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, 1998. 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)
2000 Alameda de Las Pulgas, San (650) 312-2000
Mateo, CA 94404
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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. [ ]
At February 19, 1999, 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 $5.9375 as of February 19, 1999, is $62,543,565.
Indicate the number of shares outstanding of each of the Company's classes of
common stock at December 31, 1998: 12,250,372 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, 1998, the Company's property portfolio
consisted of ownership interests in the following seven properties: (i) four
industrial research and development ("R & D") properties containing
approximately 546,000 rentable square feet of space; and (ii) three suburban
office properties containing approximately 403,000 rentable square feet of
space. The Company's properties are concentrated in the greater San
Francisco and Los Angeles areas from which the Company derived 60% and 32% of
its 1998 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. The Company's commercial
properties are managed by Continental Property Management Co. ("CPMC"), an
affiliate of the Advisor. As property manager, CPMC performs the leasing,
re-leasing and management-related services for the properties. The Advisor
is a wholly-owned subsidiary of Franklin Resources, Inc., ("Franklin") whose
primary business is the 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 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
During 1998, the Company formed a Special Committee of the Board of Directors
to undertake a review of the strategic alternatives available to the Company,
and the Special Committee engaged the services of Prudential Securities, Inc.
to assist it in this effort. The Special Committee is exploring ways to
improve shareholder value including changing the Company's business strategy
to consider a strategic alliance, merger, sale, or other transaction or
transactions involving the Company or its securities. The Company is
actively continuing with its consideration of the advisability and
feasibility of one or more of these strategic alternatives, and the Special
Committee's advisors are continuing to be actively involved in this process.
Unless and until any such strategic alternative is chosen, the Company
intends to follow its existing investment and operating strategy, while at
the same time not foreclosing the adoption of one or more new strategic
alternatives. As a result, the following description reflects the Company's
current investment and operating strategy but does not reflect any changes
that may result from the Special Committee's review.
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. Although at present, the Company's
properties are concentrated in the San Francisco Bay area and the Los Angeles
metropolitan area, the Company's investment strategy has been to acquire
suitable properties within 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, 1998, the Company's debt to total assets
ratio was 20%. 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%.
Management continues to evaluate properties for acquisition in evaluating
various strategic alternatives for the Company. Any costs of acquisitions,
capital expenditures, costs associated with lease renewals and reletting of
space, repayment of indebtedness, and development of properties will be
funded 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.
Management does not believe that the outcome of the litigation described in
Note 10 to the accompanying financial statements will have a materially
adverse effect on the Company's financial condition, results of operations,
or cash flows.
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 and 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.
The Company's fixed rate debt is subject to prepayment penalties which may
make it disadvantageous for the Company to prepay the loans, which it may
otherwise do in the absence of prepayment penalties.
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 re-leased 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 in an area
of Manhattan Beach, California which 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. A vapor ventilation
system was installed on the property by a prior owner, who also maintains and
monitors the system. According to environmental reports acquired by the
Company, the vapor ventilation system 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 required to clean up the contamination of the Data
General Building site, it would seek full indemnity from the oil companies
that 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 substantial 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, 1998, the Company's property portfolio consisted of seven
income-producing properties located in the greater San Francisco and Los
Angeles areas of California. The Company's properties were 95% leased at
December 31, 1998 as compared to 97% leased at the end of 1997. During the
year, the average occupancy of the properties held by the Company at December
31, 1998 was 97%, compared to 98% in 1997.
The following table describes the Company's rental properties:
<TABLE>
<CAPTION>
Total Rentable Year Average Occupance 1998 Rental
Property Name/ Location Square Footage Acquired During 1998 Revenue
- --------------------------------------- --------------------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
Industrial R&D Properties:
The Northport Buildings
Fremont, California 144,624 1991 100% $1,833,000
The Lam Research Buildings
Fremont, California 211,680 1996 100% 2,479,000
The Tanon Building
Fremont, California 108,600 1997 100% 1,201,000
The Hathaway Business Park
Fremont, California 80,752 1997 89% 903,000
--------------------- ------------------
545,656 $6,416,000
--------------------- ------------------
Office Properties:
The Shores
Redwood City, California 138,546 1989 88% 3,369,000
The Data General Building
Manhattan Beach, California 119,996 1989 97% 2,796,000
The Fairway Center
Brea, California 144,727 1992 100% 2,804,000
--------------------- ------------------
403,269 $8,969,000
--------------------- ------------------
Total for properties at 12/31/98 948,925 $15,385,000
=====================
Properties sold during 1998 $2,250,000
==================
Total rental revenue $17,635,000
</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, 1998, the Company's property portfolio contained a total of
45 leases. The Company's portfolio represents in the aggregate 948,925
rentable square feet of which 902,979 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,
1998.
% of
No. of Current Current
Leases Total Annualized Annual
Year Expiring Sq. Ft. Base Rent1 Base Rent
- ---- -------- --------- ---------- ---------
1999 5 47,891 $ 1,157,000 9%
2000 9 48,490 1,085,000 8%
2001 9 118,454 2,001,000 15%
2002 9 178,666 3,172,000 24%
2003 8 205,445 2,173,000 16%
2004 2 63,953 814,000 6%
2008 1 22,400 321,000 2%
2012 1 6,000 308,000 2%
2014 1 211,680 2,463,000 18%
- ---- -------- --------- ---------- ---------
Total 45 902,979 $13,494,000 100%
==== ======== ========= ========== =========
1 Annualized Base Rent means 12 multiplied by the
monthly base rent in effect with respect to each
property at December 31, 1998 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. 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 as defined above at December 31, 1998.
Annualized % of
Base Total
Square Rent at Base Lease Renewal
Tenant Name/Property Feet 12/31/98 Rent Expiration Options
- --------------------------- ------ --------- ----- ---------- --------
Lam Research Corporation:
Lam Research Buildings 211,680 $2,463,000 18% 12/31/2014 2-5 yr.
Northport Buildings 58,130 $506,000 7% 07/31/2003 1-5 yr.
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.
Discovery is continuing.
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. Discovery is continuing.
While the outcome of litigation of these claims cannot be predicted with
certainty, the Company's management does not believe that the outcome of
litigation 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, 1998, the Company had
12,250,372 Series A common shares outstanding and 745,584 Series B common
shares outstanding, and there were approximately 2,400 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.
