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, 1997. Commission File No. 0-12708
FRANKLIN SELECT REALTY TRUST
(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 number)
incorporation or organization)
P.O. Box 7777, San Mateo, CA (650) 312-2000
94403-7777
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(Address of principal and executive Company's telephone number, including
Office) 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
At March 11, 1998, 10,533,653 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 $ 6.625 as of March 11, 1998, is $69,785,451.
Indicate the number of shares outstanding of each of the Company's classes of
common stock at December 31, 1997: 12,250,374 shares of Series A common
stock and 745,584 shares of Series B common stock.
PART I
Item 1. BUSINESS
DESCRIPTION OF BUSINESS
Franklin Select Realty Trust, formerly 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"). At December 31, 1997, the Company's property portfolio
consisted of ownership interests in the following eleven properties: (i)
four industrial research and development properties containing approximately
546,000 rentable square feet of space; (ii) three suburban office properties
containing approximately 402,000 rentable square feet of space; (iii) three
neighborhood shopping centers containing approximately 205,000 rentable
square feet of space; and (iv) one 12.5 acre parcel of undeveloped land
located in Rancho Cordova, California. The Company's properties are primarily
concentrated in the greater San Francisco and Los Angeles areas from which
the Company derived 55% and 33% of its 1997 rental revenue, respectively.
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 Company does not have any employees. Nine of the Company's
commercial properties are managed by Continental Property Management Co.
("CPMC"), an affiliate of the Advisor, and the remaining commercial property
is managed by an unaffiliated management company, Cupertino Capital. Both
CPMC and Cupertino Capital perform the leasing, re-leasing and
management-related services for their respective properties. The Advisor is
a wholly-owned subsidiary of Franklin Resources, Inc., ("Franklin") whose
primary business is the $232 billion Franklin Templeton Group of Funds.
In 1995, the Boards of Directors of the Company and of two other real estate
investment trusts that the Advisor advised, Franklin Real Estate Income Fund
("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage"),
agreed to the merger of the three real estate investment trusts. At a
Special Meeting of Stockholders held on May 7, 1996, the proposed merger of
Advantage and FREIF into the Company was approved (the "Merger") by a
majority of the outstanding shares of each of the three companies, and the
surviving entity was renamed Franklin Select Realty Trust. Shares of the
Company were issued in exchange for the shares of Advantage and FREIF on the
basis described in a Joint Proxy Statement/Prospectus filed with the
Securities and Exchange Commission. The financial and operating results of
periods prior to the Merger have been restated to give effect to the Merger.
In 1996, the Company formed a limited partnership, FSRT L.P.("FSRT"), in
order to acquire two industrial R & D buildings located in Fremont,
California (the "Lam Research Buildings"). FSRT assumed the existing
financing on the Lam Research Buildings and issued 1,625,000 limited
partnership units to the owner of the property in exchange for its equity
interest in the property. The limited partnership units are convertible into
Series A shares of the Company's common stock on a one-for-one basis. The
Company is the sole general partner of FSRT and holds an approximate 70%
ownership interest in FSRT. The Company may contribute all of its remaining
properties to FSRT at some later date. The Company is subject to certain
restrictions regarding the sale or refinance of certain properties owned by
FSRT.
All references to the Company in this report refer to Franklin Select Realty
Trust and its majority owned, consolidated limited partnership, FSRT. Unless
otherwise specified, information about the Company and the properties
includes the operations of FSRT, and refers to the Company after the
completion of the Merger, and the combined operations of the Company, FREIF,
and Advantage prior to the completion of the Merger.
INVESTMENT AND OPERATING STRATEGY
The Company acquires income-producing real estate investments located in
California with cash flow growth potential, although it has the flexibility
to purchase properties elsewhere. The Company's investment strategy is
focused on the five major metropolitan areas in California: the Los Angeles
metropolitan area, Orange County, the Sacramento metropolitan area, San Diego
County and the San Francisco Bay area. In addition, the Company may consider
strategic acquisitions in other states.
The Company's investment program includes providing stockholders with a
professionally managed diversified portfolio of income-producing equity real
estate investments in strategic markets which present the potential for
current cash flow and for capital appreciation. The Company's business
strategy is to expand the size and scope as well as increase the
profitability of its current operations. Traditionally, the Company has
identified individual properties suitable for acquisition and acquired them
for cash. The Company also acquires property portfolios in exchange for
equity. In particular, the Company seeks 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.
The Company anticipates that a portion of its future acquisitions may be
achieved through the issuance of common stock or partnership interests. The
Company will carefully limit its use of debt financing as discussed under
"Financing Policy and Related Matters". It is anticipated that the Company
will issue additional limited partnership units of FSRT, or of similarly
structured partnerships, to make certain acquisitions. The issuance or
exchange of such partnership units can provide important tax benefits to a
real estate seller that can enhance the price and other terms of the
acquisition, or induce a seller to sell its property when other forms of
consideration may not be as attractive. The Company may decide to contribute
all of its remaining properties to FSRT at some later date. It is expected
that the Company will serve as the general partner and hold a majority
ownership interest in any new acquisition partnership vehicles.
After properties are acquired, the Company places a strong emphasis on
leasing and tenant retention in combination with a program of regular
maintenance, periodic renovation and capital improvement. Sophisticated
management and accounting systems linked together through a computer network
provide detailed and timely reports on property operations to the Advisor's
asset management staff. The Company views aggressive and involved property
management as crucial to maintaining and improving both cash flow from, and
the market value of, its properties.
Properties are acquired with a view to holding them as long-term
investments. When appropriate, however, the Company seeks to realize the
value of its properties through financings, refinancings, sales or exchanges.
While the Company currently follows the investment policies described above,
they are guidelines only and may be changed by the Board of Directors without
a vote of the Company's stockholders.
FINANCING POLICY AND RELATED MATTERS
The Company's present policy is to maintain a debt to total assets ratio not
to exceed 50%. At December 31, 1997, the Company's debt to total assets
ratio was 28%. The Company may from time to time modify its debt policy in
light of then current economic conditions, relative costs of debt and equity
financings, fluctuations in the fair market price of the Company's common
stock, growth and acquisition opportunities and other factors. Accordingly,
the Company may increase its debt to total assets ratio beyond the limit
described above. However, the Company's by-laws prohibit the aggregate
amount of the Company's indebtedness from exceeding 300% of its net assets,
and prohibit unsecured borrowings which result in asset coverage of less than
300%.
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) the sale of real estate investments, (iv) the sale of the Company's
equity securities, and (v) the issuance of partnership interests in
connection with acquisitions.
The Company is subject to the risks normally associated with debt financing,
including the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest, that the Company will not be
able to refinance existing indebtedness on the encumbered properties or that
the terms of such refinancing will not be as favorable as the terms of
existing indebtedness.
CASH DISTRIBUTION POLICY
Distributions are declared quarterly at the discretion of the Board of
Directors. The Company's present distribution policy is to evaluate the
current distribution rate, at least annually, in light of anticipated tenant
turnover over the next two to 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.
MATTERS THAT MAY AFFECT THE COMPANY'S RESULTS
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, Nevada and the national
markets; 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.
All of the Company's properties are located in areas that are subject to
earthquake activity. 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.
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.
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, it 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.
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.
GOVERNMENT REGULATION
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. None of these inspection reports has revealed any
environmental conditions requiring material expenditures for remediation.
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 believes that it is in compliance in all material
respects with all federal, state and local laws regarding hazardous or toxic
substances, and the Company has not been notified by any governmental
authority of any non-compliance or other claim in connection with any of its
present or former properties. The Company does not anticipate that
compliance with federal, state and local environmental protection regulations
will have any material adverse impact on the financial position, results of
operations or liquidity of the Company.
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 or 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.
The Company has not received any reports from federal or state agencies
relieving it of 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 foreseeable 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 were to be required to clean up the contamination of the Data
General Building site, it would seek full indemnity from the oil companies
which were the source of the contamination.
The 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 properties to determine whether the exterior and common
areas of such properties 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.
Item 2. PROPERTIES
PORTFOLIO SUMMARY
At December 31, 1997, the Company's property portfolio consisted of ten
income-producing properties and one parcel of undeveloped land. The
properties are located in the greater San Francisco, Los Angeles and San
Diego metropolitan areas of California and in Reno, Nevada. The Company's
properties were 97% leased at December 31, 1997 as compared to 98% leased at
the end of 1996. The Company's real estate investments (net of accumulated
depreciation) were diversified by property type as follows:
Number of Investment
Properties Amounts % of Total
Industrial R&D 4 $51,818,000 37%
Properties
Office Properties 3 62,595,000 44%
Retail Centers 3 22,410,000 16%
Undeveloped land 1 4,275,000 3%
Total 11 $141,098,000 100%
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<TABLE>
<CAPTION>
The following table describes the Company's rental properties:
Total Rentable Average
Property Name/ Location Square Year Occupancy 1997 Rental
Footage Acquired During 1997 Revenue
<S> <C> <C> <C> <C>
Industrial R&D Properties:
The Northport Buildings
Fremont, California 144,624 1991 99% $1,796,000
The Lam Research Buildings
Fremont, California 211,680 1996 100% 2,440,000
The Tanon Building
Fremont, California 108,600 1997 100% 873,000
The Hathaway Business Park
Fremont, California 80,752 1997 100% 82,000
------------------- ---------------
545,656 $5,191,000
Office Properties:
The Shores
Redwood City, California 138,546 1989 100% 3,480,000
The Data General Building
Manhattan Beach, California 118,996 1989 99% 2,668,000
The Fairway Center
Brea, California 144,727 1992 99% 3,134,000
------------------- ---------------
402,269 $9,282,000
Retail Centers:
Mira Loma Shopping Center
Reno, Nevada 94,361 1988 81% 997,000
Glen Cove Center
Vallejo, California 66,000 1994 97% 984,000
Carmel Mountain Gateway Plaza
San Diego, California 44,230 1994 100% 1,068,000
------------------- ---------------
204,591 $3,049,100
=================== ===============
Total 1,152,516 98% $17,522,000
=================== ===============
</TABLE>
The Company or FSRT owns a fee interest in each property. For information
related to the encumbrances of the individual properties, see Note 4 to
Consolidated Financial Statements and Schedule III.
