SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from TO
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Commission file number 1-12708
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FRANKLIN SELECT REALTY TRUST
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(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3095938
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 312-2000
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N/A
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Common Stock Shares Outstanding as of March 31, 1998, Series A: 12,250,373
Common Stock Shares Outstanding as of March 31, 1998, Series B: 745,584
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
Unaudited
(In thousands, except per share amounts) 1998 1997
- ----------------------------------------------------------------------------
ASSETS
Real Estate
Rental property:
Land $38,787 $38,787
Buildings and improvements 110,818 110,733
-------------------
149,605 149,520
Less: accumulated depreciation 21,683 20,817
-------------------
127,922 128,703
Rental property held for sale, net of accumulated 8,083 12,395
depreciation
-------------------
Real estate, net 136,005 141,098
Cash and cash equivalents 4,117 3,821
Mortgage-backed securities, available for sale 479 501
Deferred rent receivable 1,876 1,863
Deferred costs and other assets 2,985 2,814
===================
Total assets $145,462 $150,097
===================
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LIABILITIES AND STOCKHOLDERS' EQUITY
Notes and bonds payable $38,276 $42,487
Tenant deposits, accounts payable and accrued expenses 1,329 1,391
Distributions payable 1,573 1.645
--------------------
Total liabilities 41,178 45,523
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Minority interest 9,240 9,258
--------------------
Commitments and contingencies - -
Stockholders' equity:
Common stock, Series A, without par value; stated
value $10 per share; 110,000 shares authorized;
12,250 issued and outstanding 103,161 103,161
Common stock, Series B, without par value; stated
value $10 per share; 2,500 shares authorized;
746 issued and outstanding 6,294 6,294
Accumulated other comprehensive income (30) (28)
Accumulated distributions in excess of net income (14,381) (14,111)
--------------------
Total stockholders' equity 95,044 95,316
====================
Total liabilities and stockholders' equity $145,462 $150,097
====================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
(In thousands, except per share amounts) 1998 1997
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REVENUE:
Rent $4,533 $4,096
Interest, dividends, and other 60 36
--------------------------
Total revenue 4,593 4,132
--------------------------
EXPENSES:
Property operating 909 829
Interest 853 592
Related party 376 337
General and administrative 271 162
Depreciation and amortization 993 972
--------------------------
Total expenses 3,402 2,892
--------------------------
Operating income before gain on sale
of property and minority interest 1,191 1,240
Gain on sale of property 170 -
--------------------------
Operating income before minority 1,361 1,240
interest
Minority interest 161 161
--------------------------
NET INCOME $1,200 $1,079
==========================
Unrealized loss on mortgage-backed (2) (2)
securities
==========================
Total comprehensive income $1,198 $1,077
==========================
Net income per share, based on the
weighted average
shares outstanding of Series A common
stock of 12,250
for the three-month periods ended March $ .10 $ .09
31, 1998 and 1997
==========================
Distributions per share, based on the
weighted average
shares outstanding of Series A common
stock of 12,250
for the three-month periods ended March $ .12 $ .11
31, 1998 and 1997
==========================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Unaudited
(In thousands) 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $1,200 $1,079
-----------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,039 1,013
Gain on sale of property (170) -
Minority interest 161 161
(Increase) decrease in deferred rent receivable (13) 11
Increase in other assets (252) (268)
(Decrease) increase in accounts payable, accrued
expenses and other liabilities (80) 26
-----------------
685 943
-----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,885 2,022
-----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate 4,471 -
Improvements to real estate (112) (60)
Leasing commissions paid (54) (81)
Disposition of mortgage-backed securities 20 11
-----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,325 (130)
-----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes and bonds payable - 2,478
Repayment of notes and bonds payable (4,211) (2,402)
Payment of loan costs - (3)
Distributions paid to limited partners (161) (119)
Distributions paid to stockholders (1,542) (1,248)
-----------------
NET CASH USED IN FINANCING ACTIVITIES (5,914) (1,294)
-----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 296 598
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,821 2,558
-----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,117 $3,156
=================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
Unaudited
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Franklin Select Realty Trust (the "Company") included herein have been
prepared in accordance with the instructions to Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all appropriate adjustments
necessary to a fair presentation of the results of operations have been made
for the periods shown. All adjustments are of a normal recurring nature.
Certain prior year amounts have been reclassified to conform to current year
presentations. These financial statements should be read in conjunction with
the Company's audited financial statements for the year ended December 31,
1997.
NOTE 2 - NET INCOME PER SHARE
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.