DISTRIBUTIONS
QUARTER ENDED HIGH LOW DECLARED
------------- ---- --- --------
December 31, 1998 $ 7 $ 5 3/8 $ .12
September 30, 1998 8 1/8 6 1/2 .12
June 30, 1998 8 1/8 6 5/16 .12
March 31, 1998 7 6 5/16 .12
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
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, 1998, and 1997, the Company declared distributions to the Series
A stockholders of approximately $5,880,000 ($.48 per share) and $5,513,000
($.45 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,
1998, and 1997, was $535,000 and $1,345,000, 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, 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
(In thousands except per Restated 1 Restated 1
share amounts) 1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
Total revenues $17,937 $17,726 $14,568 $14,111 $12,990
Net income $5,055 $4,168 $3,807 $4,462 $4,273
Per Series A common share1:
Net income $0.41 $0.34 $0.28 $0.32 $0.30
Distributions declared $0.48 $0.45 $0.44 $0.44 $0.44
Weighted average number of
shares of 12,250 12,250 13,830 14,145 14,145
Series A common stock
outstanding
Balance Sheet Data:
Total assets $133,892 $150,097 $131,298 $116,457 $117,873
Debt $26,762 $42,487 $22,745 $7,145 $7,279
Stockholders' equity $94,501 $95,316 $96,653 $106,986 $108,316
Other Data:
Funds from operations2 $7,699 $8,171 $7,235 $7,795 $7,396
Cash flow from
Operating activities $8,591 $9,187 $7,831 $8,359 $8,771
Investing activities $11,144 $(17,734) $4,140 $31 $(5,904)
Financing activities $(22,300) $9,810 $(15,599) $(6,404) $(3,184)
Total rentable square
footage of properties at 948,925 1,152,516 963,624 751,944 751,944
end of period
Number of properties at end 7 11 8 7 7
of period
1 Amounts reported for 1994 and 1995 have been restated to give effect to
the Merger.
2 See discussion of funds from operations in Item 7 of this report
-Management Discussion and Analysis of Financial Condition and Results
of Operations.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Franklin Properties, Inc. (the "Advisor," or "Management") manages the
Company's day-to-day operations under the terms of an advisory agreement
which is renewable annually. The Company does not have any employees.
Property management, including leasing, re-leasing and management-related
services, for the Company's seven operating rental properties is provided by
Continental Property Management Co. ("CPMC"), an affiliate of the Advisor.
Both CPMC and the Advisor are wholly owned subsidiaries of Franklin
Resources, Inc. whose primary business is the 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 years ended December 31, 1996, 1997 and
1998. This discussion should be read in conjunction with the accompanying
consolidated financial statements and notes.
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.
GENERAL BACKGROUND
During 1998, the Company's rental revenue was generated by investments in ten
properties including three retail properties which were sold during the
year. The remaining seven properties consist of four industrial R&D
properties comprising 546,000 rentable square feet of space and three office
properties comprising 403,000 rentable square feet of space. The Company's
properties are located in the greater San Francisco and Los Angeles areas
from which the Company derived 60% and 32% of its 1998 rental revenue,
respectively. The remainder of the Company's rental revenues was earned
from properties that the Company sold during the year which were located
outside these areas.
1998 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 decreased slightly from 98% in 1997 to 95% in 1998. The transactions
that had the greatest influence on the Company's reported results in 1998
were:
(i) the sale of Carmel Mountain, a retail property, in July 1998.
(ii) the sale of the Mira Loma Retail Shopping Center, ("Mira Loma") and the
Glen Cove Shopping Center, ("Glen Cove") in November 1998.
During 1998, the Company formed a Special Committee of the Board of Directors
to undertake a review of the strategic alternatives available to the Company,
and the Special Committee engaged the services of Prudential Securities, Inc.
to assist it in this effort. The Special Committee is exploring ways to
improve shareholder value including changing the Company's business strategy
to consider a strategic alliance, merger, sale, or other transaction or
transactions involving the Company or its securities. The Company is
actively continuing with its consideration of the advisability and
feasibility of one or more of these strategic alternatives, and the Special
Committee's advisors are continuing to be actively involved in this process.
Unless and until any such strategic alternative is chosen, the Company
intends to follow its existing investment and operating strategy, while at
the same time not foreclosing the adoption of one or more new strategic
alternatives. As a result, the following description reflects the Company's
current investment and operating strategy but does not reflect any changes
that may result from the Special Committee's review.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
Total revenue increased 1% in 1998 compared to 1997. Rental revenues remained
at substantially the same levels as the prior year, despite property
acquisitions in 1997 and dispositions in 1998. The acquisition of the
Hathaway and Tanon buildings in 1997 provided increased revenue for 1998, as
a full year's revenue was received in 1998. However, property sales in 1998
and reduced rental revenue from Fairway combined to offset the increases
associated with the property acquisitions.
The average portfolio occupancy rate remained stable for the existing
properties occupied throughout both periods. The increase in interest income
was due to increases in marketable securities and Notes receivable.
Total expenses rose $600,000 (5%) in 1997 primarily due to the acquisition of
the Hathaway and Tanon Buildings and increased general and administrative
expenses associated with a strategic review being undertaken by the Special
Committee of the Board of Directors.
Interest expense increased $157,000 (6%) over the prior year as a result of
the increased debt to fund acquisitions in 1997, offset by the paydowns of
debt made in 1998 due to the sales of properties. Debt decreased $15.7
million in 1998, as property sales allowed the Company to pay off its
variable rate debt. The weighted average interest rate on borrowings
decreased from 8.63% in 1997 to 7.63% in 1998.
Property operating expenses stayed relatively stable in 1998 as compared to
the prior year. Decreased utilities and repair expenditures offset increased
administrative and maintenance costs primarily related to the Fairway window
defects discussed under Liquidity and Capital Resources, below.
There were no changes made to the agreements between the Company and related
parties during the year. Related party fees remained at 1997 levels.
General and administrative expenses increased $428,000 (66%) in 1998 as
compared to the prior year. The increases were primarily the result of costs
related to the Company's evaluation of its strategic alternatives and legal
fees incurred with respect to the pending legal actions that are described in
Note 10 to the accompanying financial statements.
The minority interest in FSRT L.P. net income increased $48,000 (7%) in 1998
as compared to the prior year due to an increase in the distribution rate to
the limited partners.
The increase in net income for the periods under review was primarily due to
the gains recorded on the sale of real estate and also the changes in
revenues and expenses described above.
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 $2.3 million (21%) 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 year 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
year. 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's cash and cash equivalents aggregated
$1,256,000 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 that was unused at year end. On
January 5, 1999 the Company collected the $7,700,000 note receivable that was
outstanding at December 31, 1998 which the Company received from the sale of
the Mira Loma and Glen Cove properties in 1998. The Company also holds
$7,700,000 of mortgage-backed securities.
