FORM 10-K
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, 1995. Commission File No. 0-12708
FRANKLIN SELECT REAL ESTATE INCOME FUND
(Exact Name of Company as Specified in its Charter)
California 94-3095938
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(State or other jurisdiction or (I.R.S. Employer Identification
incorporation or organization) number)
P.O. Box 7777, San Mateo, CA (415) 312-2000
94403-7777
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(Address of principal and executive Company's telephone number,
Office) 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
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Securities registered pursuant to Section 12(g) of the Act:
None
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 February 1, 1996, 5,373,478 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 $4.625 as of February 1, 1996, is $24,852,336.
Indicate the number of shares outstanding of each of the Company's classes of
common stock at December 31, 1995: 5,383,296 shares of Series A common stock
and 185,866 shares of Series B common stock.
PART I
Item 1. Business
Franklin Select Real Estate Income Fund (the "Company") is a California
corporation formed on January 5, 1989, for the purpose of acquiring, managing
and holding for investment income-producing real estate assets. The Company is a
real estate investment trust ("REIT").
The Company's investment program includes providing shareholders with a
professionally managed diversified portfolio of income-producing equity real
estate investments in strategic markets which represent the potential for
current cash flow and for capital appreciation. The Company has adopted a
business strategy which is intended to expand the size and scope and increase
the profitability of its current operations. Traditionally, The Company has
identified individual properties suitable for acquisition and acquired them for
cash. The Company now also intends to acquire property portfolios in exchange
for equity. In particular, the Company is seeking to establish strategic
relationships with, and acquire property portfolios from, selected real estate
operating companies that appear to have competitive advantages within their
local market areas. This strategy potentially will allow the Company to increase
its asset size, significantly diversify its portfolio and increase its revenues
and profitability while reducing its exposure to any single property type or
market area. In October 1995, the Company retained Prudential Securities
Incorporated as its exclusive financial advisor in connection with the
implementation of its portfolio acquisition strategy.
The Company's day-to-day operations are managed by Franklin Properties, Inc.
(the "Advisor") under the terms of an advisory agreement which is renewable
annually. The Advisor manages the Company subject to the overall approval of the
Board of Directors, a majority of whom are independent of the Advisor. The
Company does not have any employees. The Company's properties are managed by
Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, which
performs the leasing, re-leasing and management-related services for the
properties. The Advisor is a wholly-owned subsidiary of Franklin Resources,
Inc., ("Franklin") whose primary business is the $139 billion Franklin Templeton
Group of Funds.
On November 2, 1995 the Boards 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/Prospectus with the Securities and Exchange Commission.
The Prospectus was filed on November 13, 1995, and became effective on March 14,
1996.
In the proposed merger, 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/Prospectus. 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 on May 7, 1996, to vote on the proposed
merger upon the close of the solicitation period.
The Company is subject to the risks generally associated with the ownership of
real property, including the possibility that operating expenses, debt service
payments and fixed costs may exceed property revenues; economic conditions may
adversely change in the California and the national market; the real estate
investment climate may change; local market conditions may change adversely due
to general or local economic conditions and neighborhood characteristics;
interest rates may fluctuate and the availability, costs and terms of mortgage
financing may change; unanticipated maintenance and renovations may arise;
changes in real estate tax rates and other operating expenses may arise;
governmental rules and fiscal policies may change; natural disasters, including
earthquakes, floods or tornadoes may result in losses beyond the coverage of the
Company's insurance policies; the financial condition of the tenants of
properties may deteriorate; and other factors which are beyond the control of
the Company may occur.
Item 1. Business (Continued)
The real estate business is competitive, and the Company is in competition with
many other entities engaged in real estate investment activities, many of which
have greater assets than the Company. The Company's real estate investments in
rental properties are subject to the risk of the Company's inability to attract
or retain tenants and a consequent decline in rental income. Furthermore, real
estate investments tend to be long-term, and under the REIT provisions of the
Internal Revenue Code, might be subject to minimum holding periods to avoid
adverse tax consequences; consequently, the Company will have only minimal
ability to vary its property portfolio in response to changing economic,
financial and investment conditions. To the extent that the Company's rental
income is based on a percentage of the gross receipts of retail tenants, its
cash flow is dependent on the retail success achieved by such tenants.
The opportunities for sale, and the profitability of any sale, of any particular
property by the Company will be subject to the risk of adverse changes in real
estate market conditions, which may vary depending upon the size, location and
type of each property.
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its property. Such
laws often impose such liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances, the
presence of such substances, or the failure to properly remediate such
substances, when released. As part of the investigation of properties prior to
acquisition, the Company typically has obtained inspection reports concerning
the condition of the property, including specialized environmental inspection
reports concerning the presence of hazardous substances on the property. The
Company intends to continue this practice.
Such inspection reports, however, do not necessarily reveal all hazardous
substances or sources thereof, and substances not considered hazardous when a
property is acquired may subsequently be classified as such by amendments to
local, state, and federal laws, ordinances, and regulations. If it is ever
determined that hazardous substances on or in a Company property must be removed
or the release of such substances remediated, the Company could be required to
pay all costs of any necessary cleanup work, although under certain
circumstances, claims against other responsible parties could be made by the
Company. The Company could also experience lost revenues during any such
cleanup, or lower lease rates, decreased occupancy or difficulty selling or
borrowing against the affected property either prior to or following any such
cleanup. The Company is not aware of any hazardous substances on or in its
properties except as described below and it has not been notified by any
governmental authority of any noncompliance, liability or other claim in
connection with the environmental condition of any of its properties.
The Company is aware of the existence of certain hazardous substances at the
Data General Building site. The Data General Building is located on property
that was formerly part of a site used for storage of crude oil and various
refined petroleum products. As a result, methane gas is present in the soil and
the groundwater is contaminated throughout the area where the property is
located. According to environmental reports prepared at the time the Data
General Building was acquired, a vapor ventilation system on the property, which
was installed and is maintained and monitored by a prior owner of the property,
Chevron Land Development Company, has mitigated any material risk associated
with the presence of the methane gas. The Company has not incurred any costs for
monitoring and remediating the presence of methane gas or the groundwater
contamination at the Data General Building and does not anticipate incurring any
cost with regard to such activities in the future. The contamination in the
groundwater generally presents a risk only if the groundwater is used as
drinking water, which it is not.
Item 1. Business (Continued)
The Company has not received any reports from Federal or state agencies
relieving it for future clean-up responsibilities, but Federal and state
agencies have investigated these matters and have not, to date, required any
clean-up. The Company has no reason to believe at this time that it will be
required to take remediation steps in the future, particularly given the
geographic scope of the contaminated area. It is therefore difficult to predict
what, if any, costs might be incurred by the Company should the position of the
Federal or state agencies change. In any event, if the Company is required to
cure the contamination on the Data General Building site, it would seek full
indemnity from the oil companies which were the source of the contamination.
Data General Building's transite exterior panels and roof coverings contain
asbestos. Transite is "non-friable," which means that the asbestos fibers are
not released into the air, unless the transite is broken, cut or otherwise
damaged. The Company believes that absent such breakage or damage, the existence
of asbestos in the transite presents no measurable risk of asbestos-related
injuries. However, the presence of asbestos in the transite panels means that
protective measures may need to be taken if the transite panels are repaired or
if they are damaged by the elements.
The Americans with Disabilities Act ("ADA"), which generally requires that
buildings be made accessible to people with disabilities, has separate
compliance requirements for "public accommodations" and "commercial facilities".