At December 31, 1997, the Company's property portfolio contained a total of
84 leases. The Company's portfolio represents in the aggregate, 1,152,516
rentable square feet of which 1,114,388 square feet were leased at year end.
The following table sets forth for all of the Company's properties the lease
expiration dates and the related annual base rental income at December 31,
1997.
No. of Current % of
Leases Total Annualized Current
Year Expiring Sq. Ft. Base Rent1 Annual Rent
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1998 17 51,282 $ 808,000 5%
1999 11 96,823 1,952,000 12%
2000 11 44,074 991,000 6%
2001 10 111,926 1,760,000 11%
2002 16 200,255 3,396,000 22%
2003 5 171,757 1,461,000 9%
2004 3 63,555 690,000 4%
2005 3 40,525 395,000 3%
2006 1 12,078 193,000 1%
2007 - - - -
2008 1 22,400 321,000 2%
2009 1 16,648 372,000 3%
2010 1 50,360 552,000 4%
2011 - - - -
2012 2 6,000 334,000 2%
2013 1 15,025 109,000 1%
2014 1 211,680 2,386,000 15%
Total 84 1,114,388 15,720,000 100%
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==============================================================================
1 Annualized Base Rent means the product of (i) the
monthly base rent in effect with respect to each
property at December 31, 1997 or, if such monthly
base rent has been reduced by a temporary rent
concession, the monthly base rent that would have
been in effect at such date in the absence of
such concession, and (ii) 12. Annualized Base
Rent does not reflect any increases or decreases
in monthly rental rates or lease expirations
which are scheduled to occur or which may occur
after the date of calculation or the cost of any
leasing commissions or tenant improvements.
SIGNIFICANT TENANTS
One of the Company's tenants provides 10% or more of the Company's annual
base rental income at December 31, 1997.
<TABLE>
<CAPTION>
Annualized
Tenant Name/Property Square Base Rent % of Total Lease Renewal
Feet at 12/31/97 Base Rent Expiration Options
<S> <C> <C> <C> <C> <C>
Lam Research Corporation:
Lam Research Buildings 211,680 $2,386,000 15% 12/31/2014 2-5 yr.
Northport Buildings 58,130 $506,000 3% 07/31/2003 1-5 yr.
</TABLE>
Item 3. LEGAL PROCEEDINGS
The Company is currently defending the former directors of Advantage against
a purported class action complaint filed in the California Superior Court for
San Mateo on December 2, 1996 by two stockholders for themselves and
purportedly on behalf of certain other minority stockholders of Advantage.
Other defendants to the complaint currently include Franklin Resources, Inc.
and the Company's advisor, Franklin Properties, Inc. 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 a 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, the plaintiffs have
filed an amended complaint to address the court's response to such filings.
Document production by the defendants is currently in progress.
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., 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. Document production by the
defendants is currently in progress.
Management does not believe that the outcome of these matters will have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the last
quarter 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"). At December 31, 1997, the Company had
12,250,374 Series A common shares outstanding and 745,584 Series B common
shares outstanding, and there were approximately 2,600 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.
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 laws and regulations.
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 for the past two years and the distributions per
share declared each quarter. For periods prior to the Merger on May 7, 1996,
the amounts shown do not reflect those of FREIF and Advantage.
DISTRIBUTIONS
QUARTER ENDED HIGH LOW DECLARED
December 31, 1997 $ 7 $ 5 11/16 .12
September 30, 1997 6 1/8 5 1/2 .11
June 30, 1997 6 1/4 5 1/2 .11
March 31, 1997 6 1/4 5 3/8 .11
December 31, 1996 $ 5 7/8 $ 4 11/16 .11
September 30, 1996 5 4 1/2 .11
June 30, 1996 5 1/4 4 1/2 .11
March 31, 1996 5 1/8 3 15/16 .11
The Company has a policy, subject to the discretion of the Board of
Directors, of making quarterly cash distributions to stockholders aggregating
on an annual basis at least 95% of its taxable income. For the years ended
December 31, 1997, and 1996, the Company declared distributions to the Series
A stockholders of approximately $5,513,000 ($.45 per share) and $5,860,000
($.44 per share), respectively. Cash distributions to stockholders are
currently paid on approximately the 15th day of January, April, July and
October. Stockholders 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.
DIVIDEND REINVESTMENT PLAN
The Company has established a Dividend Reinvestment Plan (the "Plan") which
is designed to enable Company Series A stockholders 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. 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 have been issued in connection with the Plan. In order
to participate in the Plan, investors must designate that they would like
their distributions reinvested. Company Series A stockholders may elect to
participate in the Plan at any time. The Plan does not accept cash
contributions from Company stockholders to purchase additional shares of
existing Company common stock. Only distributions related to existing
Company common stock may be reinvested. For information on how to
participate in the Dividend Reinvestment Plan, please contact the Company's
transfer agent at (800) 851-4217.
RETURN OF CAPITAL
Because depreciation is a non-cash expense, cash flow will typically be
greater than earnings from operations and net income. Therefore, quarterly
distributions will generally be higher than quarterly earnings which causes a
portion of the distributions to be considered a return of capital. The
portion of distributions that represented a return of capital for financial
statement purposes on a consolidated basis, for the years ended December 31,
1997, and 1996, was $1,345,000 and $2,053,000, respectively.
REIT QUALIFICATION MATTERS
The Company is a 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.
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 Board of 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 stockholders, in the event certain
stockholders (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 stockholders 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.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands except per share amounts) Restated1 Restated1 Restated1
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total revenues $17,726 $14,568 $14,111 $12,990 $12,877
Net income $4,168 $3,807 $4,462 $4,273 $4,438
Per Series A common share1:
Net income $0.34 $0.28 $0.32 $0.30 $0.31
Distributions declared $0.45 $0.44 $0.44 $0.44 $0.43
Weighted average number of shares of
Series A common stock outstanding 12,250 13,830 14,145 14,145 14,145
Balance Sheet Data:
Total assets $150,097 $131,298 $116,457 $117,873 $114,820
Debt $42,487 $22,745 $7,145 $7,279 $3,015
Stockholders' equity $95,316 $96,653 $106,986 $108,316 $111,000
Other Data:
Funds from operations2 $8,171 $7,235 $7,795 $7,396 $7,337
Cash flow from
Operating activities $9,187 $7,831 $8,359 $8,771 $5,282
Investing activities ($17,734) $4,140 $31 ($5,904) $3,940
Financing activities $9,810 ($15,599) ($6,404) ($3,184) ($6,173)
Total rentable square footage of properties
at end of period 1,152,516 963,624 751,944 751,944 641,714
Number of properties at end of period 11 8 7 7 5
</TABLE>
1 Amounts reported for 1993 through 1995 have been restated to give
effect to the Merger.
2 Funds from operations, as defined by the National Association of Real
Estate Investment Trusts ("NAREIT"), means net income (loss) from
operations, excluding gains or losses from debt restructuring and sales
of property, plus depreciation and amortization, and after adjustment
for unconsolidated joint ventures. 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. Funds from operations does not represent net income
or cash flows from operations as defined by GAAP and does not
necessarily indicate that the cash flows will be sufficient to fund
cash needs. It should not be considered as an alternative to net
income 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. Funds from operations 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. The Company reports funds from
operations in accordance with the revised NAREIT definition. The
change in the NAREIT definition in 1995 had no material effect on the
amounts previously reported by the Company as funds from operations.
Funds from operations disclosed by other REITs may not be comparable to
the Company's calculation of funds from operations.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company's day-to-day operations are managed by Franklin Properties, Inc.
(the "Advisor," or "Management") under the terms of an advisory agreement
which is renewable annually. The Company does not have any employees.
Property management for nine of the Company's ten operating rental properties
is provided by Continental Property Management Co. ("CPMC"), an affiliate of
the Advisor, and the remaining property is managed by an unaffiliated
company, Cupertino Capital. Both management companies perform the leasing,
re-leasing and management-related services for their respective properties.
The Advisor is a wholly owned subsidiary of Franklin Resources, Inc. whose
primary business is the $222 billion Franklin Templeton Group of Funds.