During 1998, the Company's cash and cash equivalents decreased to $1,256,000
compared to $3,821,000 at December 31, 1997. The decrease in cash reflects
lower cash generated from operating cash flows, an increase in the amount
used to improve rental property and an increase in the distributions to
shareholders and minority interests. Operations generated $8,591,000, a
decrease of $596,000 from the previous year as a result of increased
expenses, as described above. The sale of property and other investing
activities produced $11,144,000 in 1998, compared to an outflow of cash in
1997 of $17,734,000 primarily from the purchase of Tanon, Hathaway and the
undeveloped land.
The Company's investment in mortgage-backed securities at December 31, 1998,
is represented by a GNMA certificate and a FNMA adjustable rate pass-through
certificate with market values of approximately $7,323,000 and $377,000,
respectively. Although payments of principal and interest are guaranteed by
these agencies, changes in market interest rates may cause the market values
to fluctuate, which could result in a gain or loss if the security is sold
before maturity.
In 1998, the Company amended its credit agreement with Bank of America to
extend the maturity date of its facility to July 1, 1999. The facility
consists of 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,
together with the rental proceeds from such properties (which collectively
accounted for 45% of the Company's 1998 rental revenue). At December 31,
1998, these properties comprised approximately 46% 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, 1998, the unused balance available
under the line of credit was $25 million.
The Company's mortgage indebtedness has the following balloon payments:
2003-$3.0 million; 2004-$3.9 million; and 2006-$13.3 million. In addition,
the Company's $25 million credit facility, which was unused at December 31,
1998, matures in July, 1999 with the option of a further extension until
January 2000. 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 become the property of
the mortgagee with a subsequent loss of income and asset value to the Company.
The Company's revolving line of credit bears interest at a floating rate tied
to LIBOR. The Company intends to use the line of credit to provide short
term financing for future acquisitions and as a source of additional working
capital, if required. An increase in interest rates may have an adverse
effect on the Company's net income and Funds from Operations.
In 1999, the Company is expecting to evaluate various options to remedy
defects discovered in the window system at Fairway Center. The Company
currently estimates the remediation cost to total approximately $1.5 million,
although certain less expensive alternatives are also being considered. The
Company has received $525,000 and expects to receive a further $312,500 in
settlement of claims related to the defects. The remediation is not
expected to have a material long term impact on the Company's cash flow,
financial condition or results of operations.
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.
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
YEAR 2000
The Company has evaluated whether its computer systems, including on-site and
embedded systems, and those of significant third party service organizations
with whom the Company interacts will function properly by, at or during the
year 2000. The Company has determined certain of its own systems are not
currently year 2000 compliant. Management has a plan to replace or upgrade
these systems within the next nine months. The Company does not expect that
the costs associated with these replacements or upgrades will have a
materially adverse impact on its financial position, results of operations or
cash flows in future periods. However, failure to successfully replace or
upgrade these systems could result in material disruptions to its business.
The Company is managed and advised by certain affiliates of Franklin
Resources, Inc. It is reliant on these entities for its basic computer
network and certain other applications. The Company is also reliant on a
third-party transfer agent for maintaining its basic shareholder records.
Management is monitoring the progress of these entities in achieving year
2000 compliance and does not currently anticipate a materially adverse impact
on the Company's business as a result of their potential non-compliance.
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 existing credit facilities. 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 - TANON MANUFACTURING, INC.
On December 3, 1998, Tanon Manufacturing, Inc. (TMI), the sole tenant of the
Tanon Building, filed for Chapter 11 bankruptcy protection. The current base
rent for the property pursuant to the lease is $8.16 per square foot annually
on a net lease basis. The Company estimates that the market base rental rate
for the property may be in excess of $12.00 per square foot annually. TMI
has not paid rent due for the period November 1, 1998 to December 3, 1998 of
approximately $100,000, including operating expense reimbursements; however,
it re-commenced contractual rental payments effective December 3, 1998. On
February 1, 1999, Smartflex Systems, Inc. ("SSI") purchased substantially all
of the assets of TMI and the bankruptcy court gave SSI until March 11, 1999
to determine whether it will assume or reject the lease. SSI has asked the
court to extend that time and the request to extend will be considered on
March 11. If SSI assumes the lease, it would be required to cure all
defaults, including paying unpaid rent. If SSI rejects the lease, the
Company would have a claim against TMI for damages, including unpaid rent
then due. If SSI rejects the lease, the Company intends to pursue all
available remedies and to re-lease the Tanon Building. If the Company must
re-lease the Tanon Building, its rental income will decline approximately
$100,000 for each month that the property is vacant, and it is likely to
incur costs for tenant improvements, leasing commissions and other expenses.
The total costs for such items cannot be determined at this time, but are not
expected to be material to the Company's results of operations or financial
position.
LEASING TURNOVER - DATA GENERAL BUILDING
The Company's leasing exposure at Data General Building consists of
approximately 34,000 square feet that was vacated by the Data General
Corporation on January 31, 1999. During 1998, the Company recorded rental
income from the Data General lease that was equivalent to approximately
$31.03 per square foot on a full service basis. Compared to the current
estimated market rate of $24.00 per square foot, management estimates that
the Company's rental income from this space will decline approximately
$240,000 annually, or 1.3% of the Company's total revenue in 1998. In
addition to receiving less rent, the Company will incur costs for tenant
improvements and leasing commissions upon re-leasing the space, which we
estimate will total between $750,000 and $1 million.
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 reasonably foreseeable future.
