SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
-------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ TO _____________________________
Commission file number 1-12708
---------------------------------------------------------
FRANKLIN SELECT REALTY TRUST
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3095938
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 312-2000
-----------------------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Common Stock Shares Outstanding as of September 30, 1997, Series A: 12,250,376
Common Stock Shares Outstanding as of September 30, 1997, Series B: 745,584
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
Unaudited
(In thousands, except per share amounts) 1997 1996
- --------------------------------------------------------------------------------
ASSETS
Real Estate
Rental property:
Land $36,635 $34,779
Buildings and improvements 105,462 98,253
-----------------------
142,097 133,032
Less: accumulated depreciation 19,903 17,261
-----------------------
122,194 115,771
Land held for development 4,162 -
Rental property held for sale,
net of accumulated depreciation 8,158 8,271
-----------------------
Real estate, net 134,514 124,042
Cash and cash equivalents 4,186 2,558
Mortgage-backed securities, available for sale 531 578
Deferred rent receivable 1,866 1,916
Deferred costs and other assets 2,431 2,204
-----------------------
Total assets $143,528 $131,298
=======================
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes and bonds payable $35,417 $22,745
Accounts payable and accrued expenses 1,005 739
Distributions payable 1,463 1,348
Other liabilities 497 484
-----------------------
Total liabilities 38,382 25,316
-----------------------
Minority interest 9,276 9,329
-----------------------
Commitments and contingencies (Note 3)
Stockholders' equity:
Common stock, Series A, without par value;
stated value $10 per share; 110,000 shares
authorized; 12,250 issued and outstanding 103,161 103,161
Common stock, Series B, without par value;
stated value $10 per share; 2,500 shares
authorized; 746 shares issued and outstanding 6,294 6,294
Unrealized loss on mortgage-backed securities (25) (36)
Accumulated distributions in excess of net income (13,560) (12,766)
-----------------------
Total stockholders' equity 95,870 96,653
-----------------------
Total liabilities and stockholders' equity $143,528 $131,298
=======================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER September SEPTEMBER September
30, 30, 30, 30,
(In thousands, except per share amounts) 1997 1996 1997 1996
-----------------------------------------------------------------------------------------
REVENUE:
<S> <C> <C> <C> <C>
Rent $4,436 $3,412 $12,982 $10,144
Interest, dividends, and other 55 185 143 540
---------------------------------------------
Total revenue 4,491 3,597 13,125 10,684
---------------------------------------------
EXPENSES:
Interest 674 153 1,999 467
Depreciation and amortization 1,014 836 2,968 2,491
Operating 1,092 1,006 2,940 2,690
Related party 365 304 1,074 864
Consolidation expense - (26) 2 680
General and administrative 111 137 411 474
Minority interest 161 - 483 -
---------------------------------------------
Total expenses 3,417 2,410 9,877 7,666
---------------------------------------------
NET INCOME $1,074 $1,187 $3,248 $3,018
=============================================
Net income per share, based on
the weighted average shares
outstanding of Series A common
stock of 12,250 and 14,145 for
the three- and nine-month periods
ended September 30, 1997 and 1996,
respectively $ .09 $ .08 $ .27 $ .21
=============================================
Distributions per share, based on
the weighted average shares
outstanding of Series A common
stock of 12,250 and 13,328 for
the three-month periods ended
and 12,250 and 13,710 for the
nine-month periods ended
September 30, 1997 and 1996,
respectively $.11 $ .11 $ .33 $ .33
=============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Unaudited
(In thousands) 1997 1996
- ----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $3,248 $3,018
----------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,091 2,491
Minority interest 483 -
Decrease in deferred rent receivable 50 42
(Increase) decrease in other assets (211) 8
Increase in accounts payable, accrued expenses
and other liabilities 220 185
----------------------
3,633 2,726
----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,881 5,744
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate (12,613) -
Improvements to real estate (529) (343)
Construction period interest paid (85) -
Leasing commissions paid (349) (219)
Disposition of mortgage-backed securities 58 878
----------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (13,518) 316
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes and bonds payable 20,338 -
Repayment of notes and bonds payable (7,666) (54)
Payoff of seller carryback note - (480)
Payment of loan costs (3) -
Dissenting shareholders' interest paid - (8)
Distributions paid to limited partners (477) -
Distributions paid to stockholders (3,927) (4,565)
----------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,265 (5,107)
----------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,628 953
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,558 6,186
----------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,186 $7,139
======================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Unaudited
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Franklin
Select Realty Trust (the "Company") included herein have been prepared in
accordance with the instructions to Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all appropriate adjustments necessary to a fair presentation of the results of
operations have been made for the periods shown. All adjustments are of a normal
recurring nature. Certain prior year amounts have been reclassified to conform
to current year presentations. These financial statements should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 1996.