In 1995, the Boards of Directors of the Company and of two other real estate
investment trusts that the Advisor advised, Franklin Real Estate Income Fund
("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage"),
agreed to the merger of the three real estate investment trusts. At a
Special Meeting of Stockholders held on May 7, 1996, the proposed merger of
Advantage and FREIF into the Company was approved (the "Merger") by a
majority of the outstanding shares of each of the three companies, and the
surviving entity was renamed Franklin Select Realty Trust. The consolidated
financial information of the Company has been presented as a reorganization
of entities under common control; therefore, the results of periods prior to
the Merger have been restated so as to give retroactive effect to the Merger.
The following discussion is based primarily on the consolidated financial
statements of the Company for the year ended December 31, 1997 and the
restated, combined financial statements of the Company, FREIF and Advantage
for the prior periods presented. This discussion should be read in
conjunction with the accompanying consolidated financial statements and 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.
GENERAL BACKGROUND
The Company's rental revenue is generated by investments in the following ten
properties: (i) four industrial R&D properties comprising 545,656 rentable
square feet of space, (ii) three office properties comprising 402,269
rentable square feet of space, and (iii) three retail centers, comprising
204,591 rentable square feet of space. Six of the properties are
concentrated in the greater San Francisco and Los Angeles areas from which
the Company derived 55% and 33% of its 1997 rental revenue, respectively.
The remaining two properties are located in San Diego, California and Reno,
Nevada. At December 31, 1997, the Company also owned 12.5 acre parcel of
undeveloped land which was sold in January, 1998.
1997 SUMMARY
The Company's property operations were stable in relation to the prior year,
both with respect to rental rates and average occupancy. Average occupancy
rates increased slightly from 95% in 1996 to 98% in 1997. The transactions
that had the greatest influence on the Company's reported results in 1997
were:
(i) the acquisition of an industrial research and development property in
April 1997 (the "Tanon Buildings");
(ii) the acquisition of 12.5 acre parcel of undeveloped land in June 1997
("Prospect Park"); and
(iii) the acquisition of an industrial research and development property in
November 1997 (the "Hathaway Business Park").
The Company financed the acquisitions of the research and development
properties with a combination of permanent financing and draws under its line
of credit. The acquisition of the undeveloped parcel of land was financed by
a draw on the line of credit.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Total revenue increased 22% in 1997 over 1996. The increase was attributable
to a 26% increase in rental revenue offset by a decrease in interest income.
Rental revenues increased over the prior year as a result of the Lam Research
Buildings acquisition that took place in the last quarter of 1996 as well as
the acquisition of the Tanon Building and Hathaway Business Park that took
place in 1997. Occupancy rates and rental revenues remained stable on the
existing properties occupied throughout both periods. The decline in
interest income was due to the sale of securities used to finance the
purchase of dissenting shareholders' stock in 1996.
Total expenses rose $2.8 million (26%) in 1997 primarily due to the
acquisition of property by the Company. The addition of the Lam buildings in
October 1996 and the acquisitions in 1997 has led to an increase in interest
expense, depreciation and operational costs.
Interest expense increased $1,874,000 (208%), net of amounts capitalized,
over the prior period as a result of the additional borrowings used to
finance the purchase of the three new properties in 1997 and on borrowings
used to finance the Lam Research Building acquired in October, 1996. An
additional $19,742,000 of debt was added in 1997 net of repayments. The
weighted average interest rate on borrowings decreased from 8.75% in 1996 to
8.63% in 1997.
Property operating expenses increased 11% in 1997 as compared to the prior
period. This was consistent with the increase in property owned by the
Company. Property taxes and utility expenses formed the bulk of the
increased costs experienced in 1997.
There was no change in the agreements between the Company and related parties
during the year. The $249,000 (21%) increase in related party expense was
primarily due to the increase in the total gross book value of real estate
owned by the Company, which caused the advisory fees to increase by $215,000
(40%) over the prior year.
General and administrative expenses remained at 1996 levels, despite the
Company's expansion. Lower director's and officer's insurance expense, stock
exchange fees and general expenses in 1997 reflect the economies of scale
achieved by the merger of the REITs in 1996. These benefits were offset by
legal fees totaling approximately $110,000 which were incurred in defending
the Company against two shareholder lawsuits (see Note 10 to the Consolidated
Financial Statements).
The minority interest in FSRT L.P. net income increased $537,000 (502%) in
1997 as compared to the prior year as the partnership was set up in October
1996 and therefore 1997 reflects a full year of activity.
Consolidated net income increased 9.5% to $4,168,000 in 1997 as a result of
the increased revenue from properties acquired in the period that was in
excess of the additional costs incurred. In addition, 1997 net income
increased with the absence of merger related expenses and a realization of
some of the economies of scale associated with the completion of the Merger.
These benefits were partially offset by reduced interest income related to
the sale of securities in 1996, and to increased legal expenses. Net income
per share increased by a greater amount, 21%, due to the reduced number of
shares of common stock outstanding during 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Total revenue increased approximately 3% compared to 1995 primarily due to
rental revenue provided by the Lam Research Buildings which were acquired on
October 31, 1996. Rental revenue for the seven properties that the Company
owned for the entire year improved 1% in 1996, reflecting stable rental rates
and occupancy rates for both periods. Interest income declined $75,000
compared to 1995 due to the sale of mortgage-backed securities in October
1996.
Total expenses increased approximately $1,112,000, or 12%, compared to 1995
primarily due to an increase in expenses related to the Merger, and due to
interest expense, depreciation expense and minority interest expense related
to the Lam Research Buildings which were acquired in 1996.
During 1996, the Company incurred non-recurring expenses related to the
Merger, totaling approximately $919,000 compared to $456,000 in 1995. The
expenses were comprised of: (i) consolidation expense of $695,000 and
$394,000, respectively, (ii) general and administrative expenses of $73,000
and $62,000, respectively, and (iii) a loss on the sale of mortgage-backed
securities of $151,000 in 1996, which was recorded when the Company sold
securities to provide cash for the repurchase of shares dissenting from the
Merger.
Property operating expenses, which generally include maintenance and repairs,
property taxes, utilities, and on-site administrative expense, declined
slightly compared to 1995 due to non-recurring expenses recorded in 1995
related to discontinuing operations of a self service car wash at the Mira
Loma Center. Excluding those expenses, operating expenses increased
approximately 1% compared to 1995. In 1996, minor increases in several
expense categories were offset by a decline in electricity expense caused by
milder summertime temperatures in Southern California. The acquisition of
the Lam Research Buildings did not cause property operating expenses to
increase in 1996 since the tenant pays the expenses directly.
Related party expense increased $175,000, or 17% in 1996 reflecting an
increase in advisory fees of $201,000, and an increase in property management
fees of $12,000, which were partially offset by a decline of $38,000 in
reimbursements to the Advisor for accounting and data processing costs. The
increase in advisory fees was caused by the acquisition of the Lam Research
Buildings, 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 increased approximately $136,000 in 1996
primarily due to legal and consulting fees related to locating potential
property acquisitions, expenses of transferring ownership of the Data General
Building to FSRT, and a temporary increase in stock exchange fees that was
attributable to the Merger. Partly offsetting these increases were declines
in the cost of directors' and officers' insurance coverage and transfer agent
expense, reflecting economies of scale after the Merger.
Net income declined approximately $655,000, or 15% in 1996 largely due to an
increase in Merger-related expenses, an increase in advisory fees subsequent
to the Merger, and a decline in interest income caused by the sale of
mortgage-backed securities. Net income per share also declined, but by a
lesser percentage, due to a decline in the number of shares outstanding after
the Company purchased the dissenting shares.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's cash and cash equivalents aggregated
$3,821,000 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 which had an outstanding balance of
$11.2 million at year end. The Company also holds $501,000 of
mortgage-backed securities.
During 1997, the Company's cash and cash equivalents increased to $3,821,000
compared to $2,558,000 at December 31, 1996. The increase in cash was
generated from operating cash flows and from borrowings offset by amounts
paid to acquire property. Operations generated $9,187,000, an increase of
$1,356,000 over the previous year as a result of the property acquisitions in
late 1996 and during 1997 and due to the absence of merger related expenses.
The acquisition of property and other investing activities used $17,734,000
in 1997, compared to an inflow of cash in 1996 of $4,140,000. The inflow of
cash in the previous year was primarily the result of the sale of securities
to fund the repurchase of common stock. The Company borrowed $23,938,000 in
1997 to fund property acquisitions and refinance loans during the year, but
this cash inflow was offset by loan repayments and by distribution payments,
so that total cash generated from financing activities was $9,810,000 for
1997. At December 31, 1997 the Company believes its cash and cash
equivalents are adequate to meet its short-term operating cash requirements.
The Company's investment in mortgage-backed securities at December 31, 1997,
is represented by a FNMA adjustable rate pass-through certificate with a
market value of approximately $501,000. Although payments of principal and
interest are guaranteed by FNMA, changes in market interest rates may cause
the security's market value to fluctuate, which could result in a gain or
loss if the security is sold before maturity.