FUNDS FROM OPERATIONS ("FFO")
The Company considers FFO to be a useful measure of the operating performance
of an equity REIT because, together with net income and cash flows, FFO
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. FFO 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"), FFO 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 FFO in accordance with the revised NAREIT
definition. The measure of FFO 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,
1998 1997 1996
-------- -------- --------
Net income $5,055 $4,168 $3,807
Add: Depreciation and 3,979 4,003 3,428
amortization
Less: Gain on sale (1,335) - -
-------- -------- --------
Funds from Operations $7,699 $8,171 $7,235
======== ======== ========
The primary cause of the decline in FFO in 1998 compared to 1997 was an
increase in general and administrative expenses as discussed under "Results
of Operations". The increase in FFO from 1996 to 1997 was mostly caused by a
decline in merger-related expenses and losses on the sale of mortgage-backed
securities. FFO 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
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants 21
Consolidated Balance Sheets as of December 31, 1998 and 1997 22
Consolidated Statements of Income for the years ended December 31, 1998, 1997 23
and 1996
Consolidated Statements of Stockholders' Equity for the years ended December 24
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 26
1997 and 1996
Notes to Consolidated Financial Statements 27
Schedule III - Real Estate and Accumulated Depreciation 37
</TABLE>
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
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Franklin Select Realty Trust at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company'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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 20, 1999
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
FRANKLIN SELECT REALTY TRUST
In thousands except per share amounts
- ------------------------------------------------------------------------------
As of December 31, 1998 and 1997 1998 1997
- ------------------------------------------------------------------------------
ASSETS
Real estate
Rental property:
Land $34,054 $38,787
Buildings and improvements 100,241 110,733
---------------------
134,295 149,520
Less: accumulated depreciation 21,341 20,817
---------------------
112,954 128,703
Property held-for-sale, net of accumulated
depreciation of $0 and $472 respectively - 12,395
---------------------
Real estate, net 112,954 141,098
Cash and cash equivalents 1,256 3,821
Mortgage-backed securities, available for sale 7,700 501
Note receivable 7,700 -
Deferred rent receivable 1,543 1,863
Deferred costs and other assets 2,739 2,814
=====================
Total assets $133,892 $150,097
=====================
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Debt $26,762 $42,487
Tenant deposits, accounts payable and accrued expenses 1,807 1,391
Distributions payable 1,641 1,645
---------------------
Total liabilities 30,210 45,523
---------------------
Minority interest 9,181 9,258
---------------------
Commitments and contingencies (Notes 6 and 10) - -
STOCKHOLDERS' EQUITY:
Common stock, Series A, without par value; stated
value $10 per share; 50,000 shares authorized; 12,250
shares issued and outstanding 103,161 103,161
issued and outstanding
Common stock, Series B, without par value; stated
value $10 per share; 1,000 shares authorized; 746 shares
issued and outstanding 6,294 6,294
Accumulated other comprehensive income (18) (28)
Accumulated distributions in excess of net income (14,936) (14,111)
---------------------
Total stockholders' equity 94,501 95,316
=====================
Total liabilities and stockholders' equity $133,892 $150,097
=====================
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
- -------------------------------------------------------------------
For the years ended December 31, 1998 1997 1996
1998, 1997 and 1996
- -------------------------------------------------------------------
REVENUES:
Rent $17,635 $17,522 $13,926
Interest, dividends, and other 302 204 642
------------------------------
Total revenue 17,937 17,726 14,568
------------------------------
EXPENSES:
Property operating 4,081 4,036 3,635
Interest 2,930 2,773 899
Related party 1,459 1,454 1,205
General and administrative 1,076 648 642
Consolidation - - 695
Loss on sale of mortgage-backed - - 151
securities
Depreciation and amortization 3,979 4,003 3,427
------------------------------
Total expenses 13,525 12,914 10,654
------------------------------
Operating income before gain on
sales of properties and minority 4,412 4,812 3,914
interest Gain on sales of properties 1,335 - -
------------------------------
Net income before minority interest 5,747 4,812 3,914
------------------------------
Minority interest (692) (644) (107)
------------------------------
NET INCOME $5,055 $4,168 $3,807
==============================
Net income per share, based on the
weighted average shares outstanding of
Series A common stock of 12,250, 12,250
and 13,830 for the years ended
December 31, 1998, 1997 and 1996,
respectively $0.41 $.34 $.28
==============================
Distributions per share, based on
the weighted average shares
outstanding of Series A common
stock of 12,250, 12,250 and 13,343
for the years ended December 31,
1998, 1997 and 1996, respectively $0.48 $.45 $.44
==============================
- -------------------------------------------------------------------
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
<TABLE>
<CAPTION>
FRANKLIN SELECT REALTY TRUST
In thousands
As of and for the years ended December 31, 1998, 1997, and 1996
COMMON STOCK Accumulated Accumulated
other distributions
Series A Series B comprehensive in excess of
Shares Amount Shares Amount income net income Total
---------------------------------------------------------------------- ------------------- --------------- ----------
Balance, January 1, 1996,
<S> <C> <C> <C> <C> <C> <C> <C>
restated 14,145 $111,569 746 $6,294 $(164) $(10,713) $106,986
Dissenting stockholders'
interest (1,895) (8,408) - - - - (8,408)
Comprehensive income:
Net income - - - - - 3,807 3,807
Unrealized loss on
mortgage-backed
securities - - - - (23) - (23)
Reclassification
adjustment for losses
included in net income
151 151
----------------
Total comprehensive
income 3,935
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
Comprehensive income:
Net income - - - - - 4,168 4,168
Unrealized gain on
mortgage-backed
securities - - - - 8 - 8
----------------
Total comprehensive
income 4,176
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
Comprehensive income:
Net income - - - - - 5,055 5,055
Unrealized gain on
mortgage-backed
securities - - - - 10 - 10
----------------
Total comprehensive
income 5,065
Cash distributions on
common stock - - - - - (5,880) (5,880)
============================= ============ =============== ====== =========== ================ ================== ================
Balance,
December 31, 1998 12,250 $103,161 746 $6,294 $(18) $14,936 $94,501
============================= ============ =============== ====== =========== ================ ================== ================
</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 C A S H F L O W S
FRANKLIN SELECT REALTY TRUST
In thousands
- ----------------------------------------------------------------------------
For the years ended December 31, 1998,1997 and 1998 1997 1996
1996
- ----------------------------------------------------------------------------
NET INCOME $5,055 $4,168 $3,807
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,163 4,171 3,440
Gain on sales of properties (1,335) - -
Loss on sale of mortgage-backed securities - - 151
Minority interest 692 644 107
(Increase) decrease in deferred rent (29) 53 54
receivable (Increase) in other assets (293) (135) (27)
Increase in tenant deposits, accounts
payable, and accrued expenses 283 312 337
and accrued expenses
(Increase) decrease in advance rents 55 (26) (38)
---------------------------
3,536 5,019 4,024
---------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,591 9,187 7,831
---------------------------
Disposition (acquisition) of rental property 20,499 (16,383) (1,428)
Improvements to rental property (1,778) (784) (627)
Leasing commissions paid (388) (652) (339)
(Acquisition) disposition of mortgage-back (7,189) 85 6,534
securities
---------------------------
NET CASH PROVIDED BY (USED IN) INVESTING 11,144 (17,734) 4,140
ACTIVITIES ---------------------------
Borrowings under notes payable - 23,938 16,222
Repayment of notes payable (15,725) (7,791) (16,781)
Payment of loan costs - (288) (599)
Repurchase of dissenting stockholders' - - (8,408)
interest
Distributions paid to stockholders and (6,575) (6,049) (6,033)
minority interest
---------------------------
NET CASH (USED IN) PROVIDED BY FINANCING (22,300) 9,810 (15,599)
ACTIVITIES
---------------------------
NET (DECREASE) INCREASE IN CASH AND CASH (2,565) 1,263 (3,628)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,821 2,558 6,186
===========================
CASH AND CASH EQUIVALENTS, END OF YEAR $1,256 $3,821 $2,558
===========================
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. Franklin
Properties, Inc. (the "Advisor", or "management") manages the Company's
day-to-day operations 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, 1998, the Company's real estate portfolio consisted of
ownership interests in seven properties: four industrial research and
development properties, and three suburban office properties.