If certain uses by tenants of a building constitute a "public accommodation",
the ADA imposes liability for non-compliance on both the tenant and the
owner/operator of the building. The Company has conducted inspections of its
property to determine whether the exterior and common area of such property are
in compliance with the ADA and it believes that its properties are in
compliance. If, however, it were ever determined that one or more of the
Company's properties were not in compliance, the Company may be subjected to
unanticipated expenditures incurred to remove access barriers, or to pay fines
or damages related to such non-compliance.
The Company's due diligence review of prospective acquisitions of office,
industrial and retail property includes an examination of such property's
compliance with the ADA, and the cost of remedial work, if any, believed to be
required to meet such requirements.
The Company's only business consists of the real estate investment activity
described above. Therefore, information about industry segments is not
applicable. The business is not seasonal.
Item 2. Properties
As of December 31, 1995, 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.
Item 2. Properties (Continued)
PORTFOLIO SUMMARY
The Company's portfolio represents in the aggregate 201,570 rentable square
feet. At December 31, 1995, the Company's properties contained a total of 25
leases. The following schedule lists the portfolio's lease expiration dates and
the related annual base rental income as of December 31, 1995.
Lease Expirations
No. of Current % of
Leases Total Annual Current
Year Expiring Sq. Ft.1 Base Rent1 Annual Rent
1996 3 4,284 $ 95,000 2.4%
1997 3 50,981 927,000 23.5%
1998 6 11,303 242,000 6.1%
1999 5 71,889 1,461,000 37.1%
2000 4 19,432 426,000 10.8%
2001 1 686 14,000 .4%
2002 1 16,443 316,000 8.0%
2008 1 22,400 311,000 7.9%
2012 1 3,600 148,000 3.8%
1 Total Square Feet and Annual Base Rent reflect the Company's 60%
interest in The Shores.
At December 31, 1995, the Company's properties were 100% leased. 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.
OCCUPANCY RATES
Data The
Year General Shores Overall
118,443 83,1271 201,570
Sq. Ft. Sq. Ft. Sq. Ft.
1991 100% 95% 98%
81% 84% 82%
1992
1993 100% 90% 96%
1994 100% 100% 100%
1995 100% 100% 100%
1 Reflects the Company's 60% interest in the Shores Office Complex.
Item 2. Properties (Continued)
AVERAGE ANNUAL RENTAL RATES/SQ. FT.1
Data The
Year General2 Shores
1991 $15.90 $24.77
1992 $15.93 $21.29
1993 $17.33 $21.94
1994 $17.24 $21.52
1995 $17.30 $21.82
1. 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.
2 The average annual rental rates for 1991 for Data General represented
triple-net leases, while the rates shown for 1992 through 1995 are a
combination of triple-net and full-service leases.
SIGNIFICANT TENANTS
Two of the Company's tenants provide 10% or more of the Company's annual base
rental income as of December 31, 1995. Both tenants are located at the Data
General Building.
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% of
Annualized Current
Principal Business Total Base Rent Annual Base Lease
Sq. Ft. at 12/31/95 Rent Expiration
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Hughes Aircraft
Employees Federal
Credit Union 48,123 $872,000 22% 11/30/97
Data General
Corporation 47,920 $974,000 25% 1/31/99
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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 Data General Corporation 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 Data General Corporation's lease
expires in 1999, it is 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.
Item 2. Properties (Continued)
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THE SHORES OFFICE COMPLEX OFFICE 138,546 SQ. FT. REDWOOD SHORES, CA.
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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, 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. The
Co-Ownership Agreement provides that the management and operation of the Shores
is vested equally in the Company and FREIF. The Company is entitled to 60% and
FREIF to 40% of the net cash flow from operations of the Shores. Operating costs
in excess of net cash flow from operations, capital expenditures and insurance
costs are paid 60% by the Company and 40% by FREIF. Neither co-owner may
transfer its interest in the Shores without the consent of the other, and each
co-owner has a right of first refusal with respect to a third-party buyer.
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.
Late in 1993 the market stabilized, and by the end of 1994 the area's vacancy
rate had declined to less than 2% where it remained throughout 1995 according to
CB Commercial Real Estate Group. As a result, effective market rental rates
increased about 9% during 1994 and rent concessions substantially ended. Rental
rates continued to increase during 1995. The Company believes that the long-term
outlook for the Redwood Shores office market remains favorable. The area
continues to be attractive to potential tenants.
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DATA GENERAL BUILDING OFFICE 118,443 SQ. FT. MANHATTAN BEACH, CA.
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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 reports from
CB Commercial Real Estate Group, the Company believes that these trends will
continue in 1996. The Manhattan Beach/El Segundo sub-market, which contains
approximately nine million rentable square feet of office space, had a vacancy
factor of 29% as of December 31, 1995, compared to 20% at December 31, 1994, and
18% at Item 2. Properties (Continued)
December 31, 1993. However, if and when recovery begins, the Advisor expects
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.
Item 3. Legal Proceedings
There are no material legal proceedings pending to which the Company is a party
or to which any of its property is the subject, required to be reported
hereunder. From time to time, the Company may be a party to ordinary routine
litigation incidental to its business.
Item 4. Submission Of Matters To A Vote Of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market For Company's Common Stock And Related Stockholder Matters
The Company has one class of common stock in two series, designated Series A and
Series B (the "Common Stock"). As of December 31, 1995, the Company had
5,383,296 Series A common shares outstanding and 185,866 Series B common shares
outstanding, and there were approximately 1,820 Series A stockholders of record.
The Common Stock votes together as one class with each share being entitled to
one vote. The Series B shares are owned by Franklin Properties, the Advisor.
On January 14, 1994, the Company registered its Series A common stock on the
American Stock Exchange (AMEX) where it is currently traded under the symbol
"FSN". Prior to January 14, 1994, there was no established public trading market
for the common stock. Set forth below are the quarterly high and low share
reported sales prices from inception of trading on the AMEX through December 31,
1995, (as reported on the Composite Tape) and the distributions per share
declared each quarter.
DISTRIBUTIONS
CALENDAR PERIODS HIGH LOW PAID
1994:
First Quarter $5 3/4 $3 $.10
Second Quarter 4 9/16 3 3/4 .10
Third Quarter 4 1/2 3 7/8 .10
Fourth Quarter 4 1/8 3 5/8 .11
1995:
First Quarter 4 3/8 3 3/4 .11
Second Quarter 4 5/8 3 3/4 .11
Third Quarter 4 11/16 3 7/8 .11
Fourth Quarter 4 5/8 3 15/16 .11
Distributions to shareholders are currently paid quarterly on approximately the
15th day of January, April, July and October. Shareholders may elect to direct
their distributions into any or one of the eligible funds in the Franklin
Templeton Group of Funds, which are managed by an affiliate of the Advisor, or
participate in the Company's Dividend Reinvestment Plan. For information on how
to participate in the Dividend Reinvestment Plan, please contact the Company's
transfer agent at (800) 851-4217.
There are no restrictions on sales or purchases of the Company's Series A common
stock other than those that may be imposed by any applicable federal or state
securities laws or by the Company's Articles of Incorporation or Bylaws with
respect to maintaining the Company's status as a qualified real estate
investment trust under applicable tax rules and regulations.
The Company is a real estate investment trust ("REIT") and elected REIT status
commencing with the 1989 tax year pursuant to the provisions of the Internal
Revenue Code (the "Code") and applicable state income tax law. Under those
provisions, the Company will not be subject to income tax on that portion of its
taxable income which is distributed annually to stockholders if at least 95% of
its taxable income (which term excludes capital gains) is distributed and if
certain other conditions are met. During such time as the Company qualifies as a
REIT, the Company intends to make quarterly cash distributions to the
stockholders aggregating on an annual basis at least 95% of its taxable income.