In 1996, the Company entered into an agreement with the Bank of America for a
$25 million secured revolving line of credit to provide funding for future
acquisitions and general business purposes. Borrowings under the line of
credit bear interest at the London Interbank Offered Rate ("LIBOR") plus
1.90%, or at the bank's Reference rate at the Company's option. The credit
facility is secured by mortgages on three of the Company's properties (which
collectively accounted for 47% of the Company's 1997 rental revenue),
together with the rental proceeds from such properties. At December 31,
1997, these properties comprised approximately 38% of the Company's net real
estate assets. The credit agreement contains customary representations,
restrictive covenants, and events of default, including a covenant limiting
quarterly distributions to 98% of funds from operations. The Company does
not anticipate that this covenant will adversely affect the ability of the
Company to declare distributions to shareholders under the Company's current
distribution policy. At December 31, 1997, the unused balance available
under the line of credit was $13.3 million
The Company's mortgage indebtedness has the following balloon payments:
1999-$4.0 million; 2003-$3.0 million; 2004-$4.6 million; and 2006-$13.4
million. In addition, the Company's $25 million credit facility, which had
an outstanding balance of $11.2 million at December 31, 1997, matures in
December of 1998. The credit facility agreement provides the Company with one
option to extend the maturity date of the credit facility for a period of one
year. The Company expects to exercise that option during 1998. The Company
does not anticipate that its cash flow from operations will be sufficient to
make all of the balloon payments of principal when due under its mortgage
indebtedness and its credit facility. The Company intends to make such
payments by refinancing or extending the indebtedness or by raising funds
through the sale of equity securities or properties. If the Company is
unable to extend, refinance, or payoff its indebtedness when due, the
mortgaged properties could be become the property of the mortgagee with a
subsequent loss of income and asset value to the Company.
As of December 31, 1997, the Company had approximately $4.2 million of
variable rate mortgage indebtedness outstanding which bears interest at a
floating rate tied to the Union Bank Reference Rate. In addition, the
outstanding balance under the Company's revolving line of credit bears
interest at a floating rate tied to the London Interbank Offered Rates
("LIBOR"). The Company intends to use the remaining portion of the line of
credit to provide short term financing for future acquisitions. An increase
in interest rates may have an adverse effect on the Company's net income and
Funds from Operations.
In 1998, the Company intends to remedy defects discovered in the window
system at Fairway Center for a cost of approximately $1.1 million. The
Company expects to receive $525,000 in partial settlement of a claim in
respect of the defects and will also pursue other third parties to further
offset the costs.
In connection with any lease renewal or new leasing, the Company will incur
costs for tenant improvements and leasing commissions which it intends to
fund first from operating cash flow and then, if necessary, from cash on hand
or the line of credit.
At December 31, 1997, the Company held two properties for sale: Prospect
Park, an undeveloped parcel of land that was sold in January 1998 for $4.5
million and Carmel Mountain, a retail center in San Diego that the Company
intends to sell in 1998. Approximately $4.1 million of the proceeds from
the sale of Prospect Park were used to reduce borrowings under the Line of
Credit. Net proceeds from the sale of Carmel Mountain after the payoff of
debt secured on the property will also be used to reduce borrowings under the
Line of Credit.
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. Inflation, however,
could increase the Company's borrowing costs.
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
DECLINE IN INTEREST INCOME, LOSS ON SALE OF MORTGAGE-BACKED SECURITIES
In years prior to 1997, net income was positively affected by interest income
that the Company earned from its investments in mortgage-backed securities.
In addition, the Company periodically sustained losses upon the sale of
certain of these securities. Late in 1996, the Company liquidated a
substantial portion 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, gains or losses from these securities, in future years. The
repurchase of the Company's common stock in 1996 has had a positive effect on
net income per share, due to the related decline in the number of shares
outstanding.
YEAR 2000
The Company is in the process of assessing the impact of Year 2000 issues on
its computer systems and applications. At this time, management believes
that the costs associated with resolving these issues will not have a
material effect on the Company's financial statements.
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 re-leasing space, the Company will be subject to
the risk that leases expiring in the future may be renewed or re-leased at
terms that are less favorable than current lease terms.
LEASING TURNOVER - DATA GENERAL BUILDING
The Data General Building is located in an area of Los Angeles County that
has historically been dominated by aerospace and defense related companies.
Because many of the defense programs that these companies are engaged in have
been curtailed, their office space requirements were substantially reduced,
causing greater vacancies and lower market rental rates. During 1997,
however, market conditions significantly improved. Based on the most
recently available reports from CB Commercial Real Estate Group, at October
31, 1997, the Manhattan Beach/El Segundo sub-market, had a total vacancy
factor of 22%, compared to 34% at October 31, 1996.
Over the next two years, the Company's leasing exposure at the Data General
Building consists of one lease covering 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 annual effective rental rate of the most recently executed lease at
the property ($20.10 per square foot) the expiring lease provides overmarket
rent of approximately $380,000 annually, or 2.1% of the Company's total
revenue in 1997. While it is impossible to predict the market rental rate in
1999, 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 upon the renewal
or re-leasing of the space, however, the amounts are unknown at this time.
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.
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 ("NAREIT"), 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 change in the NAREIT definition in 1995 had no
material effect on the amounts reported by the Company as funds from
operations in prior periods. 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.
FUNDS FROM OPERATIONS
(dollars in thousands)
Year ended December 31,
1997 1996 1995
Net income $4,168 $3,807 $4,462
Add: Depreciation and 4,003 3,428 3,333
amortization
Funds from Operations $8,171 $7,235 $7,795
------------------------------
==============================================================================
The primary difference between the periods reflects the changes in
Merger-related expenses and losses on the sale of mortgage-backed securities
as discussed under "Results of Operations." Funds from operations in 1997
also benefited from the Company's property acquisitions in 1996 and 1997.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Report of Independent Accountants 21
Consolidated Balance Sheets as
of December 31, 1997 and 1996 22
Consolidated Statements of Income
for the years ended December 31, 1997, 1996 and 1995 24
Consolidated Statements of Stockholders'
Equity for the years ended December
31, 1997, 1996 and 1995 26
Consolidated Statements of Cash Flows
for the years ended December 31, 1997,
1996 and 1995 27
Notes to Consolidated Financial Statements 28
Schedule III - Real Estate and Accumulated Depreciation 37
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.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Franklin Select Realty Trust
We have audited the accompanying consolidated balance sheets of Franklin
Select Realty Trust as of December 31, 1997 and 1996, the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997, and the
financial statement schedule of Real Estate and Accumulated Depreciation.
These financial statements and financial statement schedule are the
responsibility of Franklin Select Realty Trust'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 consolidated financial position of Franklin Select
Realty Trust as of December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 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 basic
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 26, 1998
C O N S O L I D A T E D B A L A N C E S H E E T S
<TABLE>
<CAPTION>
FRANKLIN SELECT REALTY TRUST
In thousands except per share amounts
As of December 31, 1997 and 1996 1997 1996
--------------------------------------------------------------------------------- --------------- --------------
<S> <C> <C>
ASSETS
Real estate
Rental property:
Land $38,787 $38,286
Buildings and improvements 110,733 103,339
--------------- --------------
149,520 141,625
Less: accumulated depreciation 20,817 17,583
--------------- --------------
128,703 124,042
Property held-for-sale, net of accumulated depreciation of $472 12,395 -
--------------- --------------
Real estate, net 141,098 124,042
Cash and cash equivalents 3,821 2,558
Mortgage-backed securities, available for sale 501 578
Deferred rent receivable 1,863 1,916
Deferred costs and other assets 2,814 2,204
=============== ==============
Total assets $150,097 $131,298
=============== ==============
--------------------------------------------------------------------------------- --------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Debt $42,487 $22,745
Tenant deposits, accounts payable and accrued expenses 1,391 1,223
Distributions payable 1,645 1,348
-------------- --------------
Total liabilities 45,523 25,316
--------------- --------------
Minority interest 9,258 9,329
--------------- --------------
Commitments and contingencies (Notes 6 and 10) - -
STOCKHOLDERS' EQUITY:
Common stock, Series A, without par value; stated value $10 per
share; 110,000 shares authorized; 12,250 shares 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 (28) (36)
Accumulated distributions in excess of net income (14,111) (12,766)
-------------- ---------------
Total stockholders' equity 95,316 96,653
=============== ==============
Total liabilities and stockholders' equity $150,097 $131,298
=============== ==============
-------------------------------------------------------------------------------- --------------- --------------
The accompanying notes are an integral part of these consolidated financial statements.