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 preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions 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 fair 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 component of other comprehensive income within
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,
amortized and recorded in interest expense 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.
NEW PRONOUNCEMENTS BY THE FINANCIAL ACCOUNTING STANDARDS BOARD
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), which establishes the
disclosure requirements for reporting comprehensive income. Comprehensive
income for the Company includes unrealized gains and losses on
mortgage-backed securities currently reported as components of stockholders'
equity. FAS 130 requires the Company to classify items of comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately in the equity section of the
consolidated balance sheet.
The Company has adopted Statement of Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", ("FAS
131"), which establishes new requirements for reporting segment
information. The Company has determined that it has one reportable segment
under FAS 131.
NOTE 2 - REAL ESTATE SALES
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 used to repay the line of credit
and the Company retained the remainder. Gain from sale of the property
amounted to approximately $170,000.
On July 1, 1998, the Company sold Carmel Mountain Gateway Plaza for a gross
price of $8,900,000. Approximately $8,600,000 was used to repay the line of
credit and the Company retained the remainder. Gain from sale of the property
amounted to approximately $382,000.
On November 17, 1998 the Company sold Mira Loma and Glen Cove. These two
properties were sold for a gross price of $15,400,000 under an installment
sale contract in which $7,700,000 was paid to the Company at closing on
November 18, 1998. The balance of $7,700,000 was paid to the Company on
January 5, 1999, under the terms of a note receivable. This note, which was
included as a Note Receivable at December 31, 1998, bore interest at 8%
annually which was paid at maturity. Approximately $800,000 of the net sale
proceeds were used to repay the outstanding balance of the Company's line of
credit, and the remainder was held by the Company for general corporate
purposes. Gain from sale of these properties was approximately $783,000.
NOTE 3 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities, available for sale at December 31, 1998, and
1997, were as follows:
(IN THOUSANDS) 1998 1997
-----------------------
Amortized cost $7,718 $529
Unrealized loss (18) (28)
=======================
Fair value $7,700 $501
=======================
Mortgage-backed securities, available for sale at December 31, 1998, had a
coupon rate of between 6.88% and 7.22% and maturities between 2017 and
2024. At purchase, the securities yielded 5.6% and 6.9%, respectively.
NOTE 4 - DEBT
At December 31, 1998 and 1997 debt was comprised of the following:
(IN THOUSANDS) 1998 1997
------------------------
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. $2,418 $2,453
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. 3,484 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. 5,070 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. 15,790 16,007
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, 1998), together with monthly
principal payments of $3,700 until maturity in
1999. - 1,848
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, 1998), together with variable monthly
principal payments until maturity in 1999. - 2,265
------------------------
TOTAL NOTES AND BONDS PAYABLE 26,762 31,287
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 July 1999. - 11,200
------------------------
$26,762 $42,487
========================
Each of the Company's debt facilities outstanding at December 31, 1998 has
associated prepayment penalties. Loans secured on the Hathaway, Tanon and
Lam properties carry yield maintenance prepayment penalties and the bonds
secured by the Fairway center can be prepaid commencing October 2001 with a
1% penalty.
Aggregate principal payments required in future years related to notes and
bonds payable are as follows:
(IN THOUSANDS)
1999 $450
2000 485
2001 527
2002 3,591
2003 479
Thereafter 21,230
-------------
$26,762
=============
In December 1998, the Company renewed 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 are secured by three of the Company's rental properties. The
weighted average interest rate paid during 1998 under the line of credit was
7.6%. 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 in July 1999 at which
time the outstanding balance is due and payable. The Company has the option
to either extend the line for an additional six months upon payment of a fee
equal to 0.125% 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. At December 31,
1998 this credit facility was unused.
For the years ended December 31, 1998, 1997 and 1996, interest paid was
$2,742,000, $2,618,000 and $773,000, respectively.
Management estimates that the carrying amount of aggregate debt approximates
fair value based on a comparison to interest rates available for debt with
similar terms and maturities
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 met these conditions 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 that became effective on December 10, 1997.
The FSRT Units are entitled to receive quarterly distributions of $0.121 per
unit, subject to periodic annual increases, 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.
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. The convertible partnership units are deemed anti-dilutive;
consequently there is no difference between basic and diluted earnings per
share. In addition, because the Series B shares are not currently
convertible, they are not included in the earnings per share calculation.
NOTE 6 - RENTAL INCOME
The Company's rental income from commercial properties 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, 1998 are as follows:
(IN THOUSANDS)
1999 $13,002
2000 12,451
2001 11,087
2002 9,245
2003 5,525
Thereafter 37,185
-----------
$88,495
===========
Minimum future rentals do not include reimbursements of property operating
expenses which were $2,125,000, $2,141,000, and $1,725,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998, 1997 and 1996, tenants whose base
rental revenues comprised more than 10% of base rental revenues were Lam
Research Corporation and Continental Casualty Company who together
represented 28%, 31% and 14% of those revenues, respectively.
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 0.4% for gross real estate assets exceeding $200 million.
The Company's properties are managed by Continental Property Management Co.
("CPMC"), an affiliate of the Advisor. 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, 1998, 1997
and 1996:
In thousands 1998 1997 1996
-----------------------------------
Related Party expense:
Advisory fee $753 $766 $551
Reimbursement for data processing,
accounting and certain other expenses 84 61 63
Property management fee 622 627 591
-----------------------------------
$1,459 $1,454 $1,205
Leasing commissions, capitalized and
amortized over the term of the related lease $217 $196 $28
Construction supervision fee,
capitalized and Amortized over the life
of the related investment or the term of
the related lease, as applicable $80 $31 $33
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, 1998 and 1997, cash equivalents included $759,000 and
$3,563,000, 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 $148,000, $135,000 and $60,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
The Advisor and its parent company, Franklin Resources, Inc, are
co-defendants in lawsuits brought against the Company described in Note 10.
At December 31, 1998 and 1997, accrued expenses included $168,000 and
$210,000, 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, 1998, 1997 and 1996 was as follows:
Ordinary Return of Capital Total
Year Paid Income Capital Gain Paid
- -------------------------------- -------------- ------------ --------- ---------
Franklin Select Realty Trust
1998 $0.35 $0.04 $0.09 $0.48
1997 $0.40 $0.04 - $0.44
1996 $0.42 $0.02 - $0.44
Franklin Real Estate Income Fund
1996 (to May 7, 1996) $0.18 $0.03 - $0.21
Franklin Advantage Real Estate Income Fund
1996 (to May 7, 1996) $0.19 $0.03 - $0.22
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)
<TABLE>
<CAPTION>
In thousands, except per share amounts.
