CA.
In 1989, the Company purchased the Data General Building, a five-story office
building located at 1500 Rosecrans Avenue, Manhattan Beach, Los Angeles County,
California.
The South Bay office market, which includes Manhattan Beach, stretches from Los
Angeles International Airport south along the Pacific Ocean to Long Beach. The
South Bay is dominated by aerospace and defense-related companies. Because many
of the defense programs these companies are engaged in have been curtailed,
their office space requirements have been substantially reduced, causing greater
vacancies and lower market rental rates. Based on information from local
sources, we believe that these trends will continue into 1995. The Manhattan
Beach/El Segundo sub-market, which contains nearly ten million rentable square
feet of office space, had a vacancy factor of 20% as of December, 31, 1994,
compared to 18% in 1993 and 11% in 1992. However, when recovery begins, we
expect that the Data General Building will benefit sooner than many other
buildings in the area due to its desirable location in Manhattan Beach. The
building's location has helped it maintain full occupancy despite the leasing
market's soft condition.
The Company believes that the effective rent provided by the computer
manufacturer's lease, which expires in 1999, is greater than current market
rates for comparable space in the Manhattan Beach area; the balance of the
leases are at current market rates.
- ---------------
* All market vacancy and rental rate information for the Shores and
Data General markets is based on reports from CB Commercial Real
Estate Group.
Item 6.
S E L E C T E D F I N A N C I A L I N F O R M A T I O N
<TABLE>
<CAPTION>
--------------------------------- ------------- ------------ ------------ ------------- -------------
(Dollars in 000's except per 1994 1993 1992 1991 1990
share amounts)
--------------------------------- ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenue $ 4,816 $ 5,012 $ 4,795 $ 5,695 $ 5,585
Depreciation and amortization
1,469 1,401 995 901 885
Property operations expense 1,210 1,352 1,294 1,613 1,464
Related party expenses 378 336 417 362 320
General and
administrative expenses 276 215 81 64 91
Net income 1,468 1,223 1,507 2,755 2,783
Total assets 46,904 47,438 48,898 49,414 50,184
Per share1:
Net income .27 .23 .28 .51 .59
Dividends declared .41 .40 .45 .66 .72
Tax status of dividends paid
Ordinary income .34 .04 .45 .52 .57
Return of capital .07 .36 - .14 .15
Weighted average
number of shares of
Series A common stock
outstanding 5,383,727 5,383,767 5,384,219 5,384,358 4,729,711
</TABLE>
1Per weighted average number of shares of Series A common stock
outstanding.
Item 7.
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
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 YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
Net income for 1994 increased $245,000, or 20%, compared to 1993 mostly due to
non-recurring expenses reported in 1993, related to the proposed consolidation.
Property operations were substantially unchanged from 1993 when reported on the
accrual basis; however, the Company's cash flow significantly improved in 1994,
as reported in the Statement of Cash Flows. Net cash flow from operating
activities increased to $3,021,000 in 1994 compared to $1,191,000 in 1993 and
$2,606,000 in 1992. The improvement in 1994 reflects the Company's return to a
stabilized level of cash flow after two years of operations which were impacted
by tenant lease restructurings, free rent provided to new tenants and greater
leasing commissions paid by the Company. Accounting standards require that the
financial effect of these events be capitalized and amortized over the remaining
terms of the leases. Therefore, large differences can arise between cash and
accrual results. As the cost of these items is amortized, the opposite effect
will occur causing reported rental income to be less than the cash received by
the Company.
Rental income decreased $114,000, or 3%, primarily due to a decrease in non-cash
revenue recognized at the Data General Building. From 1992 to January, 1994, the
Company recognized income related to a fee of $850,000 that the Company received
in 1992 from a tenant that terminated their lease before expiration. The fee was
recorded as advance rents and amortized over the remaining term of the tenant's
lease. The amount of related income reported in the Company's financial
statements for 1992, 1993 and 1994 was $268,000, $537,000 and $45,000,
respectively. The fee is now fully amortized. In addition, the non-cash effect
of straight-lining rental income for 1992, 1993 and 1994 was to increase or
(decrease) reported income by $198,000, $499,000 and ($24,000), respectively. A
significant portion of these amounts were caused by free rent periods provided
to new tenants in the years indicated. Excluding the effects of lease buy-out
amortization, rental income increased approximately $378,000, or 9%, in 1994
primarily due to an increase in the average occupancy rate for the Company's
properties to 97% from 87% in 1993. Rental rates were substantially unchanged.
Interest and dividend income decreased $82,000, or 18%, due to lower yields
realized on investments in mortgage-backed securities, and to a lower average
investment balance during 1994, reflecting the use of cash reserves in 1992 and
1993 for re-tenanting costs at the Data General Building.