C ON S O L I D A T E D S T A T E M E N T S O F I N C O M E
FRANKLIN SELECT REALTY TRUST
In thousands, except per share amounts Restated
- ----------------------------------------------------- -------------- -------------- --------------
For the years ended December 31, 1997, 1996 and 1995 1997 1996 1995
- ----------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Rent $17,522 $13,926 $13,383
Interest, dividends, and other 204 642 728
-------------- -------------- --------------
Total revenue 17,726 14,568 14,111
-------------- -------------- --------------
EXPENSES:
Property operating 4,036 3,635 3,705
Interest 2,773 899 681
Related party 1,454 1,205 1,030
Consolidation - 695 394
General and administrative 648 642 506
Loss on sale of mortgage-backed securities - 151 -
Depreciation and amortization 4,003 3,427 3,333
-------------- -------------- --------------
Total expenses 12,914 10,654 9,649
-------------- -------------- --------------
Operating income before minority interest 4,812 3,914 4,462
Minority interest (644) (107) -
-------------- -------------- --------------
NET INCOME $4,168 $3,807 $4,462
============== ============== ==============
Net income per share, based on the weighted
average shares outstanding of Series A
common stock of 12,250, 13,830 and 14,145
for the years ended December 31, 1997,
1996 and 1995, respectively $.34 $.28 $.32
============== ============== ==============
Distributions per share, based on the weighted
average shares outstanding of Series +A
common stock of 12,250, 13,343 and 14,145
for the years ended December 31, 1997,
1996 and 1995, respectively $.45 $.44 $.44
============== ============== ==============
- ----------------------------------------------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C O N S O L I D A T E D S T A T E M E N T S
O F S T O C K H O L D E R S' E Q U I T Y
C O N S O L I D A T E D S T A T E M E N T S
O F S T O C K H O L D E R S' E Q U I T Y
FRANKLIN SELECT REALTY TRUST
In thousands
As of and for the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Unrealized
COMMON (loss)/gain on Accumulated
STOCK mortgage- distributions
Series A Series B backed in excess of
Shares Amount Shares Amount securities net income Total
- ---------------------------- ---------- ----------- ------- ---------- --------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995, restated 14,145 $111,572 746 $6,294 $(581) $(8,969) $108,316
Redemption of Series A
Common stock - (3) - - - - (3)
Unrealized gain on
Mortgage-backed
Securities - - - - 417 - 417
Net income - - - - - 4,462 4,462
Cash distributions on
Common stock - - - - - (6,206) (6,206)
- ---------------------------- ---------- ----------- ------- ---------- --------------- ----------------- -----------
Balance, December 31,
1995, restated 14,145 111,569 746 6,294 (164) (10,713) 106,986
Dissenting stockholders'
Interest (1,895) (8,408) - - - - (8,408)
Unrealized gain on
Mortgage-backed
Securities - - - - 128 - 128
Net income - - - - - 3,807 3,807
Cash distributions on
common stock - - - - - (5,860) (5,860)
- ---------------------------- ---------- ----------- ------- ---------- --------------- ----------------- -----------
Balance,
December 31, 1996 12,250 103,161 746 6,294 (36) (12,766) 96,653
Unrealized gain on
Mortgage-backed
Securities - - - - 8 - 8
Net income - - - - - 4,168 4,168
Cash distributions on
common stock - - - - - (5,513) (5,513)
============================ ========== =========== ======= ========== =============== ================= ===========
Balance,
December 31, 1997 12,250 $103,161 746 $6,294 $(28) $(14,111) $95,316
============================ ========== =========== ======= ========== =============== ================= ===========
The accompanying notes are an integral part of these consolidated financial statements.
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
FRANKLIN SELECT REALTY TRUST
In thousands Restated
- ----------------------------------------------------------------------- ----------- ------------- ------------
For the years ended December 31, 1997,1996 and 1995 1997 1996 1995
- ----------------------------------------------------------------------- ----------- ------------- ------------
<S> <C> <C> <C>
NET INCOME $4,168 $3,807 $4,462
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,171 3,440 3,335
Loss on sale of mortgage-backed securities - 151 -
Minority interest 644 107 -
Loss on disposition of rental property - - 100
Decrease in deferred rent receivable 53 54 44
(Increase) decrease in other assets (135) (27) 309
Increase in tenant deposits, accounts payable,
and accrued expenses 312 337 148
Decrease in advance rents (26) (38) (39)
----------- ------------- ------------
5,019 4,024 3,897
----------- ------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,187 7,831 8,359
----------- ------------- ------------
Acquisition of rental property (16,383) (1,428) -
Improvements to rental property (784) (627) (390)
Leasing commissions paid (652) (339) (371)
Disposition of mortgage-back securities 85 6,534 792
----------- ------------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (17,734) 4,140 31
----------- ------------- ------------
Borrowings under notes payable 23,938 16,222 -
Repayment of notes payable (7,791) (16,781) (134)
Payment of loan costs (288) (599) -
Repurchase of dissenting stockholders' interest - (8,408) -
Redemption of Series A common stock - - (3)
Distributions paid to stockholders and minority interest (6,049) (6,033) (6,267)
----------- ------------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 9,810 (15,599) (6,404)
----------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,263 (3,628) 1,986
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,558 6,186 4,200
=========== ============= ============
CASH AND CASH EQUIVALENTS, END OF YEAR $3,821 $2,558 $6,186
=========== ============= ============
</TABLE>
Supplemental cash flow information and non-cash investing and
financing activities - Notes 2 and 4.
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Franklin Select Realty Trust (the "Company") (formerly Franklin Select Real
Estate Income Fund) is a California corporation formed on January 5, 1989 for
the purpose of investing in income-producing real property. The Company `s
day-to-day operations are managed by Franklin Properties, Inc. (the
"Advisor", or "management") under the terms of an advisory agreement that is
renewable annually. On May 7, 1996 Franklin Real Estate Income Fund
("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage")
merged into the Company. In connection with the Merger of the three companies
(the "Merger"), the Company issued approximately 7,945,000 shares of Series A
common stock and 559,718 shares of Series B common stock in exchange for
3,363,877 and 3,013,713 shares of Series A common stock and 319,308 and
124,240 shares of Series B common stock of FREIF and Advantage, respectively,
in each case excluding dissenting shares. The Merger was accounted for as a
combination of entities under common control.
On November 1, 1996, the Company purchased approximately 635,638 shares of
FREIF Series A common stock and 1,077,667 shares of Company Series A common
stock from shareholders who had elected to exercise dissenter's rights
pursuant to Chapter 13 of the California General Corporation Law.
At December 31, 1997, the Company's real estate portfolio consisted of
ownership interests in eleven properties: four industrial research and
development properties, three suburban office properties, three retail
centers and a 12.5 acre parcel of undeveloped land.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company include all
accounts of the Company and its majority owned partnership, FSRT L.P.
("FSRT"). The Company is the sole General Partner of FSRT. All significant
intercompany amounts and transactions have been eliminated. The 1995
statements of income, stockholders' equity and cash flows have been restated
to give effect to the merger.
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.
REAL ESTATE
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. Tenant improvements are generally amortized over the lesser of
the improvements' useful life or the lease term. Significant improvements
and betterments are capitalized. Maintenance and repairs are charged to
expense when incurred. The Company capitalizes interest on property under
development.
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 analyses include 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 will
reduce the carrying value of the asset to fair value; however, to date, such
adjustments have not been required.
Property held-for-sale is held at the lower of cost or net realizable value.
Property is designated available-for-sale when it is being actively marketed
and the sale of the property is anticipated within twelve months.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits with banks,
debt instruments with original maturities of three months or less, and money
market funds, which are readily convertible into cash. Due to the relatively
short-term nature of these investments, the carrying value approximates fair
value.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held by the Company are classified as available
for sale and are carried at fair 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.
DEFERRED COSTS
Lease commissions are deferred and amortized using the straight-line method
over the term of the related lease. Loan fees and loan costs are deferred and
amortized using the straight-line method, which approximates the effective
interest method, over the term of the related loan.
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.
INCOME TAXES
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 is in compliance with these tests. Accordingly,
no provision is made for income taxes in these financial statements.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of mortgage-backed securities and
operating leases with tenants.
The Company places excess cash in short-term deposits with Franklin Money
Fund, 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.
NOTE 2 - REAL ESTATE ACQUISITION
During 1997, the Company acquired three properties, two of which were
acquired by FSRT and the third was purchased directly by the Company.
On April 1, 1997, FSRT purchased an industrial research and development
building in Fremont, California for approximately $8.5 million in cash (the
"Tanon Building").
On June 25, 1997, the Company purchased a 12.5 acre parcel of undeveloped
land in Rancho Cordova, California for approximately $4.1 million in cash
("Prospect Park") During 1997, the Company commenced development activities
and capitalized certain development costs of $32,000 and capitalized interest
of $165,000.
On November 24, 1997, FSRT purchased an industrial research and development
building for approximately $7.2 million, comprised of $3.6 million in cash
and an assumption of debt of $3.6 million ("Hathaway Business Park").
NOTE 3 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities, available for sale at December 31, 1997, had a
coupon rate of 7.31% and a maturity date of July 17, 2001. Amortized cost
was $529,000 and the fair value was $501,000 resulting in a gross unrealized
loss of $28,000 at December 31, 1997. Mortgage-backed securities at December
31, 1996 had an aggregate market value of $578,000 and an amortized cost of
$614,000 resulting in a gross unrealized loss of $36,000.
NOTE 4 - DEBT
<TABLE>
<CAPTION>
At December 31, 1997 and 1996 debt was comprised of the following:
In thousands 1997 1996
----------------- ----------------
<S> <C> <C>
FAIRWAY CENTER
Bonds payable, net of prepaid reserve of $207,000,
collateralized by a lien, including serial bonds maturing
through October 1, 2016, at interest rates ranging from
4.00% to 6.50%, and term bonds maturing October 1, 2026,
at an interest rate of 6.625%. The payments on the bonds are
calculated in an amount sufficient to fully amortize the indebtedness. $2,453 $2,335
GLEN COVE
Note payable, collateralized by a deed of trust. The
note bears interest, payable monthly, at the lender's
Reference Rate plus 1.5% (aggregating 10% at December 31, 1997), together
with monthly principal payments of $3,700 until maturity in 1999. 1,848 1,893
CARMEL MOUNTAIN
Note payable, collateralized by a deed of trust. The
note bears interest, payable monthly, at the lender's
Reference Rate plus 1.5% (aggregating 10% at December 31, 1997),
together with variable monthly
principal payments until maturity in 1999. 2,265 2,295
HATHAWAY BUSINESS PARK
Note payable, collateralized by a deed of trust. The note bears
interest at a fixed rate of 7.75%. The combined interest and principal
payment of $30,786 is payable monthly until maturity in 2003.