THREE MONTHS ENDED
------------------------ ---------------------- ------------------------------ ----------------------------
MARCH 31, 1998 JUNE 30, 1998 SEPTEMBER 30, 1998 DECEMBER 31, 1998
------------------------ ---------------------- ------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Revenue $4,593 $4,832 $4,339 $4,173
Net income $1,200 $1,152 $1,082 $1,621
Net income per share $.10 $.09 $.09 $.13
THREE MONTHS ENDED
------------------------ ---------------------- ------------------------------ ----------------------------
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, 1997
------------------------ ---------------------- ------------------------------ ----------------------------
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
</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.
Discovery is continuing.
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. Discovery is continuing.
While the outcome of litigation of these claims cannot be predicted with
certainty, the Company's management does not believe that the outcome of
litigation of these matters will have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Management is currently considering a number of options regarding remediation
of certain defects in the window system at Fairway Center. The Company has
received $525,000 from third parties and expects to receive an additional
$312,500 in final settlement of litigation on this matter. Settlement
amounts received are included in accrued expenses as the Company evaluates
various options to remedy the defects. Present alternatives to correct the
defects being investigated include an option to replace a portion of the
window system which is estimated to cost $1.5 million. Any additional costs
to correct the defects over amounts received from settlement are expected to
be capitalized and amortized over the remaining estimated useful life of the
building. Any remediations are expected to be funded from cash flow from
operations, the liquidation of investments and the Company's existing debt
facilities.
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 December 31, 1998
In thousands
COST CAPITALIZED
INITIAL SUBSEQUENT TO GROSS AMOUNT AT WHICH
COST TO FUND ACQUISITION CARRIED AT CLOSE OF PERIOD
Life on Which
Depreciation in
Buildings Accumu- Latest
And lated Year of Operations
Encum- Improve- Improve- Deprecia- construc- Date Statement is
Description brances Land Buildings ments Land ments Total tion tion Acquired Computed
- ---------------------------------------- -------- --------- ------------------------------------- --------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Shores
Redwood City, CA (Note 4) $7,033 $20,499 $2,323 $7,033 $22,822 $29,855 $7,073 82, 87 09/89 35
Data General Building
Manhattan Beach, CA - 5,372 16,994 3,787 5,372 20,781 26,153 6,446 82 12/89 35
Northport Buildings
Fremont, CA (Note 4) 2,874 8,708 662 2,874 9,370 12,244 2,685 85 01/91 35
Fairway Center (Note 4)
Brea, CA $2,418 7,430 14,273 1,508 7,430 15,781 23,211 3,413 87 01/92 35
Lam Research Buildings
Fremont, CA 15,790 7,337 19,591 - 7,337 19,591 26,928 1,213 96 10/96 35
Tanon Building
Fremont, CA 5,070 1,855 6,680 161 1,855 6,841 8,696 341 83 4/97 35
Hathaway Business Park
Fremont, CA 3,484 2,153 5,015 40 2,153 5,055 7,208 170 85 11/97 35
------------------ -------- --------- -------- --------- -----------------
Total real estate $26,762 $34,054 $91,760 $8,481 $34,054 $100,241 $134,295 $21,341
======================================== ======== ========= ======== ========= ===================================================
</TABLE>
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 $127,724.
(2) RECONCILIATION OF REAL ESTATE
1998 1997 1996
---------------------------------------
Balance at beginning of $162,387 $141,625 $114,070
period
Dispositions (28,870) - -
Additions during period:
Acquisitions - 19,781 26,928
Improvements and carrying 1,778 981 627
costs
---------------------------------------
Balance at end of period $134,295 $162,387 $141,625
=======================================
(3) RECONCILIATION OF ACCUMULATED DEPRECIATION
1998 1997 1996
---------------------------------------
Balance at beginning of $21,289 $17,583 $14,416
period
Dispositions (3,554) - -
Depreciation expense for 3,606 3,706 3,167
the period
---------------------------------------
Balance at end of period $21,341 $21,289 $17,583
=======================================
(4) These assets are pledged as collateral under the Company's $25 million
line of credit which was unused at December 31, 1998.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10 through 12 of Part III is incorporated
herein by reference from the Company's Proxy Statement which will be mailed
to stockholders in connection with the Company's annual meeting of
stockholders scheduled to be held on April 27, 1999.
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 0.5% of the book value of its real estate assets before
depreciation. This fee is reduced to 0.4% 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, 1998, 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.
The Advisor and its parent company, Franklin Resources, Inc, are
co-defendants in lawsuits brought against the Company described in Item 3 -
"Legal Proceedings" above and in the Notes to the Financial Statements.
All of the Company's properties are managed by Continental Property
Management Co. ("CPMC"), an affiliate of the Advisor. 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, 1998, are listed in the
table below.
During the year ended December 31, 1998, the Company paid or accrued the
following amounts for the reimbursements and services noted above:
Advisory fee, charged to related party expense $753
Reimbursement for data processing, accounting and certain
other expenses charged to related party expense $84
Property management fee, charged to related party expense $622
Leasing commission, capitalized and amortized over the term of $217
the related lease
Construction supervision fee, capitalized and amortized over
the life of the related investment or the term of the $80
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 found on page 37.
3. Exhibits:
Exhibit
NO. LIST OF EXHIBITS FOOTNOTE
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 Northport Associates No. 18, a California limited
liability company, dated as October 30, 1996. (4)
10.4 Contribution Agreement, dated as of October 30, 1996, between FSRT,
L.P., the Company, Northport Associates No. 18, a California limited
liability company, and the members of Northport Associates No. 18. (4)
10.5 Exchange Rights Agreement, dated as of October 30, 1996, among the
Company, FSRT L.P., and Northport Associates No. 18, a
California limited liability company. (4)
10.6 Registration Rights Agreement, dated as of October 30, 1996, among
the Company and Northport Associates No. 18, a California limited
liability company. (4)
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 schedule
* Filed herewith.
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, 1998, the Company filed
reports on Form 8K as follows:
(i) On December 2, 1998, the Company filed a report dated July 1, 1998,
(date of earliest event reported). This report contained
information about the sale of its three retail properties i.e.
Carmel Mountain Gateway Plaza, Mira Loma Shopping Center and Glen
Cove Center.
(ii) On December 15, 1998, the Company filed a report dated December 3,
1998 (date of earliest event reported). This report contained
information about Tanon Manufacturing, Inc., a tenant that filed a
bankruptcy petition under Chapter 11 of the United States Bankruptcy
Code.