The Company has a policy, subject to the discretion of the Board of Directors,
of making quarterly cash distributions to shareholders aggregating on an annual
basis at least 95% of its taxable income. For the years ended December 31, 1995,
and 1994, the Company declared distributions of approximately $2,368,000 ($.44
per share) and $2,207,000 ($.41 per share). 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 which causes a portion of the
Item 5. Market For Company's Common Stock And Related Stockholder Matters
(Continued)
distributions to be considered a return of capital. For the years ended December
31, 1995, and 1994, the portion of distributions that represented a return of
capital under generally accepted accounting principles were $1,060,000 and
$739,000, respectively. For return of capital information on a tax basis see
"Item 6. Selected Financial Data".
Among other requirements, the Company must, in order to continue its status as a
REIT under the Code, not have more than 50% in value of its outstanding shares
owned by five or fewer individuals during the last half of a taxable year (the
"5/50 Provision"). In order to meet these requirements, the Company has the
power to redeem a sufficient number of shares in order to maintain or to bring
the ownership of the shares into conformity with these requirements, and to
prohibit the transfer of shares to persons whose acquisition would result in a
violation of these requirements. The price to be paid in the event of the
redemption of shares will be the last reported sale price of the Series A common
stock on the last business day prior to the redemption date on the principal
national securities exchange on which the Series A common stock is listed or
admitted to trading or otherwise, as determined in good faith by the Directors
of the Company.
In order to assure compliance with the 5/50 Provision of the Code, described
above, the Company's Bylaws permit the Directors of the Company to impose a
lower percentage limit on the remaining shareholders, in the event certain
shareholders (including Franklin and its affiliates) acquire in excess of 9.9%
of the outstanding shares of Common Stock during the offering period. The
Directors of the Company have exercised this authority under the Bylaws to lower
the percentage limitation such that shareholders may not acquire additional
shares if such shareholder then holds, or would then hold, in excess of 7% of
the total outstanding voting shares of the Company. Any shares acquired in
excess of the foregoing limitation will be deemed to be held in trust for the
Company, and will not be entitled to receive distributions or to vote.
The Directors of the Company may impose, or seek judicial or other imposition of
additional restrictions if deemed necessary or advisable, including but not
limited to further reductions in the foregoing percentage limitation with or
without notice, or redemption of shares, in order to protect the Company's
status as a qualified REIT.
The Company has established a Dividend Reinvestment Plan (the "Plan") which is
designed to enable Company Series A Shareholders to choose to have distributions
automatically invested in additional shares of Company common stock at market
value, without the payment of any brokerage commission, service charge or other
expense. In order to participate in the Plan, investors must designate that they
would like their distributions reinvested. Company Series A shareholders may
elect to participate in the Plan at any time. The Plan does not accept cash
contributions from Company shareholders to purchase additional shares of
existing Company common stock. Only distributions on existing Company common
stock may be reinvested. Item 6. Selected Financial Data
<TABLE>
<CAPTION>
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(Dollars in 000's except per 1995 1994 1993 1992 1991
share amounts)
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<S> <C> <C> <C> <C> <C>
Total revenue $5,005 $ 4,816 $ 5,012 $ 4,795 $ 5,695
Depreciation and
amortization 1,495 1,469 1,401 995 901
Property operations
expense 1,404 1,210 1,352 1,294 1,613
Related party expenses 444 378 336 417 362
General and
administrative expenses 204 276 215 81 64
Consolidation expense, net 150 2 452 470 -
Net income 1,308 1,468 1,223 1,507 2,755
Total assets 46,191 46,904 47,438 48,898 49,414
Per share1:
Net income .24 .27 .23 .28 .51
Distributions declared
.44 .41 .40 .45 .66
Tax status of
distributions paid:
Ordinary income .35 .34 .04 .45 .52
Return of capital .09 .07 .36 - .14
Weighted average
number of shares of
Series A common stock
outstanding 5,383,346 5,383,727 5,383,767 5,384,219 5,384,358
</TABLE>
1Per weighted average number of shares of Series A common stock outstanding.
Item 7. 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 YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994 Total
revenue for the year increased $189,000, or 4%, reflecting increased rental
income from the Shores Office Complex and increased interest income earned on
temporary investments in mortgage-backed securities. However, net income for
1995 declined $160,000, or 12%, compared to 1994, largely due to a one time
property tax refund received in 1994 which caused a reduction in 1994 operating
expenses coupled with expenses incurred in 1995 related to the proposed
consolidation of the Company.
Rental income increased $81,000, 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 years 1995 and 1994 was 99% and 93%, respectively. The
occupancy rate at the Data General Building was 100% for both periods.
Interest and dividend income increased $108,000, or 28%, due to higher yields
realized on investments in mortgage-backed securities, and to a higher average
investment balance during 1995.
Total expenses increased in 1995 by $349,000, or 10%, from $3,348,000 in 1994 to
$3,697,000. The increase in total expenses is attributable to the following
factors: an increase in depreciation and amortization of $26,000, or 2%; an
increase in operating expenses of $194,000, or 16%; an increase in related party
expenses of $66,000, or 17%; an increase in consolidation expense, net, of
$148,000; a decrease in general and administrative expense of $72,000, or 26%;
and a decrease in loss on the sale of mortgage-backed securities of $13,000, or
100%.
Depreciation and amortization increased $26,000 in 1995, reflecting tenant
improvement costs incurred at the Shores and the Data General Building.
Operating expenses increased $194,000 in 1995 when compared to the same period
in 1994. The increase is primarily due to a one time property tax refund of
$156,000 received in 1994 which caused a reduction in 1994 operating expenses,
and to an increase in insurance expense of $43,000 in 1995 which was mostly
related to the cost of earthquake coverage.
Related party expense increased $66,000, primarily due to an increase in
advisory fees related to the conversion of the Company to an infinite-life REIT
late in 1994.
Consolidation expense reported in 1995 of $148,000 relates to the proposed plan
of consolidation.
General and administrative expense decreased $72,000 primarily due to a decrease
in nonrecurring costs associated with listing the Company's stock on the
American Stock Exchange in January, 1994, of $89,000. The decrease in
nonrecurring costs were partially offset by an increase in directors' fees
related to the consolidation of $22,000.
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
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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.
Effective rental rates were substantially unchanged.
Interest and distribution 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 $156,000 and
an additional reduction in the 1994 tax expenses of approximately $99,000. These
benefits were partially offset by an increase in utility costs of $70,000 as a
result of an increase in occupancy at the same property and increases in
insurance expense and property legal expenses.
Related party expense increased $42,000, primarily due to an increase in
property management fees which are based on cash receipts.
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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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.
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, 1995, 1994 and 1993, the Company recorded $215,000,
$148,000 and $126,000 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, 1995, 1994 and 1993, the Company recorded $274,000,
$241,000, and $159,000, respectively, of compensation 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 cash flow has been its principal source of capital
for minor property improvements, leasing costs and the payment of quarterly
distributions. At December 31, 1995, the Company's cash reserves aggregated
$8,453,000 including investments in mortgage-backed securities. 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 has 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).
As of December 31, 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. During the periods presented, the Company
did not enter into any significant investing and financing activities
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 distributions.