NOTE 2 - NET INCOME PER SHARE
On May 7, 1996 Franklin Real Estate Income Fund ("FREIF") and Franklin Advantage
Real Estate Income Fund ("Advantage") merged into the Company (the "Merger"). On
November 1, 1996 in connection with the merger, the Company repurchased shares
of FREIF and Advantage common stock, equivalent to approximately 1.9 million
shares of the Company's common stock, which was held by certain FREIF and
Advantage shareholders who dissented from the merger.
For purposes of calculating net income per share for the periods ended September
30, 1996, the weighted average shares outstanding of Series A common stock has
been calculated assuming the shares attributable to dissenting shareholders
(equivalent to approximately 1.9 million shares of the Company's common stock)
were converted into the Company's common stock and were outstanding for the
period.
NOTE 3 - REAL ESTATE
Management intends to dispose of the Carmel Mountain property and accordingly
has reclassified the related net assets to "Rental property held for sale" in
the accompanying balance sheet as of September 30, 1997. Management does not
expect that the eventual sale of the property will result in a material gain or
loss to the Company.
In June, 1997 the Company acquired a 12.5 acre parcel of land in Rancho Cordova,
California and shortly thereafter commenced development activities. In that
regard, through September 30, 1997, the Company has capitalized interest
incurred of approximately $85,000. As previously disclosed, the purchase
agreement provides that if the parties did not execute a development agreement
by September 23, 1997 then the seller was granted a 90 day option to repurchase
the parcel from the Company at a price equal to the sum of the Company's
purchase price, its closing costs, interest expense at an annual rate of 10%,
plus $100,000. A development agreement has not been executed by the parties,
however, the parties are continuing to negotiate an agreement.
NOTE 4 - LITIGATION
On December 2, 1996, two stockholders, for themselves and purportedly on behalf
of certain other minority stockholders of Advantage, filed a purported class
action complaint in the California Superior Court for San Mateo County against
Advantage, its directors, the Advisor, Franklin Resources, Inc. and
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Unaudited
NOTE 4 - LITIGATION (Continued)
the Massachusetts State Teachers' and Employees' Retirement Systems Trust
("MASTERS"). The complaint alleges that defendants breached fiduciary duties to
plaintiffs and other minority stockholders in connection with the purchase by
Franklin Resources, Inc. in August 1994 of MASTERS' 46.6% interest in Advantage
and in connection with the Merger of Advantage into the Company in May 1996,
which was approved by a majority of the outstanding shares of each of the three
companies. Plaintiffs also allege that defendants misstated certain material
facts or omitted to state material facts in connection with these transactions.
The complaint includes a variety of additional claims, including claims relating
to the investment of Advantage assets, the suspension of the dividend
reinvestment program, the allocation of merger-related expenses, revisions to
the investment policies of Advantage, and the restructuring of the contractual
relationship with the Advisor. Plaintiffs seek damages in an unspecified amount
and certain equitable relief. The defendants deny any wrongdoing in these
matters and intend to vigorously defend the action. As a result of the pleadings
filed by the various defendants, including the Company, the plaintiffs have
filed an amended complaint to address the court's response to such filings.