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 3, 1999 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 3, 1999
- ----------------------------- and Director ------------------------
David P. Goss
s/Barry C. L. Fernald Director1 March 3, 1999
- ----------------------------- ------------------------
Barry C. L. Fernald
s/Lloyd D. Hanford, Jr. Director1 March 3, 1999
- ----------------------------- ------------------------
Lloyd D. Hanford, Jr.
s/Egon H. Kraus Director1 March 3, 1999
- ----------------------------- ------------------------
Egon H. Kraus
s/Frank W. T. LaHaye Director1 March 3, 1999
- ----------------------------- ------------------------
Frank W. T. LaHaye
s/Larry D. Russel Director1 March 3, 1999
- ----------------------------- ------------------------
Larry D. Russel
s/E. Samuel Wheeler Director1 March 3, 1999
- ----------------------------- ------------------------
E. Samuel Wheeler
1 Independent Director
Exhibit 10.1
Amended and Restated Advisory Agreement
AMENDED AND RESTATED
ADVISORY AGREEMENT
between
FRANKLIN SELECT REALTY TRUST
and
FRANKLIN PROPERTIES, INC.
THIS AMENDED AND RESTATED ADVISORY AGREEMENT ("Agreement") is
dated as of January 1, 1999, between FRANKLIN SELECT REALTY TRUST, a
California corporation (the "Company"), and FRANKLIN PROPERTIES, INC., a
California corporation (the "Advisor").
WHEREAS, the Company and the Advisor entered into a certain
agreement (the "Old Agreement") captioned "Advisory Agreement between
Franklin Select Real Estate Income Fund and Franklin Properties, Inc.," dated
as of March 1, 1989.
WHEREAS, the Company and the Advisor entered into a certain
agreement captioned "First Amendment to Advisory Agreement between Franklin
Select Real Estate Income Fund and Franklin Properties Inc.," dated as of
October 1, 1994, pursuant to which the Agreement was amended to reflect
certain changes in the compensation paid to the Advisor as approved by the
shareholders.
WHEREAS, the Company and the Advisor desire to amend and restate
the Old Agreement so that all of the terms between the Company and the
Advisor are set forth in one agreement, as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants in the Old Agreement and this Agreement, the parties agree
as follows:
1. DUTIES OF ADVISOR. The Advisor agrees to use its
best efforts to present to the Company (a) a continuing and suitable
investment program consistent with the investment policies and objectives of
the Company and (b) investment opportunities of a character consistent with
the investment program as the Directors may adopt from time to time. In
performance of this undertaking, subject to the supervision of the Directors
and upon their direction, and consistent with the provisions of the Articles
of Incorporation and Bylaws of the Company, the Advisor shall:
(a) furnish or obtain and supervise the day-to-day
operations of the Company;
(b) serve as the Company's investment and financial
advisor and provide research, economic and statistical data in connection
with the Company's investments and investment and financial policies;
(c) on behalf of the Company, investigate, select
and conduct relationships with consultants, investment banks, lenders,
mortgagors, brokers, investors, shareholders, transfer agents, builders,
developers and others;
(d) consult with the Directors and furnish the
Directors with advice and recommendations with respect to making, acquiring
(by purchase, investment, exchange or otherwise), holding and disposing
(through sale, exchange or otherwise) of investments consistent with the
policies and provisions of the Company;
(e) on behalf of the Company, investigate, select
and commit to purchase (subject to board approval) investments consistent
with the policies and provisions of the Company and in accordance with the
policies and guidelines established by the Directors, provided that actual
investments shall be made only with the prior approval of a majority of a
quorum of the Directors or by written consent of all Directors;
(f) obtain for the Directors such services as may
be required in acquiring and disposing of investments, disbursing and
collecting the funds of the Company, paying the debts and fulfilling the
obligations of the Company and handling, prosecuting and settling any claims
of the Company;
(g) obtain for the Company such services as may be
required for property management, including property management services
rendered by an affiliate of the Advisor, and other activities relating to the
investment portfolio of the Company;
(h) advise in connection with and conduct
negotiations by or on behalf of the Company with investment banking firms,
securities brokers or dealers and other institutions or investors for public
or private sales of Shares or other securities of the Company, or obtain
loans for the Company, but in no event in such a way that the Advisor could
be deemed to be acting as a broker-dealer or underwriter;
(i) provide, at the Company's expense, office
space, office furnishings, personnel and other overhead items necessary and
incidental to the Company's business and operations;
(j) from time to time or at any time requested by
the Directors, make reports to the Directors of its performance of services
under this Agreement;
(k) obtain appraisal reports, where appropriate, on
investments or contemplated investments of the Company;
(l) provide, at the Company's expense and at the
direction of the Board of Directors, accounting and related services
necessary to the preparation of the Company's financial statements,
regulatory filings, and tax returns; and
(m) do all things necessary to assure its ability
to render the services described in this Agreement.
2. NO PARTNERSHIP OR JOINT VENTURE. The Company and the
Advisor are not partners or joint venturers with each other and nothing in
this Agreement shall be construed to make the parties partners or joint
venturers or impose any liability as a partner or joint venturer on either of
them.
3. RECORDS. At all times, the Advisor shall keep proper
books of account and records relating to services performed under this
Agreement, which shall be accessible for inspection by the Company at any
time during ordinary business hours.
4. REIT QUALIFICATIONS. Notwithstanding anything else
in this Agreement, the Advisor shall refrain from any action (including,
without limitation, performing services for tenants of property or managing
or operating real property) which, in its sole judgment made in good faith or
in the judgment of the Directors of which the Advisor has written notice,
would adversely affect the status of the Company as a real estate investment
trust as defined and limited in the Code, which would violate any law, rule,
regulation or statement of policy of any governmental body or agency having
jurisdiction over the Company or over its securities, or which would
otherwise not be permitted by the Company's Bylaws.
5. BANK ACCOUNTS. The Advisor, at the expense of the
Company, may establish and maintain one or more bank accounts in its own
name, and may collect and deposit into any one or more accounts, and disburse
from any account or accounts, any money on behalf of the Company, on the
terms and conditions as the Directors may approve, provided that no funds
shall be commingled with funds of the Advisor; and the Advisor shall from
time to time give an appropriate accounting of collections and payments to
the Directors and to the auditors of the Company.
6. BOND. The Advisor, if and to the extent that the
Directors require, shall maintain a fidelity bond with a responsible surety
company in such amount as the Directors may require from time to time,
covering all directors, officers, employees and agents of the Advisor
handling funds of the Company and any investment documents or records
pertaining to investments of the Company. The bond shall inure to the
benefit of the Company in respect of losses of any property from acts of the
directors, officers, employees and agents of the Advisor through theft,
embezzlement, fraud, negligence, error or omission or otherwise. The premium
for the bond shall be an expense of the Company.