The Company currently has two leases that provide 10% or more of its total
annual revenue as described under "Item 2. Properties". 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 would
determine whether a reduction in the Company's quarterly distribution rate was
warranted in light of the Company's distribution policy discussed below, then
existing leasing market conditions and other factors deemed relevant by the
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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,
1995, 1994 and 1993 was $2,753,000, $3,021,000 and $1,191,000, respectively. The
decline in cash flow from 1994 to 1995 is primarily due to consolidation
expenses incurred in 1995. The increase in cash flow from 1993 to 1994 primarily
reflects free rent that the Company provided to new tenants during 1993 and
leasing commissions paid by the Company during 1993. These activities are
described in greater detail under "Results of Operations" above.
Funds from Operations for the years ended December 31, 1995, 1994 and 1993 were
$2,803,000, $2,937,000, and $2,624,000, respectively. The primary difference
between the periods reflect the changes in net income as discussed under
"Results of Operations". 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, 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. The Company reports Funds
from Operations in accordance with the NAREIT definition. For the periods
presented, Funds from Operations represents net income plus depreciation and
amortization. The measure of Funds from Operations as reported by the Company
may not be comparable to similarly titled measures of other companies that
follow different definitions.
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.
DISTRIBUTIONS
Distributions are declared quarterly at the discretion of the Board of
Directors. The Company's present distribution policy is to at least annually
evaluate the current distribution 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 distribution rate which:
i) provides a stable distribution which is sustainable
despite short term fluctuations in property cash flows;
ii) maximizes the amount of cash flow paid out as
distributions consistent with the above listed objective;
and
iii) complies with the Internal Revenue Code requirement that
a REIT annually pay out as distributions not less than 95%
of its taxable income.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
During the years ended December 31, 1995, and 1994, the Company declared
distributions totaling $2,368,000, or $.44 per share, and $2,207,000, or $.41
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.
Item 8. Financial Statements And Supplementary Data
Index to Financial Statements and Schedules
Page
Report of Independent Accountants 18
Balance Sheets as of December 31, 1995, and 1994 19
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 20
Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993 21
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 22
23-28
Notes to Financial Statements
Schedule III - Real Estate and Accumulated Depreciation 29-30
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S
Board of Directors and Stockholders
Franklin Select Real Estate Income Fund
We have audited the accompanying balance sheets of Franklin Select Real Estate
Income Fund as of December 31, 1995 and 1994, the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995, and the financial statement schedule of Real
Estate and Accumulated Depreciation. These financial statements and the
financial statement schedule are the responsibility of Franklin Select Real
Estate Income Fund's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Franklin Select Real Estate
Income Fund as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule referred to above, when
considered in relation to the above financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L. L. P.
San Francisco, California
January 20, 1996
B A L A N C E S H E E T S
<TABLE>
<CAPTION>
Franklin Select Real Estate Income Fund
- ----------------------------------------------------------------------------------------
as of December 31, 1995 and 1994
(dollars in 000's except per share amounts) 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Rental property:
Land $9,686 $9,686
Buildings and improvements 33,385 33,243
--------------------------
43,071 42,929
Less: accumulated depreciation 6,934 5,536
--------------------------
36,137 37,393
Cash and cash equivalents 3,251 2,423
Mortgage-backed securities, available for sale 5,202 5,484
Deferred rent receivable 978 1,022
Deferred costs and other assets 623 582
==========================
Total assets $46,191 $46,904
==========================
- ----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Tenants' deposits and other liabilities $272 $218
Advance rents 11 21
Distributions payable 592 592
--------------------------
Total liabilities 875 831
--------------------------
Stockholders' equity:
Common stock, Series A, without par value; stated
value $10 per share; 50,000,000 shares authorized;
5,383,296 and 5,383,439 shares issued and
outstanding for 1995 and 1994, respectively 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 1,859 1,859
Unrealized loss on mortgage-backed securities (113) (417)
Accumulated distributions in excess of net income (5,287) (4,227)
--------------------------
Total stockholders' equity 45,316 46,073
--------------------------
Total liabilities and stockholders' equity $46,191 $46,904
==========================
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
S T A T E M E N T S O F O P E R A T I O N S
Franklin Select Real Estate Income Fund
- --------------------------------------------------------------------------------------------
for the years ended December 31, 1995, 1994 and
1993 1995 1994 1993
(Dollars in 000's except per share amounts)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Rent $4,511 $4,430 $4,544
Interest and dividends 494 386 468
------------------------------------------
Total revenue 5,005 4,816 5,012
------------------------------------------
Expenses:
Depreciation and amortization 1,495 1,469 1,401
Property operations 1,404 1,210 1,352
Related party 444 378 336
Consolidation expense, net 150 2 452
General and administrative 204 276 215
Loss on sale of mortgage-backed
securities - 13 33
------------------------------------------
Total expenses 3,697 3,348 3,789
------------------------------------------
Net income $1,308 $1,468 $1,223
==========================================
Net income per share, based on the
weighted average shares outstanding
of Series A common stock of 5,383,346,
5,383,727 and 5,383,767 for the years
ended December 31, 1995, 1994 and 1993,
respectively $ .24 $ .27 $ .23
==========================================
Distributions per share, based on the
weighted average shares outstanding of
Series A common stock of 5,383,346,
5,383,727 and 5,383,767 for the years
ended December 31, 1995, 1994 and 1993,
respectively $ .44 $ .41 $ .40
==========================================
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
S T A T E M E N T S O F S T O C K H O L D E R S' EQUITY
Franklin Select Real Estate Income Fund
for the years ended December 31, 1995, 1994 and 1993 (Dollars in 000's)
Common Stock
Series A Series B
Unrealized Accumulated
(Loss)/Gain on Distributions
Mortgage-Backed in Excess of
Shares Amount Shares Amount Securities Net Income Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1992 5,383,767 $48,859 185,866 $1,859 - $(2,557) $48,161
Net income - - - - - 1,223 1,223
Distributions
declared - - - - - (2,154) (2,154)
- ---------------------------------------------------------------------------------------------------------------
Balance, December
31, 1993 5,383,767 48,859 185,866 1,859 - (3,488) 47,230
Redemption of
Series A common
stock (328) (1) - - - - (1)
Unrealized loss on
mortgage-backed
securities - - - - (417) - (417)
Net income - - - - - 1,468 1,468
Distributions
declared - - - - - (2,207) (2,207)
- ---------------------------------------------------------------------------------------------------------------
Balance, December
31, 1994 5,383,439 48,858 185,866 1,859 (417) (4,227) 46,073
Redemption of
Series A Common
Stock (143) (1) - - - - (1)
Unrealized gain on
mortgage-backed
securities - - - - 304 - 304
Net Income - - - - - 1,308 1,308
Distributions
Declared - - - - - (2,368) (2,368)
- ---------------------------------------------------------------------------------------------------------------
Balance, December
31, 1995 5,383,296 $48,857 185,866 $1,859 $(113) $(5,287) $45,316
===============================================================================================================
The accompanying notes are an integral part of these financial statements.
S T A T E M E N T O F C A S H F L O W S
Franklin Select Real Estate Income Fund
- ----------------------------------------------------------------------------------------
for the years ended December 31, 1995, 1994 and 1995 1994 1993
1993 (Dollars in 000's)
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
-----------------------------------
Net income $1,308 $1,468 $1,223
-----------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,495 1,469 1,401
(Increase) decrease in deferred rent receivable 44 24 (499)
(Increase) decrease in other assets (138) 29 (405)
Increase in tenants' deposits and other
liabilities 54 55 8
Decrease in advance rents (10) (24) (537)
-----------------------------------
1,445 1,553 (32)
-----------------------------------
Net cash provided by operating activities 2,753 3,021 1,191
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to rental property (142) (279) (1,352)
Investment in mortgage-back securities - (1,667) -
Disposition of mortgage-back securities 586 1,201 3,685
-----------------------------------
Net cash provided by (used in) investing
activities 444 (745) 2,333
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Series A common stock (1) (1) -
Distributions paid (2,368) (1,615) (2,154)
-----------------------------------
Net cash used in financing activities (2,369) (1,616) (2,154)
-----------------------------------
Net increase in cash and cash equivalents 828 660 1,370
Cash and cash equivalents, beginning of year 2,423 1,763 393
===================================
Cash and cash equivalents, end of year $3,251 $2,423 $1,763
===================================
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
As of December 31, 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.