3,580 -
TANON BUILDING
Note payable, collateralized by a deed of trust. The note bears
interest at a fixed rate of 8.47%. The combined interest and principal
payment of $41,445 is payable monthly until maturity in 2004.
5,134 -
LAM RESEARCH BUILDINGS
Notes payable, collateralized by deeds of trust. The two
notes bear interest at a fixed rate of 8.44%. The combined
principal and interest payment of $129,969 is payable
monthly until maturity in 2006. 16,007 16,222
----------------- ----------------
TOTAL NOTES AND BONDS PAYABLE 31,287 22,745
SECURED LINE OF CREDIT
Interest is payable monthly based on the London Interbank Offer Rate
("LIBOR"), or the bank's reference rate, plus 1.9%. The line of credit
matures in December, 1998. 11,200 -
----------------- ----------------
$42,487 $22,745
================= ================
</TABLE>
Aggregate principal payments required in future years related to notes and
bonds payable are as follows:
In thousands
1998 $486
1999 4,482
2000 482
2001 524
2002 565
Thereafter 24,748
=============
$31,287
=============
In December 1996, the Company entered into a $25 million revolving secured
line of credit agreement with a bank to provide funding for future
acquisitions and working capital. Borrowings under the line of credit bear
interest at the applicable London Interbank Offering Rate, or at the bank's
reference rate, plus 1.9% and is secured by three of the Company's rental
properties. The weighted average interest rate paid during 1998 under the
line of credit was 7.7%. Among other covenants, the agreement restricts
payment of quarterly dividends to an amount not to exceed 98% of funds from
operations, as defined in the agreement. The line of credit agreement expires
on December 1, 1998 at which time the outstanding balance is due and
payable. The Company has the option to either extend the line for one
additional year upon payment of a fee equal to 0.25% of the total line or
convert amounts outstanding at the maturity date to a five year term note
under the same variable interest rate structure. In addition, the Company
pays an annualized fee of .25% of the unused portion of the line of credit,
payable quarterly.
For the years ended December 31, 1997, 1996 and 1995, interest paid was
$2,618,000, $773,000 and $687,000, respectively, net of amounts capitalized.
Management estimates that the carrying amount of aggregate debt approximates
fair value.
NOTE 5 - COMMON STOCK AND INCOME PER SHARE
The Company has one class of common stock in two series: Series A and Series
B. 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. No distribution may be paid or declared on the Series B
shares prior to exercise of the exchange rights, as defined below. After
exercising their exchange rights, the Advisor will receive distributions on
its Series A shares.
The Series B common stock held by the Advisor may be exchanged for Series A
common stock when the Series A common stock achieves certain trading prices
for 20 consecutive trading days. The Series B shares become eligible for
exchange for a total of 622,395 Series A shares when the trading price of the
Series A shares is between $8.42 and $11.33. To date, the market price of
the Series A shares has not reached the target prices and thus the Series B
shares are not currently convertible. The rates of exchange and trading
prices will be subject to change under certain circumstances as provided in
the Exchange Rights Agreement.
In October 1997, 1,625,000 limited partnership units (the "FSRT Units")
became eligible for exchange into a like number of Series A common shares in
the Company in accordance with the partnership agreement of FSRT. No units
were exchanged for common stock during the year. The Company filed a related
shelf registration on Form S-3 which became effective on December 10, 1997.
The FSRT Units are entitled to receive quarterly distributions of $.11 per
unit, subject to periodic annual increases commencing in June, 1998, as
specified in the partnership agreement. Residual cash flow after
distributions to the FSRT Units is distributable to the Company. In the
future, the Company may contribute its remaining assets to FSRT at which time
the distribution rate on the FSRT Units may be modified at the Company's
discretion in accordance with the partnership agreement. The Company is
subject to certain restrictions regarding the sale or refinance of the
properties owned by FSRT.
The Company has adopted Statement of Financial Accounting Standard No. 128,
"Earnings per share" ("FAS 128"). FAS 128 requires that the Company
retroactively restate prior period earnings per share ("EPS") data. The
impact on the previously reported EPS is not material. The convertible
partnership units were deemed anti-dilutive and consequently there is no
difference between basic and diluted earnings per share.
For the purposes of determining the weighted average number of shares to be
used in the net income per share calculation, approximately 1.9 million
shares attributable to the dissenting shareholders of FREIF and Advantage
were deemed to be share equivalents during the period May 7, 1996 to November
1, 1996.
NOTE 6 - RENTAL INCOME
The Company's rental income from commercial property is received principally
from tenants under non-cancelable operating leases. The tenant leases
typically provide for guaranteed minimum rent plus contingent rents. Minimum
future rentals on non-cancelable tenant operating leases at December 31, 1997
are as follows:
In thousands
1998 $15,679
1999 14,305
2000 13,047
2001 11,502
2002 10,167
Thereafter 50,748
-----------
$115,439
===========
Minimum future rentals do not include contingent rents which represent
reimbursements of property operating expenses. Contingent rents were
$2,141,000, $1,725,000, and $1,567,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
During the years ended December 31, 1997, 1996 and 1995, one of the Company's
tenants, the Continental Casualty Company, provided 12.7%, 13.8% and 14.3% of
the Company's base rental income under a lease which expired in October
1997. The Company renewed the tenant's lease for a five year period at a
reduced monthly rental rate.
Late in 1996, the Company acquired two industrial buildings that are occupied
by Lam Research Corporation under leases that expire in 2014. In addition,
Lam Research Corporation leases other space from the Company at the Northport
Buildings under a lease that expires in 2003. During 1997 approximately 18%
of the Company's base rental income was received from Lam Research
Corporation.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company has an agreement with the Advisor to administer the day-to-day
operations of the Company. Under the terms of the agreement, which is
renewable annually, the Advisor receives an annualized fee equal to 0.5% of
the Company's gross real estate assets, defined generally as the book value
of the assets before depreciation, payable quarterly. The fee will be
reduced to .4% for gross real estate assets exceeding $200 million.
Prior to the Merger, fees paid to the Advisor by FREIF and Advantage were
calculated in a manner different from that used by the Company. If the
advisory fees for FREIF and Advantage had been calculated under terms of the
Company's current advisory agreement, the aggregate advisory fees for the
Company, FREIF and Advantage would have been $606,000 and $570,000 for the
years ended December 31, 1996 and 1995, respectively. In addition, FREIF and
Advantage paid the Advisor acquisition fees equal to 6% of the asset purchase
price which are not payable under the terms of the Company's current advisory
agreement.
Nine of the Company's properties are managed by Continental Property
Management Co. ("CPMC"), an affiliate of the Advisor, and the remaining
rental property is managed by an unaffiliated company, Cupertino Capital.
The Company pays a property management fee, leasing commission and
construction supervision fee to CPMC based on actual services performed. The
fees paid to CPMC do 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.
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, 1997, 1996
and 1995:
<TABLE>
<CAPTION>
Restated
In thousands 1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Advisory fee, charged to related party expense $766 $551 $350
Reimbursement for data processing, accounting
and certain other expenses, charged to related
party expense $61 $63 $101
Property management fee, charged to related
party expense $627 $591 $579
Leasing commissions, capitalized and amortized
over the term of the related lease $196 $28 $187
Construction supervision fee, capitalized and
amortized over the life of the related investment
or the term of the related lease, as applicable $31 $33 $30
</TABLE>
The Company's Board of Directors (including all of its Independent Directors)
have determined that the compensation paid to the Advisor and to CPMC is fair
and reasonable to the Company.
At December 31, 1997 and 1996, cash equivalents included $3,563,000 and
$1,764,000, 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 $135,000, $60,000 and $23,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, accrued expenses included $210,000 and
$177,000, respectively, payable to the Advisor or its affiliates.
NOTE 8 - DISTRIBUTIONS
The allocation of cash distributions per share for individual stockholders'
income tax purposes, as reported on Internal Revenue Service Form 1099-DIV,
for the years ended December 31, 1997, 1996 and 1995 was as follows:
Ordinary Return of Total
Year Paid Income Capital Paid
- ---------------------------- ------------ ------------ --------
Franklin Select Realty Trust
1997 $.40 $.04 $.44
1996 $.42 $.02 $.44
1995 $.35 $.09 $.44
Franklin Real Estate Income Fund
1996(to May 7, 1996) $.18 $.03 $.21
1995 $.49 $.01 $.50
Franklin Advantage Real Estate Income Fund
1996 (to May 7, 1996) $.19 $.03 $.22
1995 $.60 $.01 $.61
In December 1994, the Company implemented a 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 have been issued in connection with the Plan.
NOTE 9 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands, except per share amounts.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------- ------------------ -------------------------- ------------------------
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, 1997
-------------------- ------------------ -------------------------- ------------------------
<S> <C> <C> <C> <C>
Revenue $4,132 $4,502 $4,491 $4,601
Net income $1,079 $1,095 $1,074 $920
Net income per share $.09 $.09 $.09 $.08
THREE MONTHS ENDED
-------------------- ------------------ -------------------------- ------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996
-------------------- ------------------ -------------------------- ------------------------
<S> <C> <C> <C> <C>
Revenue $3,474 $3,613 $3,597 $3,884
Net income $ 753 $1,078 $1,187 $ 789
Net income per share $ .05 $ .08 $ .08 $ .06
</TABLE>
NOTE 10 - LITIGATION
The Company is currently defending the former directors of Advantage against
a purported class action complaint filed in the California Superior Court for
San Mateo on December 2, 1996 by two stockholders for themselves and
purportedly on behalf of certain other minority stockholders of Advantage.