On June 3, 1997, Herbert S. Hodge, Jr., on behalf of himself and certain other
shareholders of FREIF, filed an alleged class action complaint in the California
Superior Court for San Mateo County against the Company, certain of its
directors, the Company's advisor, Franklin Properties Inc., Franklin Resources
Inc., certain of the Company's directors and Bear Stearns Co. Inc. The complaint
alleges that defendants breached fiduciary duties to plaintiff and certain other
shareholders in connection with the merger of FREIF into Franklin Select Realty
Trust in May 1996. Plaintiff also alleges that defendants misstated certain
material facts or omitted to state material facts in connection with this
transaction. Plaintiff seeks damages in an unspecified amount. The defendants
deny any wrongdoing in these matters and intend to vigorously defend the action.
All defendants, including the Company, are challenging the legal sufficiency of
the complaint.
Management does not believe that the outcome of these matters will have a
material adverse affect on the Company's financial condition, results of
operations or cash flows.
NOTE 5 - STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("FAS 128") and No.
129 "Disclosure of Information About Capital Structure" ("FAS 129"). FAS 128
specifies the computation, presentation and disclosure requirements for earnings
per share for entities with publicly held common stock. In summary, FAS 128
would require the Company to present its net income per share on a basic and
diluted basis effective for financial statements issued for periods ending after
December 15, 1997. The Company has not yet determined what effect, if any, this
pronouncement will have on the Company's consolidated financial statements.
FAS 129 consolidates the existing disclosure requirements regarding an entity's
capital structure and becomes effective for financial statements issued for
periods ending after December 15, 1997. The Company has not yet determined what
effect, if any, this pronouncement will have on the Company's consolidated
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS
130") and No. 131 "Disclosures of Segment Information" ("FAS 131"). FAS 130
establishes the disclosure requirements for reporting comprehensive
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
Unaudited
NOTE 5 - STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS (Continued)
income in an entity's annual and interim financial statements and becomes
effective for the Company for the fiscal year ending December 31, 1998.
Comprehensive income includes unrealized gains and losses on securities
currently reported by the Company as a component of stockholders' equity which
the Company would be required to include in a financial statement and display
the accumulated balance of other comprehensive income seperately in the equity
section of the consolidated balance sheet. The Company has not yet determined
what effect, if any, this pronouncement will have on the Company's results of
operations.
FAS 131 establishes standards for determining an entity's operating segments and
the type and level of financial information to be disclosed. FAS 131 becomes
effective for financial statements issued for periods ending after December 15,
1997. The Company has not yet determined what effect, if any, this pronouncement
will have on the Company's consolidated financial statements.
NOTE 6 - SUBSEQUENT EVENT
In October, 1997 the Company filed a registration statement on Form S-3 to
register 1,625,000 shares of the Company's Series A common stock to accommodate
the potential conversion of a like number of limited partnership units held by
the limited partners of FSRT, L.P.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion is based primarily on the consolidated financial
statements of the Company for the period ended September 30, 1997. The
information should be read in conjunction with the accompanying consolidated
financial statements and the notes thereto.
When used in the following discussion, the words "believes," "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected, including, but not
limited to, those set forth in the section entitled "Potential Factors Affecting
Future Operating Results," below. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND
1996
Total revenue for the three- and nine-month periods ended September 30, 1997
increased $894,000, or 25%, and $2,441,000, or 23%, compared to the same periods
in 1996. These increases were primarily due to rental revenue provided by the
LAM Research Buildings and the Tanon Building acquired in October, 1996, and
April, 1997, respectively. The increase in rental revenue was partially offset
by a decrease in interest revenue due to the sale of mortgage-backed securities
in the fourth quarter of 1996.
Total expenses for the three- and nine-month periods ended September 30, 1997,
increased $1,007,000, or 42%, and $2,211,000, or 29%, respectively, when
compared to the same periods in 1996. The increases for the periods reported
were primarily as a result of increases in interest, depreciation and
amortization, operating, and minority interest expenses related to the LAM
Research Buildings and the Tanon Building. These increases were partially offset
by a decrease in non-recurring expenses related to the Merger.
Related party expense for the three- and nine-month periods ended September 30,
1997 increased 20% and 24%, respectively, compared to the same periods in 1996,
primarily as a result of an increase in advisory fees as a result of the
acquisition of the LAM Research Buildings and the Tanon Building, and the
adoption of the Company's advisory agreement by the two REITs that merged with
the Company in May, 1996. Prior to the Merger, the REITs operated under advisory
agreements containing different methods of compensation to the Advisor.