RENTAL PROPERTY
Rental property is stated at cost and depreciated using the straight-line method
over an estimated useful life of 35 years for buildings and improvements.
Significant improvements and betterments are capitalized. Maintenance, repairs
and minor renewals are charged to expense when incurred. The Shores Office
Complex (the "Shores") is reflected in these financial statements in accordance
with the Company's 60% ownership interest.
Pursuant to the Company's investment objectives, property purchased is generally
held for extended periods. During the holding period, management periodically,
but at least annually, evaluates whether rental property has suffered an
impairment in value. Management's analysis includes consideration of estimated
undiscounted future cash flows during the expected holding period in comparison
with carrying values, prevailing market conditions and other economic matters.
If the current carrying value of an individual property exceeds estimated future
undiscounted cash flows, the Company would reduce the carrying value of the
asset to fair value; however, to date, such adjustments have not been required.
CASH AND CASH EQUIVALENTS
The Company classifies highly liquid investments with original maturities of
three months or less from the date acquired as cash equivalents.
MORTGAGE-BACKED SECURITIES VALUATION
Mortgage-backed securities held by the Company are classified as available for
sale and are carried at market value. The resulting unrealized gains and losses
are reported as a separate component of stockholders' equity until realized.
Realized gains and losses are recognized on the specific identification method
and are included in earnings. For the year 1993 prior to the adoption of
Statement of Financial Accounting Standards No. 115, the Company valued
mortgage-backed securities at amortized cost. The impact of this change on
stockholders' equity on January 1, 1994, was immaterial.
NOTES TO FINANCIAL STATEMENTS
DEFERRED COSTS
Organization costs were deferred and amortized using the straight-line method
over a five year period. Lease commissions are deferred and amortized using the
straight-line method over the term of the related lease.
RENTAL REVENUES
Rental revenues are recorded on the straight-line method to reflect scheduled
rent increases and free rent over the related lease term. As a result, a
deferred rent receivable is created when rental receivables are less than the
amount earned using the straight-line method or when rental income is recognized
during free rent periods of a lease.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of mortgage-backed securities.
The Company places excess cash in short-term deposits with Franklin Money Fund,
an investment company managed by an affiliate of the Advisor, and in money
market securities of companies with strong credit ratings and, by policy, limits
credit exposure to any one issuer. The Company performs ongoing credit
evaluations of its tenants and generally does not require collateral for
commercial tenants. The Company reserves for potential credit losses, as
appropriate.
The following tenants provided 10% or more of the Company's total straight-line
revenues for the years 1995, 1994 and 1993:
Percent of Straight-Line
Rental Revenue
Principal Business Lease Expiration 1995 1994 1993
- ----------------------------------------------------------------------------
Credit Union 11/30/97 21.5% 23.3% 25.1%
Computer Manufacturer 01/31/99 22.7% 24.7% 26.6%
RECLASSIFICATION
Certain reclassifications were made in the 1994 and 1993 financial statements to
conform to the presentation in the 1995 financial statements. Such
reclassifications had no effect on previously reported results.
NOTE 2 - 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 distributions to Series A common stock shareholders
totaling at least 7% per annum on their adjusted price per share, as defined.
NOTES TO FINANCIAL STATEMENTS
The agreements between the Company and the Advisor, or affiliates of the
Advisor, provide for certain types of compensation and payments including but
not limited to the following for the years ended December 31, 1995, 1994 and
1993:
1995 1994 1993
-------------------------------------
Advisory fee, charged to related
party expense $215,000 $148,000 $126,000
Reimbursement for data processing,
accounting and certain other
expenses, charged to related party
expense 28,000 34,000 51,000
Property management fee, charged to
related party expense 201,000 196,000 159,000
Leasing commissions, capitalized and
amortized over the term of the
related lease 62,000 30,000 -
Construction supervision fee,
capitalized and amortized over the
life of the related investment or
the term of the related lease 11,000 15,000 -
At December 31, 1995 and 1994, cash equivalents included $423,000 and $145,000,
respectively, which was invested in Franklin Money Fund, an investment company
managed by an affiliate of the Advisor. Distributions earned from Franklin Money
Fund totaled $9,000, $9,000 and $7,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
NOTE 3 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities, available for sale at December 31, 1995, had coupon
rates between 6.4% and 7.9% and maturities between 2018 and 2028. Amortized cost
was $5,315,000, market value was $5,202,000 resulting in a gross unrealized loss
of $113,000.
Mortgage-backed securities at December 31, 1994 had an aggregate market value of
$5,484,000 and an amortized cost of $5,901,000, resulting in a gross unrealized
loss of $417,000.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - COMMON STOCK AND INCOME PER SHARE
In connection with the approval of the 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 (the "Conversion"), the Company
issued to the Advisor an option (the "Option") 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 exercise price will be subject to
change under certain circumstances as provided in the Option. After exercise of
the Option, the Advisor, like any other shareholder, will receive distributions
on the Series A shares.
Prior to the Conversion, no distributions were ever paid on the Series B common
stock. Series A and Series B common stock have the same voting rights.
Distributions on Series A common stock are declared at the discretion of the
Board of Directors.
NOTE 5 - DISTRIBUTIONS
The allocation of cash distributions per share for individual shareholders'
income tax purposes, as reported on Internal Revenue Service Form 1099-DIV, for
the years ended December 31, 1995, 1994 and 1993 was as follows:
Ordinary Return of Total
Year Paid Income Capital Paid
- -------------------------------------------------
1995 $.35 $.09 $.44
1994 $.34 $.07 $.41
1993 $.04 $.36 $.40
In December, 1994, the Company implemented a new Dividend Reinvestment and Share
Purchase Plan (the "Plan"), under which a stockholder's cash distributions may
be reinvested in shares of Series A common stock of the Company, subject to the
terms and conditions of the Plan. Under the Plan, the Company's Dividend
Reinvestment Agent makes open market purchases of the Company's Series A common
stock, administers the Plan and performs other duties related to the Plan. No
new shares are issued in connection with the Plan.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - RENTAL INCOME
The Company's rental income from commercial property is received principally
from tenants under noncancellable operating leases. The tenant leases typically
provide for guaranteed minimum rent plus contingent rents. Minimum future
rentals on noncancellable tenant operating leases at December 31, 1995 are as
follows:
1996 $ 3,947,000
1997 3,794,000
1998 2,880,000
1999 1,804,000
2000 1,050,000
Thereafter 5,560,000
--------------
$ 19,035,000
==============
Minimum future rentals do not include contingent rents which represent
reimbursements of property operating expenses. Contingent rents amounted to
$612,000, $678,000 and $501,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
NOTE 7 - PROPOSED MERGER
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/Prospectus with the Securities and Exchange Commission.
The Prospectus was filed on November 13, 1995.
In the proposed merger, 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/Prospectus. 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 Prospectus and the close of the solicitation period.
The Company expenses non-recurring consolidation costs in the periods in which
they are incurred. Expenses recorded in 1993 and 1994 relate to a previous plan
of consolidation and are net of certain reimbursements by the Advisor.