Other defendants to the complaint currently include Franklin Resources, Inc.
and the Company's advisor, Franklin Properties, Inc. 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 a 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, the plaintiffs have
filed an amended complaint to address the court's response to such filings.
Document production by the defendants is currently in progress.
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., 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. Document production by the
defendants is currently in progress.
Management does not believe that the outcome of these matters will have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
NOTE 11 - SUBSEQUENT EVENTS
On January 21, 1998 the Company sold a 12.5 acre parcel of undeveloped land
that was acquired in June of 1997. The sale price was approximately $4.5
million, and the Company will realize a gain on the sale of the land of
approximately $171,000 during the quarter ended March 31, 1998.
Approximately $4.1 million of the sale proceeds were applied to the
outstanding balance of the Company's line of credit and the remainder was
retained by the Company.
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
<TABLE>
<CAPTION>
FRANKLIN SELECT REALTY TRUST
As of, and for the years ended December 31, 1997, 1996 and 1995
In thousands
INITIAL COST CAPITALIZED GROSS AMOUNT AT WHICH
COST TO SUBSEQUENT TO CARRIED AT CLOSE OF
FUND ACQUISITION PERIOD
Life on Which
Depreciation
Buildings Accumu- in Latest
Description Carry- and lated Date of Operations
Encum- Improve- ing Improve- Deprecia- construc- Date Statement
brances Land Buildings ments Costs Land ments Total tion tion Acquired is Computed
(Note 4)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Shores
Redwood City, CA - $7,033 $20,499 $2,198 - $7,033 $22,697 $29,730 $6,325 82, 87 09/89 35
Data General
Building
Manhattan Beach, CA - 5,372 16,994 2,886 - 5,372 19,880 25,252 5,806 82 12/89 35
Mira Loma
Shopping Center 11/88 &
Reno, Nevada - 2,233 7,006 894 - 2,233 7,900 10,133 2,182 85, 88 09/92 35
Northport Buildings
Fremont, CA - 2,874 8,708 662 - 2,874 9,370 12,244 2,396 85 01/91 35
Glen Cove
Shopping Center
Vallejo, CA $1,848 2,500 4,200 127 - 2,500 4,327 6,827 488 89 01/94 35
Fairway Center
Brea, CA 2,453 7,430 14,273 839 - 7,430 15,112 22,542 2,798 87 01/92 35
Lam Research
Buildings
Fremont, CA 16,007 7,337 19,591 - - 7,337 19,591 26,928 653 96 10/96 35
Tanon Building
Fremont, CA 5,134 1,855 6,680 161 - 1,855 6,841 8,696 145 83 4/97 35
Hathaway
Business Park
Fremont, CA 3,580 2,153 5,015 - - 2,153 5,015 7,168 24 85 11/97 35
29,022 38,787 102,966 7,767 - 38,787 110,733 149,520 20,817
PROPERTY
HELD FOR SALE
Prospect Park Drive
Rancho Cordova, CA - 4,078 - - 197 4,275 - 4,275 - N/A 6/97 N/A
Carmel Mountain
Gateway Pl
San Diego, CA 2,265 3,507 5,053 32 - 3,507 5,085 8,592 472 94 11/94 35
Property
held-for-sale 2,265 7,585 5,053 32 197 7,782 5,085 12,867 472
Total real estate $31,287 $46,372 $108,019 $7,799 $197 $46,569 $115,818 $162,387 $21,289
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 $155,651.
(2) RECONCILIATION OF REAL ESTATE
Restated
1997 1996 1995
---------------- ----------------- --------------------
<S> <C> <C> <C>
Balance at beginning of period $141,625 $114,070 $113,833
Dispositions - - (153)
Additions during period:
Acquisitions 19,781 26,928 -
Improvements and carrying costs 981 627 390
---------------- ----------------- --------------------
Balance at end of period $162,387 $141,625 $114,070
================ ================= ====================
(3) RECONCILIATION OF ACCUMULATED DEPRECIATION
Restated
1997 1996 1995
---------------- ----------------- --------------------
Balance at beginning of period $17,583 $14,416 $11,383
Dispositions - - (53)
Depreciation expense for the period 3,706 3,167 3,086
---------------- ----------------- --------------------
Balance at end of period $21,289 $17,583 $14,416
================ ================= ====================
</TABLE>
(4) These assets are pledged as collateral under the Company's $25 million line
of credit which had an outstanding balance of $11.2 million at December 31,
1997.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item. 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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 twice during the
year ended December 31, 1997. The Directors and Officers of the Company are:
NAME POSITION
David P. Goss Chief Executive Officer, President and Director
Barry C. L. Fernald Independent Director
Lloyd D. Hanford Independent Director
Egon H. Kraus Independent Director
Frank W. T. LaHaye Independent Director
Larry D. Russel Independent Director
E. Samuel Wheeler Independent Director
Richard S. Barone Secretary
Mark A. TenBoer Vice President - Finance and Chief Financial Officer
Name, Age and Five-Year Business Experience Director Since
DAVID P. GOSS (50) 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), and the
Advisor. 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. Mr. Goss was also
the Chief Executive Officer, President and Director of Franklin Real Estate
Income Fund (1988 to May, 1996) and Franklin Advantage Real Estate Income Fund
(1990 to May, 1996).
BARRY C. L. FERNALD (51) 1996
Mr. Fernald is an Independent Director of the Company. He was co-founder of, and
until 1994 a Senior Vice President of Devcon Construction, Inc. During his
association with Devcon, Devcon developed and constructed more than 10 million
square feet of industrial and commercial buildings in the Silicon Valley and
throughout Northern California. Since retiring from the day-to-day operations of
Devcon in 1994, Mr. Fernald continues to manage his real estate holdings, as
well as consult and participate in new real estate ventures. Mr. Fernald holds a
Bachelor of Architecture degree from the University of California at Berkeley
and is a licensed architect in the State of California. He is a founder of the
Children's Discovery Museum of San Jose and of the Silicon Valley Bank. Mr.
Fernald also serves on the board of directors of the San Jose Jet Center and the
I Think I Can Foundation, is a member of the American Institute of Architects
and is a former director of the Santa Clara Valley Chapter of The American
Institute of Architects.
LLOYD D. HANFORD, JR. (70) 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. In September 1996 GMAC Commercial Mortgage
acquired the assets of the Hanford/Healy Companies. Mr. Hanford is presently an
independent real estate appraiser and consultant but maintains his offices at
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 Counselors of Real Estate
and the Institute of Real Estate Management (IREM). Mr. Hanford is a past
national president of IREM and of the IREM Foundation and is the 1998 Chair of
the Appraisal Foundation (Washington, DC). Mr. Hanford is also on the Advisory
Board of the Eastern European Real Property Foundation. Mr. Hanford was also a
Director of Franklin Advantage Real Estate Income Fund (1990 to May, 1996).
EGON H. KRAUS (68) 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 was also a Director of Franklin Real Estate
Income Fund (1988 to May, 1996) and Franklin Advantage Real Estate Income Fund
(1990 to May 1996).
FRANK W. T. LAHAYE (68) 1996
Mr. LaHaye is an Independent Director of the Company. He is General Partner,
Peregrine Associates and Miller & LaHaye, which are General Partners of
Peregrine Ventures and Peregrine Ventures II (venture capital firms); Chairman
of the Board and Director, Quarterdeck Corporation; Director, Fischer Imaging
Corporation; Digital Transmission Systems, Inc.; and Director or trustee, as the
case may be, of 28 of the investment companies in the Franklin Templeton Group
of Funds. He was also a Director of Franklin Real Estate Income Fund (1995 to
May, 1996). Mr. LaHaye received a B.S. degree in Metallurgical Engineering from
Stanford University in 1954.
LARRY D. RUSSEL (51) 1996
Mr. Russel is an Independent Director of the Company. Mr. Russel was a founding
partner and former Chairman and President of Devcon Construction, Inc. until his
retirement in 1989. During his association with Devcon, Devcon developed and
constructed more than 10 million square feet of industrial and commercial
buildings in the Silicon Valley and throughout Northern California. Mr. Russel
served on the board of directors for Citation Insurance Company, a publicly held
insurance company, from 1984 to 1996. He is chairman of the Board of Directors
of the San Jose Jet Center and is also a general partner in a private real
estate management company.
E. SAMUEL WHEELER (54) 1989
Mr. Wheeler is an Independent Director of the Company. He is a Certified Public
Accountant and owns and manages an accounting and tax practice (1990 to date).
He is a current member of the National Association of Real Estate Investment
Trusts (NAREIT) Adjunct 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 was also a Director of Franklin Advantage Real Estate Income Fund
(1990 to May, 1996).