General and administrative expense for the three- and nine-month periods ended
September 30, 1997, decreased 19% and 13%, respectively, compared to the same
periods in 1996 as a result of decreases in directors' and officers' insurance
premiums, and merger related expenses. These decreases were partially offset by
increases in legal fees as a result of the litigation described in Note 3,
transfer agent expense and accounting expense.
The decrease in net income for the three-month period under review was primarily
due to an increase in interest expense as a result of an increase in the
outstanding balance on the line of credit. The increase in interest expense was
partially offset by an increase in net income from property operations. Net
income increased during the nine-month period ended September 30, 1997 when
compared to the same period in 1996 primarily as a result of an increase in
rental income and a decrease in consolidation expenses, partially offset by
increased property operating expenses and interest expense relating to recently
acquired properties.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, cash and cash equivalents aggregated $4,186,000 which the
Company believes is adequate to meet its short-term operating cash requirements.
The Company also has access to a revolving line of credit in the amount of $25
million and holds $531,000 in mortgage-backed securities. At September 30, 1997,
the outstanding balance under the Company's credit facility was $7.6 million.
Borrowings under the line of credit bear interest at the London Interbank
Offered Rate plus 1.90%, or at Bank of America's Reference rate at the Company's
option. On July 30, 1997, the Company refinanced $5.1 million of borrowings
under the line of credit with a fixed rate loan provided by First Nationwide
Life Insurance Company in the amount of $5.16 million. The new debt is
collateralized by the R&D building and bears monthly principal and interest
payments at 8.47% per annum, based on a 25-year amortization schedule, with the
remaining principal maturing on August 1, 2004. At September 30, 1997 the
weighted average interest rate of borrowings under the line of credit was 7.68%.
Management continues to evaluate properties for acquisition by the Company. The
Company expects to fund the cost of acquisitions, capital expenditures, costs
associated with lease renewals and reletting of space, repayment of
indebtedness, and development of properties from (i) cash flow from operations,
(ii) borrowings under its credit facility and, if available, other indebtedness
(which may include indebtedness assumed in acquisitions), (iii) proceeds from
the sale of the Company's equity securities, and (iv) the issuance of
partnership interests in connection with acquisitions. The Company's operating
cash flow has been its principal source of capital for minor property
improvements, leasing costs and the payment of quarterly distributions.
Net cash provided by operating activities for the nine-month period ended
September 30, 1997 was $6,881,000, or $1,356,000 more than the same period in
1996. The increase in cash flow provided by operating activities is primarily
attributable to the acquisition of the Lam Research Buildings and the Tanon
Building, and a decrease in consolidation expense.
Net cash used in investing activities and net cash provided by financing
activities increased $14,053,000 and $13,372,000, respectively, when compared to
the same period in 1996 primarily as a result of the acquisition of the Tanon
Building and the undeveloped land.
Management has decided to sell the Carmel Mountain Gateway Plaza. The sale of
the property is not expected to result in a material gain or loss to the
Company. Until a replacement property is purchased, management expects to apply
the sale proceeds to the outstanding balance of the Company's line of credit, or
temporarily invest the proceeds in short term securities. Any dilution to the
Company's earnings during that time is not expected to be material.
Management does not believe that the outcome of the litigation described in Note
4 to the accompanying financial statements will have a material adverse affect
on the Company's financial condition or results of operations.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Management believes that the Company's sources of capital as described under
Liquidity and Capital Resources are adequate to meet its liquidity needs in the
foreseeable future.
IMPACT OF INFLATION
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.
CASH DISTRIBUTION POLICY
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.
During the nine month period ended September 30, 1997, the Company declared
distributions related to the Series A common stock totaling $4,042,000.
FUNDS FROM OPERATIONS
The Company considers funds from operations to be a useful measure of the
operating performance of an equity REIT because, together with net income and
cash flows, Funds from operations provides investors with an additional basis to
evaluate the ability of a REIT to support general operating expense 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 stockholders. 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
revised NAREIT definition. 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.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
FUNDS FROM OPERATIONS (Continued)
For the Nine Months Ended
Funds from Operations September 30,
(In thousands) 1997 1996
- ----------------------------------------------------------------------------
Net income $3,248 $3,018
Add: Depreciation and amortization 3,091 2,491
- ----------------------------------------------------------------------------
Funds from Operations $6,339 $5,509
============================================================================
The primary difference between the periods reflects the changes in net income as
discussed under "Results of Operations".