NOTE 8 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $1,247,000 $1,276,000 $1,236,000 $1,246,000
Net income 421,000 380,000 243,000 264,000
Net income per share .08 .07 .05 .04
Three Months Ended
---------------------------------------------------------
March 31, June 30, September 30, December 31,
1994 1994 1994 1994
---------------------------------------------------------
<C> <C> <C> <C>
Revenues $1,195,000 $1,209,000 $1,216,000 $1,196,000
Net income 379,000 314,000 262,000 513,000
Net income per share .07 .06 .05 .09
Three Months Ended
---------------------------------------------------------
March 31, June 30, 1993 September December 31,
1993 30, 1993 1993
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $1,183,000 $1,156,000 $1,319,000 $1,354,000
Net income 297,000 228,000 219,000 429,000
Net income per share .06 .04 .04 .09
- --------------------------------------------------------------------------------------------------------------------------------
R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N
- --------------------------------------------------------------------------------------------------------------------------
Franklin Select Real Estate Income Fund
as of, and for the years ended December 31, 1995, 1994 and 1993
Cost Capitalized
Initial Subsequent To Gross Amount at Which
Cost to Fund Acquisition Carried at Close of Period
Description Encum- Land Buildings Improve- Carry- Land Buildings Total Accum-
brances ments ing and ulated
Costs Improvements Deprecia-
tion
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Office Complex $ - $4,314,000 $12,575,000 $1,175,000 $ - $4,314,000 $13,750,000 $18,064,000 $2,808,000
Redwood City, CA
Office Complex - 5,372,000 16,994,000 2,641,000 - 5,372,000 19,635,000 25,007,000 4,126,000
Manhattan Beach, CA
- -------------------------------------------------------------------------------------------------------------------------
$ - $9,686,000 $29,569,000 $3,816,000 $ - $9,686,000 $33,385,000 $43,071,000 $6,934,000
(1), (2) (3)
==========================================================================================================================
Date of Date Life on
cons- Acqui- Which
truc- red Deprecia-tion
tion in Latest
Operat-ions
State-ment is
Computed
<C> <C> <C>
82-87 09/89 35
82 12/89 35
========================================================================================================================
R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N
========================================================================================================================
NOTES:
(1) The aggregate cost for federal income tax purposes is $43,071,000.
(2) Reconciliation of Real Estate
1995 1994 1993
------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $42,929,000 $42,650,000 $41,298,000
Additions during period -
improvements 142,000 279,000 1,352,000
------------------------------------------------
Balance at end of period $43,071,000 $42,929,000 $42,650,000
================================================
(3) Reconciliation of Accumulated Depreciation
1995 1994 1993
------------------------------------------------
Balance at beginning of period $5,536,000 $4,162,000 $2,849,000
Depreciation expense for the
period 1,398,000 1,374,000 1,313,000
------------------------------------------------
Balance at end of period $6,934,000 $5,536,000 $4,162,000
================================================
</TABLE>
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers Of The Company And The Advisor
Directors of the Company are elected annually by the shareholders. The Officers
of the Company are appointed by the Board of Directors, and serve under the
supervision, and, at the pleasure of the Board of Directors. There is an audit
committee consisting of the Independent Directors of the Company. The Audit
Committee's responsibilities generally include review of the internal controls
of the Company, accounting compliance and review of the Company's financial
reporting. In performing these reviews, the Audit Committee met once during the
year ended December 31, 1995. The Directors and Officers of the Company and/or
the Advisor are:
NAME POSITION
David P. Goss Chief Executive Officer,
President and Director
Lloyd D. Hanford Independent Director
Egon H. Kraus Independent Director
Lawrence C. Werner Independent Director
E. Samuel Wheeler Independent Director
Michael J. McCulloch Executive Vice President
Richard S. Barone Secretary
Mark A. TenBoer Vice President - Finance
and Chief Financial Officer
All such officers and directors have served in these capacities with the Company
since January 1989 with the exception of Mr. TenBoer, who was elected in
December 1993.
NAME, AGE AND FIVE-YEAR BUSINESS EXPERIENCE DIRECTOR SINCE
David P. Goss (48) 1989
Mr. Goss is the Chief Executive Officer, President and Director of the Company.
He is also Chief Executive Officer, President and Director of Property
Resources, Inc., Property Resources Equity Trust (1987 to date), the Advisor,
Franklin Real Estate Income Fund (1988 to date), Franklin Advantage Real Estate
Income Fund (1990 to date), and Franklin Real Estate Management, Inc. (1991 to
date). Mr. Goss has a B.A. degree from the University of California, Berkeley,
and a J.D. degree from the New York University School of Law.
Lloyd D. Hanford (67) 1989
Mr. Hanford is an Independent Director of the Company. In 1988 he was co-founder
of, and until July 1992, principal of the Hanford/Healy Companies, a San
Francisco real estate appraisal, asset management and consulting firm,
practicing on a national basis. Mr. Hanford presently serves as Executive
Appraiser for the Hanford/Healy Appraisal Company. Mr. Hanford graduated from
the University of California, Berkeley and holds the professional designations
MAI, CRE and CPM awarded respectively by the Appraisal Institute, the American
Society of Real Estate Counselors and IREM. Mr. Hanford is also a Director of
Advantage (1990 to date).
Egon H. Kraus (66) 1989
Mr. Kraus is an Independent Director of the Company. He was formerly Vice
President and director of McNeil Investors Inc. (1991 - 1995). He is a Certified
Public Accountant, primarily involved in real estate transactions. He has a B.S.
and an M.B.A. from the University of California, Berkeley, where he was elected
to Phi Beta Kappa. Mr. Kraus is a member of the American Institute of Certified
Public Accountants, and a former member of the Financial Executives Institute
and the Tax Executives Institute. He is also a Director of Franklin Real Estate
Income Fund (1988 to date) and Franklin Advantage Real Estate Income Fund (1990
to date). Item 10. Directors and Executive Officers Of The Company And The
Advisor (Continued)
Lawrence C. Werner (77) 1989
Mr. Werner is an Independent Director of the Company. He is a private investor
and is currently a Director of the Civic Interest League of Atherton,
California. He was formerly a sales executive with IBM. Mr. Werner is also a
director of Franklin Advantage Real Estate Income Fund (1990 to date).
E. Samuel Wheeler (52) 1989
Mr. Wheeler is an Independent Director of the Company. He is a self-employed
Certified Public Accountant. He is a current member of the National Association
of Real Estate Investment Trusts (NAREIT) Government Relations, Insurance
Planning and Accounting Committees. He received his B.S. in Accounting and
Finance from San Jose State University in 1966, and is a member of the American
Institute of Certified Public Accountants and the California Society of
Certified Public Accountants. Mr. Wheeler is also a director of Franklin
Advantage Real Estate Income Fund (1990 to date).
The executive officers of the Company other than those listed above are:
Michael J. McCulloch, age 48, is Executive Vice President of the Company (1989
to date). He is also Executive Vice President of Property Resources, Inc.,
Property Resources Equity Trust (1987 to date), the Advisor, Franklin Real
Estate Income Fund (1988 to date), Franklin Advantage Real Estate Income Fund
(1990 to date), and Franklin Real Estate Management, Inc. (1991 to date). He
attended California State University, Los Angeles and the University of Southern
California.