Total expenses decreased in 1994 by $441,000, or 12%, from $3,789,000 in 1993 to
$3,348,000. The decrease in total expenses is attributable to the following
factors: an increase in depreciation and amortization of $68,000, or 5%; a
decrease in operating expenses of $142,000, or 11%; an increase in related party
expenses of $42,000, or 13%; a decrease in consolidation expense, net, of
$450,000, or 99%; an increase in general and administrative expense of $61,000,
or 28%; and a decrease in loss on the sale of mortgage-backed securities of
$20,000, or 61%.
Depreciation and amortization increased $68,000 in 1994, reflecting tenant
improvement costs at the Shores and the Data General Building related to new
leases commencing late in 1993 and in 1994.
Operating expenses decreased $142,000, primarily due to a partial refund of
prior years' property taxes at the Data General Building totaling $209,000. This
benefit was partially offset by an increase in utility costs of $70,000 as a
result of an increase in occupancy at the same property.
Related party expense increased $42,000, primarily due to an increase in
property management fees which are based on cash receipts.
<PAGE>
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
Consolidation expense decreased $450,000 on a net basis due to the termination
of the proposed merger in the fourth quarter of 1993.
General and administrative expense increased $61,000 primarily as a result of an
increase in legal and related costs and other nonrecurring costs incurred in
connection with listing the Company's stock on the American Stock Exchange and
the conversion to an infinite-life REIT of $75,000 and an increase in directors
and officers insurance of $13,000. These increases were partially offset by a
decrease in accounting and shareholder service costs of $26,000.
Loss on sale of mortgage-backed securities decreased $20,000 reflecting a
greater amount of mortgage-backed securities sold in 1993 in order to provide
funds for tenant improvements.
COMPARISON OF YEAR ENDED DECEMBER 31, 1993 TO YEAR ENDED DECEMBER 31, 1992
Net income for 1993 decreased $284,000, or 19%, compared to 1992 due to the
following factors: an increase in rental revenue of $488,000; a decrease in
interest and dividends of $271,000; an increase in depreciation and amortization
of $406,000; an increase in operating expenses of $58,000; a decrease in related
party expenses of $81,000; a decrease in consolidation expense of $18,000; an
increase in general and administrative expense of $134,000; and an increase in
loss on the sale of mortgage-backed securities of $2,000.
Rental revenue increased $488,000, or 12%, primarily due to increased rental
revenue at the Data General Building, as a result of an increase in average
occupancy at the property. The average occupancy rate at the property during
1993 and 1992 was 91% and 79%, respectively. The occupancy rates at December 31,
1993, for the Data General Building and the Shores Office Complex were 100% and
90%, respectively.
Interest and dividend income decreased $271,000, or 37%, due to lower yields
realized on investments in mortgage-backed securities, and to a lower average
investment balance during 1993, reflecting the use of funds for re-tenanting
costs at the Data General Building.
Total expenses increased in 1993 by $501,000, or 15%, from $3,288,000 in 1992 to
$3,789,000. The increase in total expenses is attributable to the following
factors: an increase in depreciation and amortization of $406,000, or 41%; an
increase in operating expenses of $58,000, or 5%; a decrease in related party
expenses of $81,000, or 19%; a decrease in consolidation expense, net, of
$18,000, or 4%; an increase in general and administrative expense of $134,000,
or 165%; and an increase in loss on the sale of mortgage-backed securities of
$2,000, or 7%.
Depreciation and amortization increased $406,000 in 1993, reflecting tenant
improvement costs at the Data General Building related to new leases commencing
late in 1992 and in 1993, covering 60% of the building's rentable space.
Operating expenses increased $58,000, primarily due to increased utility expense
at the Data General Building as a result of its improved occupancy.
Related party expense decreased $81,000, primarily due to a decrease in property
management fees of $56,000. Property management fees are based on collected
rental revenue; therefore, the 1993 fees were impacted by free rent provided to
a new tenant at the Data General Building. Also contributing to the decrease in
related party expense was the discontinuance of an affiliated transfer agent and
registrar for the Company's common stock. As of January 1, 1993, this service
was assumed by an unaffiliated company, and the expense is now recorded under
general and administrative expense.
Consolidation expense decreased $18,000 on a net basis due to the termination of
the proposed merger.
<PAGE>
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
General and administrative expense increased $134,000 primiarly due to the
acquisition of directors and officers insurance coverage in 1993 of $78,000, the
change in the transfer agent previously discussed of $38,000, nonrecurring costs
associated with listing the Company's stock on the American Stock Exchange of
$7,000 and accounting services of $14,000.