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. None of
the partnership units have been exchanged for common stock. The convertible
partnership units are deemed anti-dilutive according to the terms of FAS 128
and consequently there is no difference between basic and diluted earnings
per share.
NOTE 3 - SALE OF REAL ESTATE
On January 21, 1998, the Company sold a 12.5-acre parcel of undeveloped land
that was acquired in June 1997. Net proceeds of $4,471,000 were received
and of that amount approximately $4,100,000 was applied to the outstanding
balance of the Company's line of credit and the remainder was retained by the
Company.
NOTE 4 - LITIGATION
The Company is currently defending the former directors of Franklin Advantage
Real Estate Income Fund ("Advantage") against a purported class action
0complaint 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.
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
Unaudited
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.
Defendants are challenging the legal sufficiency of certain aspects of the
complaint. 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 Franklin Real Estate Income Fund ("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. Plaintiff has filed an amended
complaint, to which defendants will respond in May 1998. 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 5 - STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Company has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes the
disclosure requirements for reporting comprehensive income in an entity's
annual and interim financial statements and became effective for the Company
in the current fiscal year. Comprehensive income includes unrealized gains
and losses on securities previously reported by the Company as a component of
stockholders' equity. The Company is now required to show comprehensive
income in a financial statement and display the accumulated balance of other
comprehensive income separately in the equity section of the consolidated
balance sheet.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is based primarily on the consolidated financial
statements of the Company for the period ended March 31, 1998. The
information should be read in conjunction with the accompanying consolidated
financial statements and the notes thereto.
When used in the following discussion, the words "believes," "anticipates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected, including,
but not limited to, those set forth in the section entitled "Potential
Factors Affecting Future Operating Results," below. Readers are cautioned
not to place undue reliance on these forward-looking statements that 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 that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
Total revenue for the three-month period ended March 31, 1998 increased
$461,000, or 11% compared to the same period in 1997, primarily due to rental
revenue provided by the Tanon Building and the Hathaway Building which were
acquired in April 1997 and November 1997, respectively. The rental revenue
from buildings owned during both periods decreased slightly (1%) as a result
of lower rent from a lease renewed in November 1997 and from a temporary
decline in occupancy at the Data General building.
Total expenses for the three-month period ended March 31, 1998, increased
$510,000, or 18%, when compared to the same period in 1997. The increase for
the period reported was primarily as a result of increases in interest,
general and administrative and property operating expenses related to
property acquisitions.
General and administrative expenses for the three-month period ended March
31, 1998, increased $109,000, or 67% compared to the same period in 1997
primarily as a result of legal expenses incurred with respect to the actions
that are described in Note 4 to the accompanying financial statements.
The increase in net income for the three-month period under review was
primarily due to changes in revenues and expenses described above and also
the gain recorded on the sale of a parcel of undeveloped land in January 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, cash and cash equivalents aggregated $4,117,000. The
Company believes this amount is adequate to meet its short-term operating
cash requirements. The Company also holds $479,000 in mortgage-backed
securities and has access to a revolving line of credit in the amount of $25
million, of which $17.9 remains available as at March 31, 1998. At March 31,
1998, the outstanding balance under the Company's credit facility was $7.1
million. Borrowings under the line of credit bear interest at the London
Interbank Offered Rate plus 1.90%, or at Bank of America's Reference rate at
the Company's option. At March 31, 1998, the weighted average interest rate
of borrowings under the line of credit was 7.8%.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Management continues to evaluate properties for acquisition by the Company.
The Company expects to fund the cost of acquisitions, capital expenditures,
costs associated with lease renewals and reletting of space, repayment of
indebtedness, and development of properties from (i) cash flow from
operations, (ii) borrowings under its credit facility and, if available,
other indebtedness (which may include indebtedness assumed in acquisitions),
and (iii) the issuance of partnership interests in connection with
acquisitions. The Company's operating cash flow has been its principal
source of capital for minor property improvements, leasing costs and the
payment of quarterly distributions.
Net cash provided by operating activities for the three-month period ended
March 31, 1998 was $1,885,000. The decrease in cash flow provided by
operating activities is attributable to the changes in revenues and expenses
as explained previously, and also to a decline in the level of accounts
payable compared to 1997.
The changes in net cash provided by investing and financing activities
principally resulted from the sale of a parcel of undeveloped land in January
1998.
Management does not believe that the outcome of the litigation described in
Note 4 to the accompanying financial statements will have a material adverse
affect on the Company's financial condition, results of operations, or cash
flows.