Richard S. Barone, age 45, is Secretary of the Company (1989 to date). He is
also secretary of the Advisor, Property Resources, Inc., Property Resources
Equity Trust, Franklin Real Estate Income Fund (1988 to date), Franklin
Advantage Real Estate Income Fund (1990 to date), and Franklin Real Estate
Management, Inc. (1991 to date). He is also Senior Vice President - Legal of the
Advisor, Property Resources, Inc. (1988 to date), and Franklin Real Estate
management, Inc. (1991 to date); and Corporate Counsel of Franklin Resources,
Inc. (1988 to date). Mr. Barone received a B.A. degree and a J.D. degree from
the University of San Francisco. He is a member of the State Bar of California.
Mark A. TenBoer, age 39, is Vice President - Finance and Chief Financial Officer
of the Company, Franklin Real Estate Income Fund and Franklin Advantage Real
Estate Income Fund (1993 to date), and has served as Vice President - Asset
Management for the Advisor, Property Resources, Inc., and Franklin Real Estate
Management, Inc., since 1994. From 1983 to 1991 he was Director - Portfolio
Management and Controller of the Advisor and Property Resources, Inc. He
received a B.S. degree in Accounting from the University of Illinois. Mr.
TenBoer is a Certified Public Accountant.
The Advisor and Continental Property Management Co.
The principal executive officers, directors and key employees of the Advisor are
as follows:
NAME POSITION
David P. Goss Chief Executive Officer,
President and Director
Harmon E. Burns Director
Rupert H., Johnson, Jr. Director
Charles E. Johnson Director
Michael J. McCulloch Executive Vice President
Richard S. Barone Senior Vice President - Legal and Secretary
Martin L. Flanagan Vice President - Finance
and Chief Financial Officer
Mark A. TenBoer Vice President - Asset Management
David P. Rath Vice President - Asset Management
David N. Popelka Vice President - Asset Management
Item 10. Directors and Executive Officers Of The Company And The Advisor
(Continued)
The principal executive officers of Continental Property Management Co. are as
follows:
NAME POSITION
Thomas J. Bennett President, Chief Financial Officer and Director
Charles L. Gee Senior Vice President and Secretary
For a description of the occupations and affiliations of Messrs. Goss,
McCulloch, Barone and TenBoer, see "The Company" above.
NAME, AGE AND FIVE-YEAR BUSINESS EXPERIENCE DIRECTOR SINCE
Harmon E. Burns (51) 1988
Mr. Burns has served since 1990 as Executive Vice President, Secretary and
Director of Franklin Resources, Inc. He also serves as Executive Vice President
of Franklin/Templeton Distributors, Inc., Executive Vice President of Franklin
Advisers, Inc., Director of Templeton Worldwide, Inc., Franklin/Templeton
Investor Services, Inc. and Franklin Bank and as an officer of most of the
mutual funds in the Franklin Templeton Group of Funds. Mr. Burns received a
B.B.A. degree from George Washington University in 1969 and received a J.D.
degree from San Mateo Law School in 1976. He is a member of the State Bar of
California and is a licensed General Securities Principal with the National
Association of Securities Dealers, Inc.
Rupert H. Johnson, Jr. (55) 1988
Mr. Johnson has served since 1990 as Executive Vice President and Director of
Franklin Resources, Inc. Previously, he was Senior Vice President of Franklin
Resources, Inc. He holds similar positions with is subsidiaries and affiliates
including the position of President and Director of Franklin Advisors, Inc. He
has also served as Director of Property Resources, Inc. since 1985 and currently
serves as a Director or Trustee and Vice President on most of the mutual funds
in the Franklin Templeton Group of Funds, and as a Director of Franklin Bank.
Charles E. Johnson, Jr. (39) 1988
Mr. Johnson has served as the Senior Vice President (1990) and a Director of
Franklin Resources, Inc. since 1987. He is also the Senior Vice President of
Franklin Templeton Distributors, Inc. (1990 to date), and the President and a
Director of Templeton Worldwide, Inc. and Franklin Institutional Services
Corporation (1991 to date). He is also an officer and/or director or trustee, as
the case may be, of 24 of the investment companies in the Franklin Templeton
Group of Funds.
The executive officers of the Advisor and Continental Property Management Co.
other than those listed above are as follows:
Martin L. Flanagan, age 35, has been associated with the Templeton Group since
1983. He is currently the Executive Vice President, Chief Operating Officer and
a Director of Templeton, Galbraith & Hansberger ltd., John Templeton Counselors,
Inc., and Templeton Global Investors, Inc.; General Manager of Templeton
Financial Advisory Services, S.A.; Managing Director of Templeton Global
Investors, Ltd.; Finance Director of Templeton Investment Management; Senior
Vice President - Finance, Secretary and a Director of Templeton Investment
Counsel Ltd.; and Senior Vice president - Finance and a Director of Templeton
Investment Counsel, Inc. he is also a Director and/or Chairman of Templeton
Funds Annuity Company, Templeton Funds Trust Company, Templeton Funds
Management, Inc., Templeton Funds Distributor, Inc. Forcecare Ltd., Templeton
Global Strategic Services, S.A., Universal Investment Management, Inc.,
Templeton Life Assurance Ltd., Structured Asset management, Inc., The DIAS
Group, Inc., Templeton Global Bond Managers, Inc., Templeton Emerging Markets,
Templeton Investment Services, Inc., Templeton Management (Lux), S.A., Templeton
Unit Trust Item 10. Directors and Executive Officers Of The Company And The
Advisor (Continued)
Managers Ltd., and Templeton Investment Management Ltd. He is also Vice
President - Finance and Chief Financial Officer of Property Resources, Inc.,
Property Resources Equity Trust and Franklin Properties, Inc. Mr. Flanagan
received a B.A. degree from Southern Methodist University and is a Certified
Public Accountant and a Chartered Financial Analyst. He is currently a member of
the American Institute of Certified Public Accountants and the International
Society of Financial Analysts.
Thomas J. Bennett, age 47, has served since 1989 as the President of Continental
Property Management Co. and since 1989 as sole Director and Chief Financial
Officer. Previously, he served as Regional Vice President, Utah Region, of
Continental Property management Co. He is a graduate of California State
University at Long Beach and holds the Certified Property Manager (CPM)
designation awarded by the Institute of Real Estate Management.
David P. Rath, age 47, has served since 1992 as the Vice President - Asset
Management for the Advisor, Property Resources, Inc. and Franklin Real Estate
Management, Inc. Previously, he was Assistant Vice President-Research and
Analysis for the Advisor. Mr. Rath operated his own real estate investment
company, Rath Investments, from 1987 to 1990. Mr. Rath received a B.S. degree in
Mechanical Engineering from Bucknell University and a M.B.A. degree from the
University of California at Berkeley.
David N. Popelka, age 43, has served since 1992 as Vice President - Asset
Management for the Advisor, Property Resources, Inc. and Franklin Real Estate
Management, Inc. Prior to joining Franklin Properties, Inc., Mr. Popelka was
Vice President - Portfolio Management for the Glenborough Management Company in
Redwood City, California. Mr. Popelka is a graduate of Illinois State University
and received an M.B.A. degree from the University of Washington. He has been a
guest lecturer on real estate investments and finance at Golden Gate University.
Charles L. Gee, age 49, has served since 1991 as the Senior Vice President of
Continental Property Management Co. and as its Secretary since 1989. From 1986
to 1991, he held the office of Vice President for Continental Property
Management Co. Mr. Gee holds the Certified Property manager (CPM) designation
awarded by the Institute of Real Estate Management and is a California real
estate broker.