The executive officers of the Company other than those listed above are:
RICHARD S. BARONE (47)
Mr. Barone is Secretary of the Company (1989 to date). He is also secretary of
the Advisor, Property Resources, Inc., Property Resources Equity Trust, 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. Mr. Barone was also the Secretary of Franklin Real Estate
Income Fund (1988 to May, 1996) and Franklin Advantage Real Estate Income Fund
(1990 to May, 1996).
MARK A. TENBOER (41)
Mr. TenBoer is Vice President - Finance and Chief Financial Officer of the
Company and has served as Vice President - Asset Management for the Advisor,
Property Resources, Inc., and Franklin Real Estate Management, Inc., since 1991.
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 was also the Vice President -
Finance and Chief Financial Officer of Franklin Real Estate Income Fund (1993 to
May, 1996) and Franklin Advantage Real Estate Income Fund (1993 to May, 1996).
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 in 1997, except that the
Independent Directors of the Company received fees of $6,000 per year plus $500
per each regular meeting attended and $400 per each telephonic meeting of the
Board attended. For the fiscal year ended December 31, 1997, fees to all
Directors for attendance at Board meetings totaled approximately $58,000. The
Company has no annuity, pension or retirement plans or any existing plans or
arrangement under which payments have or will 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 under "Item 13. Certain
Relationships and Related Transactions."
Performance Graph
The following graph compares the yearly percentage change in the Company's
cumulative total stockholder return with two indices, the Equity REIT Index
prepared by the National Association of Real Estate Investment Trusts
("NAREIT"), and the S&P 500 Index. The period covered by the graph commences on
January 14, 1994, which is the date when the Company's Series A Common Stock
commenced trading on the American Stock Exchange. Prior to that date, there was
no established trading market for the shares. The graph assumes $100 was
invested in January 14, 1994, in the Series A Common Stock and the indices, and
that all dividends were reinvested throughout the period.
Performance Measurement Comparison
Total Return
Franklin Select Realty Trust
Performance Measurement Comparison
EDGAR REPRESENTATION OF DATA POINTS USED IN THE PRINTED GRAPHIC
SELECT REIT EQUITY INDEX S&P 500 INDEX
1/94 100.00 100.00 100.00
1994 78.03 102.07 101.31
1995 91.96 117.65 139.23
1996 136.33 160.86 171.19
1997 174.26 193.46 228.32
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, 1997. 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, Series A 7,191
Officer, President and Director
Barry C. L. Fernald, Independent Common Stock, Series A 4,500
Director
Limited Partnership
Units of FSRT, L.P.* 406,250
Lloyd D. Hanford, Jr., Common Stock, Series A 1,000
Independent Director
Egon H. Kraus, Independent Common Stock, Series A 12,430
Director
Frank W.T. LaHaye, Independent Common Stock Series A 1,000
Director
Larry D. Russel, Independent Limited Partnership
Director Units of FSRT, L.P.* 406,250
E. Samuel Wheeler, Independent Common Stock, Series A 2,000
-----------
Director
Directors and officers as a group Common Stock Series A 31,321
Directors and officers as a group Limited Partnership
Units of FSRT, L.P.* 812,500
*The limited partnership units of FSRT, L.P. are convertible into shares of the
Company's Series A common stock on a one-for-one basis. The limited partnership
units are non-voting interests.
To the Company's knowledge, as of December 31, 1997, no person beneficially
owned more than 5% of the outstanding Common Stock except as set forth below:
AMOUNT AND NATURE
OF SHARES
NAME AND ADDRESS TITLE OF BENEFICIALLY % OF CLASS1
CLASS OWNED
Franklin Resources, Inc. Common Stock, 1,685,400 13.0%
777 Mariners Island Series A
Boulevard
San Mateo, CA 94404
Franklin Properties, Inc. Common 745,5841 5.7%
1800 Gateway Drive Stock,
San Mateo, CA 94404 Series B
1 The Company has one class of Common Stock in two series, designated Series A
and Series B. The Series A shares and Series B shares vote together as one class
with each share being entitled to one vote.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, a majority of whom are independent of the Advisor. 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
properties formerly owned by FREIF and Advantage became subject to the Company's
advisory fee structure upon the Merger of FREIF and Advantage into and with the
Company in May 1996. The Advisory fee paid to the Advisor during the year ended
December 31, 1997, is stated in the table below.
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, 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.
Seven of the Company's properties are managed by Continental Property Management
Co. ("CPMC"), an affiliate of the Advisor, and the remaining property is managed
by an unaffiliated company, Cupertino Capital. The Company pays a property
management fee, leasing commission and construction supervision fee to CPMC
based on actual services performed. The fees paid to CPMC do 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. The fees paid to CPMC
for the year ended December 31, 1997, are listed in the table below.
During the year ended December 31, 1997, the Company paid or accrued the
following amounts for the reimbursements and services noted above:
Advisory fee, charged to related party expense $766,000
Reimbursement for data processing, accounting and certain
other expenses charged to related party expense $61,000
Property management fee, charged to related party expense $627,000
Leasing commission, capitalized and amortized over the term of $196,000
the related lease
Construction supervision fee, capitalized and amortized over
the life of the related investment or the term of the $31,000
related lease
The Company's Board of Directors (including all of its Independent Directors)
have determined that the compensation paid to the Advisor and to CPMC is fair
and reasonable to the Company.
David P. Goss, 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 20.
2. The supplemental financial statement schedule of the Company included
in Item 8 of this report is listed on the index on page 20.
3. Exhibits:
<TABLE>
<CAPTION>
Exhibit
NO. LIST OF EXHIBITS FOOTNOTE
--------- ---------------- --------
<S> <C>
3.1 Articles of Incorporation (1)
3.2 First Amendment to Articles of Incorporation (2)
3.2a Second Amended and Restated Bylaws of Franklin Select Realty Trust (2)
10.1 Amended and Restated Advisory Agreement
10.2 Property Management Agreement (3)
10.3 Agreement of Limited Partnership of FSRT, L.P. between the Company and (4)
Northport Associates No. 18, a California limited liability company, dated as
October 30, 1996.
10.4 Contribution Agreement, dated as of October 30, 1996, between FSRT, L.P., (4)
the Company, Northport Associates No. 18, a California limited liability company,
and the members of Northport Associates No. 18.
10.5 Exchange Rights Agreement, dated as of October 30, 1996, among the Company, (4)
FSRT L.P., and Northport Associates No. 18, a California limited liability company.
10.6 Registration Rights Agreement, dated as of October 30, 1996, among the (4)
Company and Northport Associates No. 18, a California limited liability company.
10.7 Secured line of credit loan agreement, dated December 10, 1996, by and
between the Company and Bank of America.
21.1* Subsidiaries of the Company.
23.1* Consent of independent accountants
27.1* Financial data scheduled
* Filed herewith.
</TABLE>
FOOTNOTES
(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 S-4 Registration Statement,
dated November 13, 1995, (Registration No. 033-64131), and are
incorporated herein by reference.
(3) Documents were filed in the Company's Form 10-K for the year ended
December 31, 1994, and are incorporated herein by reference.
(4) Documents were filed in the Company's Form 8-K, dated October 31, 1996,
and are incorporated herein by reference.
(b) Reports filed on Form 8-K.
During the quarter ended December 31, 1997, the Company filed a report
dated April 1, 1997, (date of earliest event reported) on Form 8-K,
with respect to the acquisition of the Tanon Building, the Rancho
Cordova Land, and the Hathaway Building.
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 REALTY TRUST
(Company)
Date: MARCH 25,1998 By: S/DAVID P. GOSS
David P. Goss
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company, and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
s/David P. Goss Chief Executive Officer March 25,1998
David P. Goss and Director
s/Barry C. L. Fernald Director1 March 25,1998
Barry C. L. Fernald
s/Lloyd D. Hanford, Jr. Director1 March 25,1998
Lloyd D. Hanford, Jr.
s/Egon H. Kraus Director1 March 25,1998
Egon H. Kraus
s/Frank W. T. LaHaye Director1 March 25,1998
Frank W. T. LaHaye
s/Larry D. Russel Director1 March 25,1998
Larry D. Russel
s/E. Samuel Wheeler Director1 March 25,1998
E. Samuel Wheeler
1 Independent Director
Exhibit 21.1
Subsidiaries of Franklin Select Realty Trust
SUBSIDIARY NAME STATE OF ORGANIZATION NAME UNDER WHICH SUBSIDIARY IS DOING
BUSINESS
FSRT L.P. Delaware FSRT L.P.
Exhibit 23.1
Consent of independent accountants
We consent to the incorporation by reference in the registration statement of
Franklin Select Realty Trust (the "Company") on Form S-3 (File No 333-38463) of
our report dated January 26, 1998, on our audits of the consolidated financial
statements and financial statement schedule of the Company as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997, which is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Francisco, California
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTRANT'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,821
<SECURITIES> 501
<RECEIVABLES> 4,677
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,999
<PP&E> 162,387
<DEPRECIATION> 21,289
<TOTAL-ASSETS> 150,097
<CURRENT-LIABILITIES> 3,036
<BONDS> 42,487
0
0
<COMMON> 103,161
<OTHER-SE> (7,845)
<TOTAL-LIABILITY-AND-EQUITY> 150,097
<SALES> 0
<TOTAL-REVENUES> 17,726
<CGS> 0
<TOTAL-COSTS> 10,786
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,772
<INCOME-PRETAX> 4,168
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<EPS-DILUTED> 0.34
</TABLE>