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
DECLINE IN INTEREST INCOME, LOSS ON SALE OF MORTGAGE-BACKED SECURITIES
In prior years, net income has been positively affected by interest income that
the Company earned on its investments in mortgage-backed securities. In
addition, the Company periodically incurred losses upon the sale of certain of
the securities. Late in 1996, the Company liquidated substantially all of its
mortgage-backed securities in order to provide funds to repurchase a portion of
its outstanding common stock. Therefore, the Company does not anticipate
generating significant amounts of interest income, or losses on the sale of
mortgage-backed securities, in future years. The repurchase of the Company's
common stock was not detrimental to the Company's operating results in 1996
calculated on a per share basis, due to the related decline in the number of
shares outstanding.
LEASING TURNOVER
In connection with any lease renewal or new lease, the Company typically incurs
costs for tenant improvements and leasing commissions which will be funded first
from operating cash flow and, if necessary, from cash reserves or the line of
credit. In addition, while the Company has historically been successful in
renewing and releasing space, the Company will be subject to the risk that
leases expiring in the future may be renewed or released at terms that are less
favorable than current lease terms.
CONTINENTAL CASUALTY COMPANY LEASE
The Company completed the renewal of the Continental Casualty Company's
("CNA") lease at Fairway Center. The CNA lease, which covers 74,500 square
feet, was renewed for a period of five years commencing November 1, 1997.
Annual rental income to be received under the new lease will decline
approximately $430,000 compared to the existing lease due to lower market
rental rates. Management believes the rental rates of the other tenants at
the Fairway Center are substantially at market rates. The Company will incur
costs for tenant improvements and leasing commissions related to the CNA
lease totaling approximately $740,000 which the Company expects to fund from
its operating cash flow by June 30, 1998.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS (Continued)
LEASING TURNOVER - DATA GENERAL BUILDING
Over the next eighteen months, the Company's greatest leasing exposure consists
of one lease at the Data General Building covering approximately 48,000 square
feet, which expires in January 1999. The lease carries a triple net rental rate
that is equivalent to approximately $28.00 per square foot on a full service
basis. Compared to the estimated current market rate of $19.80 per square foot,
this lease provides overmarket rent of approximately $394,000 annually, or 2% of
the Company's current annual revenue based on annualizing the total revenue for
the quarter ended September 30, 1997. It is impossible to predict the market
rental rate in 1999; however, the Company expects that when this lease expires,
the rental income related to this space will be less than $28.00 per square foot
regardless of whether the lease is renewed or new leases are signed. The Company
will also incur costs for tenant improvements and leasing commissions related to
the renewal or re-leasing of the space, however, the amounts are unknown at this
time.
During the current quarter, the Company renewed the lease of another significant
tenant at the Data General Building that currently occupies approximately 48,000
square feet of space. The new five year lease commences on December 1, 1997 and
covers approximately 33,000 square feet. The effective rental rate under the new
lease is approximately 14% greater that the existing lease on a per square foot
basis. The Company will incur costs for tenant improvements related to this
lease totaling approximately $200,000 during 1998. The remaining 15,000 square
feet of space is being actively marketed to prospective tenants.
FRANKLIN SELECT REALTY TRUST
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Not applicable
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended September 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN SELECT REALTY TRUST
By: /S/ DAVID P. GOSS
David P. Goss
Chief Executive Officer
Date: NOVEMBER 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,186
<SECURITIES> 531
<RECEIVABLES> 1,866
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 134,534
<DEPRECIATION> 0
<TOTAL-ASSETS> 143,528
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 109,455
<OTHER-SE> (13,585)
<TOTAL-LIABILITY-AND-EQUITY> 143,528
<SALES> 0
<TOTAL-REVENUES> 13,125
<CGS> 0
<TOTAL-COSTS> 9,877
<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> 3,248
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