Management believes that the Company's sources of capital as described under
Liquidity and Capital Resources are adequate to meet its liquidity needs in
the foreseeable future.
IMPACT OF INFLATION
The Company's policy of negotiating leases which incorporate operating
expense "pass-through" provisions is intended to protect the Company against
increased operating costs resulting from inflation.
CASH DISTRIBUTION POLICY
Distributions are declared quarterly at the discretion of the Board of
Directors. The Company's present distribution policy is to at least annually
evaluate the current distribution rate in light of anticipated tenant
turnover over the next two or three years, the estimated level of associated
improvements and leasing commissions, planned capital expenditures, any debt
service requirements and the Company's other working capital requirements.
After balancing these considerations, and considering the Company's earnings
and cash flow, the level of its liquid reserves and other relevant factors,
the Company seeks to establish a distribution rate which:
i) provides a stable distribution which is sustainable
despite short-term fluctuations in property cash
flows;
ii) maximizes the amount of cash flow paid out as
distributions consistent with the above listed
objective; and
iii) complies with the Internal Revenue Code requirement
that a REIT annually pay out as distributions not less
than 95% of its taxable income.
During the three month period ended March 31, 1993, the Company declared
distributions related to the Series A common stock totaling $1,470,000.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
FUNDS FROM OPERATIONS
The Company considers funds from operations to be a useful measure of the
operating performance of an equity REIT because, together with net income and
cash flows, funds from operations provides investors with an additional basis
to evaluate the ability of a REIT to support general operating expense and
interest expense before the impact of certain activities, such as gains and
losses from property sales and changes in the accounts receivable and
accounts payable. However, it does not measure whether income is sufficient
to fund all of the Company's cash needs including principal amortization,
capital improvements and distributions to stockholders. Funds from
operations should not be considered an alternative to net income or any other
GAAP measurement of performance, as an indicator of the Company's operating
performance or as an alternative to cash flows from operating, investing or
financing activities as a measure of liquidity. As defined by the National
Association of Real Estate Investment Trusts, funds from operations is net
income (computed in accordance with GAAP), excluding gains or losses from
debt restructuring and sales of property, plus depreciation and amortization,
and after adjustment for unconsolidated joint ventures. The Company reports
funds from operations in accordance with the revised NAREIT definition. The
measure of funds from operations as reported by the Company may not be
comparable to similarly titled measures of other companies that follow
different definitions.
For the Three Months Ended
March 31,
(In thousands) 1998 1997
- -----------------------------------------------------------------
Net income $1,200 $1,079
Add: Depreciation and amortization 993 972
Less: Gain on sale of property (170) -
- -----------------------------------------------------------------
Funds from Operations $2,023 $2,051
=================================================================
The primary difference between the periods reflects the changes in net income
as discussed under "Results of Operations".
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
LEASING TURNOVER
In connection with any lease renewal or new lease, the Company typically
incurs costs for tenant improvements and leasing commissions which will be
funded first from operating cash flow and, if necessary, from cash reserves
or the line of credit. In addition, while the Company has historically been
successful in renewing and releasing space, the Company will be subject to
the risk that leases expiring in the future may be renewed or released at
terms that are less favorable than current lease terms.
LEASING TURNOVER - DATA GENERAL BUILDING
Over the next twelve months, the Company's greatest leasing exposure consists
of one lease at the Data General Building covering approximately 48,000
square feet, which expires in January 1999. The lease carries a triple net
rental rate that is equivalent to approximately $28.00 per square foot on a
full service basis. Compared to the estimated current market rate of
approximately $20.10 per square foot, this lease provides over-market rent of
approximately $380,000 annually, or 2% of the Company's current annual
revenue based on annualizing the total revenue for the quarter ended March
31, 1998. It is not possible to predict the market rental rate in 1999;
however, the Company expects that when this lease expires, the rental income
related to this space will be less than $28.00 per square foot regardless of
whether the lease is renewed or new leases are signed. The Company will also
incur costs for tenant improvements and leasing commissions related to the
renewal or re-leasing of the space, however, the amounts are unknown at this
time.
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.
FRANKLIN SELECT REALTY TRUST
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Not applicable
(b) Reports on Form 8-K - None
.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN SELECT REALTY TRUST
By: /S/ DAVID P. GOSS
David P. Goss
Chief Executive Officer
Date: MAY 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<SECURITIES> 479
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<PP&E> 157,688
<DEPRECIATION> 21,683
<TOTAL-ASSETS> 145,462
<CURRENT-LIABILITIES> 2,902
<BONDS> 38,276
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<COMMON> 103,161
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