The Company has entered into an agreement with the Advisor to administer the
day-to-day operations of the Company. The agreement was amended on October 1,
1994, as described in Note 2 to the accompanying financial statements. For the
years ended December 31, 1994, 1993 and 1992, the Company recorded $148,000,
$126,000 and $136,000 respectively of advisory fee expense to the Advisor in
accordance with the Advisory Agreement. The Company's properties are managed by
Continental Property Management Co., ("CPMC"), an affiliate of the Advisor. For
the years ended December 31, 1994, 1993 and 1992, the Company recorded $196,000,
$159,000 and $216,000, respectively, of property management fee expense to CPMC
in accordance with the Property Management Agreement.
The Company's Board of Directors (including all of its Independent Directors)
have determined, after review, that the compensation paid to the Advisor and to
CPMC referenced above, as well as the reimbursements made by the Company to the
Advisor reflected in Note 2 to the accompanying financial statements, are fair
and reasonable to the Company.
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 December 31, 1994, the Company's cash reserves
aggregated $7,907,000. The Company's investment in mortgage-backed securities
consists of GNMA FNMA and FMLMC adjustable rate pass-through certificates in
which payments of principal and interest are guaranteed by GNMA, FNMA and FMLMC.
However, changes in market interest rates may cause the securities market values
to fluctuate, which could result in a gain or loss if the securities are sold
before maturity.
On September 22, 1994, the shareholders approved a proposal to convert the
Company from a finite-life real estate investment trust to an infinite-life real
estate investment trust and related changes to the objectives and policies of
the Company and in the compensation to the Advisor. As a result of the
conversion, the Company will have broader, growth-oriented investment and
reinvestment policies than prior to the conversion. The Company is also expected
to have greater potential for portfolio growth and diversification due to its
ability to acquire additional properties with the proceeds from securities
offerings, to issue stock in exchange for properties and to reinvest the net
proceeds from the disposition or refinancing of properties (subject to REIT
distribution requirements).
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 substantially to acquire additional properties.
As of September 30, 1994, 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 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.
The Company currently has two leases that provide 10% or more of its total
annual revenue as described under "Real Estate Portfolio - Significant Tenants".
The tenants are located at the Data General Building and provide 25% and 22% of
the Company's annual base rent under leases that expire in 1999 and 1997,
respectively. If one of the tenants decided not to renew, or to default on their
lease, management
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
would determine whether a reduction in the Company's quarterly dividend rate was
warranted in light of the Company's dividend policy discussed below, then
existing leasing market conditions and other factors deemed relevant by the
Board of Directors . In connection with any lease renewal or new leasing, the
Company would incur costs for tenant improvements and leasing commissions which
would be funded first from operating cash flow and, if necessary, from cash
reserves.
Net cash flow provided by operating activities for the years ended December 31,
1994, 1993 and 1992 was $3,021,000, $1,191,000 and $2,606,000, respectively. The
primary differences between the periods relate to free rent provided to tenants
during 1993, leasing commissions paid 1993, and advance rent received by the
Company in 1992, which was amortized as income through January of 1994. These
activities are described in greater detail under "Results of Operations" above.
Funds from Operations for the years ended December 31, 1994, 1993 and 1992 were
$2,937,000, $2,624,000 and $2,502,000, respectively. The increase from 1992 to
1993 is primarily due to an increase in the average occupancy rate at the Data
General Building. The increase from 1993 to 1994 primarily reflects
consolidation expenses incurred in 1993, which reduced that year's results.
These items are described more fully 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
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, as an
indicator of the Company's operating 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.
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 cash flow 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.
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
During the years ended December 31, 1994, and 1993, the Company declared
dividends totaling $2,207,000, or $.41 per share, and $2,154,000, or $.40 per
share, respectively. Because depreciation is a non-cash expense, cash flow will
typically be greater than earnings from operations and net earnings. Therefore,
quarterly distributions will consistently be higher than quarterly earnings.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
FRANKLIN SELECT REAL ESTATE INCOME FUND
(Company)
Date: JANUARY 9, 1996 By: s/ David P. Goss
------------------------
David P. Goss
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company, and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
s/David P. Goss Chief Executive Officer, January 9, 1996
- ----------------------- ----------------------
David P. Goss and Director
s/Lloyd D. Hanford, Jr. Director1 January 9, 1996
- ----------------------- ----------------------
Lloyd D. Hanford, Jr.
s/Egon H. Kraus Director1 January 9, 1996
- ----------------------- ----------------------
Egon H. Kraus
s/Lawrence C. Werner Director1 January 9, 1996
- ----------------------- ----------------------
Lawrence C. Werner
s/E. Samuel Wheeler Director1 January 9, 1996
- ----------------------- ----------------------
E. Samuel Wheeler
1 Independent Director