Item 11. Executive Compensation
No direct compensation has been paid by the Company to its directors and
officers, or directors and officers of the Advisor, except that the independent
directors of the Company receive fees of $2,000 per year plus $400 per each
regular meeting attended and $300 per each telephonic meeting attended. Each
independent director also received $2,500 per quarter and $400 per meeting for
attending independent committee meetings related to the proposed merger. For the
fiscal year ended December 31, 1995, fees to all independent directors related
to any attendance at board meetings, independent committee meetings and
reimbursement of expenses totaled $40,200. The Company has no annuity, pension
or retirement plans or any existing plans or arrangement under which payments
have or would in the future be made to any director or officer. The Company has
paid certain fees and will reimburse certain expenses of the Advisor, as
described below under "Item 13. Certain Relationships and Related Transactions".
Item 12. Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth the beneficial ownership of the Company's Common
Stock by the Directors and by all Directors and Officers as a group, as of
December 31, 1995. At such date, all Directors and Officers as a group owned
less than 1% of the outstanding Common Stock of the Company.
AMOUNT AND
NATURE OF SHARES
Name TITLE OF CLASS BENEFICIALLY OWNED
David P. Goss, Chief Executive Common Stock,
Officer, President and Director Series A 3,263
E. Samuel Wheeler Common Stock,
Independent Director Series A 100
Lloyd D. Hanford Common Stock,
Independent Director Series A -
Laurence C. Werner Common Stock,
Independent Director Series A -
Egon H. Kraus Common Stock,
Independent Director Series A 4,000
Directors and officers Common Stock,
as a group Series A 9,818
To the Company's knowledge, as of December 31, 1995, no person beneficially
owned more than 5% of the outstanding Common Stock Except as set forth below:
AMOUNT AND
NATURE OF SHARES % OF
NAME AND ADDRESS TITLE OF CLASS BENEFICIALLY CLASS1
OWNED
Commonwealth of Massachusetts Common Stock, 1,077,608 19.4%
Pension Reserve Investment Series A
Management Board ( " PRIM" )
125 Summer Street
10th Floor
Boston, MA 02110
Franklin Properties, Inc. Common Stock, 185,8661 3.3%
Series B
1 The Company has one class of common stock in two series, designated Series
A and Series B. The Series A and Series B shares vote together as one class
with each share being entitled to one vote. The 185,866 Series B Shares
(3.3% of the total number of outstanding shares of Common Stock) were
originally issued to Franklin Resources, Inc., the parent company of the
Advisor, in return for capital contributions to the Company, applied to pay
a portion of the sales commission in connection with the Company's offering
of its Series A common stock. Franklin Resources, Inc. transferred these
Series B Shares to the Advisor.
Item 13. Certain Relationships And Related Transactions
The Company has no employees. The Company is managed by the Advisor under the
terms of an Advisory Agreement, which is renewable annually and is subject to
the overall approval of the Board of Directors of the Company. Continental
Property Management Co. acts as property manager for the properties owned by the
Company. The Company pays the Advisor, as an asset management fee, an annualized
fee of .5% of the book value of its real estate assets before depreciation. This
fee is reduced to .4% of the book value before depreciation of real estate
assets exceeding $200 million. The fee is calculated and paid at the end of each
fiscal quarter of the Company, based on the real estate assets at the end of
such quarter. The Company changed its advisory fee structure after its
conversion to an infinite life REIT in 1994.
The Company pays all expenses of its operations except for the following, which
are borne by the Advisor (i) employment expenses of the Company's Chairman,
President, Executive Vice President, Senior Vice President, Chief Financial
Officer, Secretary and of the Company's directors who are also officers of the
Advisor, (ii) office expenses of the Advisor, and (iii) overhead expenses of the
Advisor not properly attributable to the performance of its duties and
obligations under the Advisory Agreement.
The Company pays a property management fee to Continental based on actual
services performed. If Continental retains independent management companies to
perform a portion or all of the services required for the management of the
Company's properties, it pays any fees charged by those persons without
additional cost to the Company. The fee paid to Continental does not include any
fees or expenses paid to on-site property managers or leasing commissions paid
to third parties, both of which are borne by the Company. During the year ended
December 31, 1995, the Company paid Continental property management and other
fees totaling $274,000, respectively. See also "The Company - Property
Management."
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 distributions to Series A common stock shareholders
totaling at least 7% per annum on their adjusted price per share, as defined.
The agreement also provided for the following compensation and payments to the
Advisor and its affiliates, which have been discontinued under the terms of the
amended agreement.
Acquisition fees not to exceed 6% of the contract price of the acquired
property for services rendered in connection with the investigation,
selection and acquisition of real property, or the origination of mortgage
investments.
Sales commission of 3% of the gross selling price of the Company's real
property.
Subordinated incentive fee of 10% of net proceeds, as defined, from
proceeds due to the sale or refinancing of Company real property. The fee
is payable to the Advisor provided the Series A stockholders have received
cumulative distributions in cash from sales or refinancing equal to their
adjusted price per share, as defined, plus a 6% per annum cumulative
return.
Item 13. Certain Relationships And Related Transactions (Continued)
During the year ended December 31, 1995, the Company paid or accrued the
following amounts for the reimbursements and services noted above:
Advisory fee, charged to related party expense $215,000
Reimbursement for data processing accounting and
and certain other expenses charged to related party expense 28,000
Property Management fee, charged to
related party expense 201,000
Leasing commission, capitalized and amortized
over the term of the related lease 62,000
Construction supervision fee, capitalized and amortized
over the life of the related investment or the term of the related 11,000
lease
David P. Goss, Michael J. McCulloch, Mark A. TenBoer and Richard S. Barone, who
are officers of the Company, are also officers of the Advisor.
PART IV
Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K
(a) 1. The financial statements of the Company included in Item 8 of this
report are listed on the index on page 17.
2. The supplemental financial statement schedule of the Company
included in Item 8 of this report is listed on the index on page 17.
3. Exhibits:
(3.1) Articles of Incorporation 1
(3.2) Bylaws 1
(10.1) Material Contracts - Advisory Agreement 1
(10.1a) First Amendment to Advisory Agreement 2
(10.2) Material Contracts - Property Management Agreement 2
(11.) Statement regarding computation of earnings per share.
See Note 3 to the Financial Statements.
1 Documents were filed in the Company's Form S-11 Registration
Statement, dated March 30, 1989 (Registration No. 033-26562)
and are incorporated herein by reference.
2 Documents were filed in the Company's Form 10-K for the year
ended December 31, 1994, and are incorporated herein by
reference.
(b) Reports filed on Form 8-K.
No reports on Form 8-K were filed by the Company for the quarter ended
December 31, 1995.
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: March 19, 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
Chief Executive
Officer, and
/s/ David P. Goss Director March 19, 1996
- ------------------------------ ---------------------
David P. Goss
/s/ Lloyd D. Hanford, Jr. Director1 March 19, 1996
- ------------------------------ ---------------------
Lloyd D. Hanford, Jr.
/s/ Egon H. Kraus Director1 March 19, 1996
- ------------------------------ ---------------------
Egon H. Kraus
/s/ Lawrence C. Werner Director1 March 19, 1996
- ------------------------------ ---------------------
Lawrence C. Werner
/s/ E. Samuel Wheeler Director1 March 19, 1996
- ------------------------------ ---------------------
E. Samuel Wheeler
1 Independent Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR
THE FISCAL YEAR DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,241
<SECURITIES> 5,202
<RECEIVABLES> 978
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,071
<DEPRECIATION> 6,934
<TOTAL-ASSETS> 46,191
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 50,716
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 46,191
<SALES> 0
<TOTAL-REVENUES> 5,005
<CGS> 0
<TOTAL-COSTS> 3,697
<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> 1,308
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