7. INFORMATION FURNISHED ADVISOR. The Directors shall
at all times keep the Advisor fully informed with regard to the investment
policy of the Company, the capitalization policy of the Company and,
generally, their current intentions as to the future of the Company. In
particular, the Directors shall notify the Advisor promptly of their
intention to sell or otherwise dispose of any of the Company's investments or
to make any new investment. The Company shall furnish the Advisor with a
certified copy of all financial statements, a signed copy of each report
prepared by independent certified public accountants and all other
information with regard to the Company's affairs as the Advisor may
reasonably request.
8. CONSULTATION AND ADVICE. In addition to the services
described elsewhere in this Agreement, the Advisor shall consult with the
Directors, and shall, at the request of the Directors or the officers of the
Company, give advice and recommendations with respect to other aspects of the
business and affairs of the Company. In general, the Advisor shall inform
the Directors of any factors, which come to its attention which the Advisor
believes would influence the policies of the Company, except to the extent
that giving that information would involve a breach of fiduciary duty.
9. DEFINITIONS. As used in this Agreement, the
following terms shall have the meanings indicated:
(a) "Affiliate" means as to any Person (i) any other
Person directly or indirectly controlling, controlled by or under common
control with such Person, (ii) any other person owning or controlling 10% or
more of the outstanding voting securities or beneficial interest of such
Person, (iii) any officer, director, trustee or general partner of such
Person and (iv) if such other Person is an officer, director, trustee or
partner of another entity, then the entity for which that Person acts in any
such capacity.
(b) "Average Invested Assets" means for any period the
average of the aggregate book value of the assets of the Company invested,
directly or indirectly, in equity interests in and loans secured by real
estate, before reserves for depreciation or bad debts or other similar
non-cash reserves computed by taking the average of such values at the end of
each month during such period.
(c) "Fiscal Year" means any period for which an income tax
return is submitted to the Internal Revenue Service and which is treated by
the Internal Revenue Service as a reporting period for the Company.
(d) "Mortgage Investment" means the assets of the Company
invested in any mortgage loans, mortgage-backed securities, notes, bonds or
other evidences of indebtedness or obligations which are secured or
collateralized by interests in real estate.
(e) "Net Income" means the total revenues of the Company
for any period, computed on the basis of its results of operations for that
period, after deduction of all expenses, excluding, however, any additions to
reserves for depreciation or bad debts or other similar non-cash reserves.
(f) "Person" means an individual, corporation,
partnership, joint venture, association, company, trust, bank or other
entity, or government and any agency and political subdivision of a
government.
(g) "Real Estate Assets" means for any calendar quarter,
the aggregate book value of the assets of the Company on the last day of the
quarter, invested directly or indirectly in interests in real estate, before
reserves for depreciation, bad debts, or other similar non-cash reserves, as
set forth in the Company's financial statements (which may be unaudited
except as elsewhere provided in this Agreement), prepared quarterly on an
accrual basis in accordance with generally accepted accounting principles.
Real Estate Assets do not include Mortgage Investments.
10. ADVISOR COMPENSATION (a) At the end of each calendar
quarter or such other interval as the parties shall agree, the Company shall
pay to the Advisor as compensation for the advisory services rendered to the
Company hereunder an annualized fee equal to the sum of (a) one-half of one
percent (.5%) of the Real Estate Assets up to and including $200,000,000 and
(b) four-tenths of one percent (.4%) of the Real Estate Assets, if any, in
excess of $200,000,000.
(b) The Board has commenced a review of various strategic
alternatives available to Franklin Select Realty Trust (the "Company") which
may lead to a merger or sale of the REIT and/or its assets. However, it is
difficult to forecast how long this process may take or whether such a
transaction will occur. The Board recognizes that under these circumstances
it may be difficult for the Adviser to retain key employees necessary to the
operation of the Company. Moreover, the Board acknowledges that the Company
will derive substantial benefit in the execution of its strategic objectives
if certain key employees are retained until the strategic review is
complete. Therefore, the Board, on behalf of the company, may determine to
establish a fund for the purpose of creating an incentive to certain key
employees of the Advisor who might otherwise depart before the completion of
the Board's strategic review. The fund will be disbursed at the discretion
of the Board with the advice of the Advisor. Any such funds will be paid to
Advisor and paid to employees.
11. STATEMENTS. The Advisor shall furnish to the Company at
least quarterly, beginning with the second calendar quarter of the term of
this Agreement, a statement showing the computation of the fee payable in
respect of the preceding calendar quarter under Section 10, even after the
termination of this Agreement. The final settlement of any fees for each
Fiscal Year shall be subject to adjustment in accordance with, and upon
completion of, the annual audit of the Company's financial statement; any
payment by the Company or repayment by the Advisor indicated as a result of
the audit shall be made promptly after the completion of the audit and shall
be reflected in the audited statements to be published by the Company.
12. COMPENSATION FOR ADDITIONAL SERVICES.
(a) Where appropriate in the sole judgment of the
Directors or the Advisor, an Affiliate of the Advisor may be retained to
perform property management services for the Company.
(b) If and to the extent that the Company shall request
the Advisor, or any director, officer, partner or employee of the Advisor, to
perform services for the Company other than those required under this
Agreement, the additional services, if performed, will be compensated
separately on terms to be agreed between that party and the Company.
13. EXPENSES OF THE ADVISOR. Without regard to the
amount of compensation received under this Agreement by the Advisor, the
Advisor shall bear the following expenses:
(a) employment expenses of the officers and directors of
the Advisor;
(b) telephone, utilities, office furniture and furnishings
and other office expenses of the Advisor; and
(c) miscellaneous administrative and other expenses of the
Advisor not relating to the performance by the Advisor of its functions
hereunder.
14. EXPENSES OF THE COMPANY. Except as expressly
otherwise provided in this Agreement, the Company shall pay all its expenses
not expressly assumed by the Advisor, and without limiting the generality of
the foregoing it is specifically agreed that the following expenses of the
Company shall be paid by the Company and shall not be paid by the Advisor:
(a) the cost of money borrowed by the Company;
(b) taxes on income and taxes and assessments on real
property and all other taxes applicable to the Company;
(c) real estate brokerage and sales commissions with
respect to the purchase or sale of real estate assets of the Company payable
to real estate brokers who cooperate with the Advisor in such transactions,
and brokerage and sales commissions with respect to the purchase or sale of
Mortgage Investments payable to mortgage brokers who cooperate with the
Advisor in such transactions;
(d) legal, accounting, underwriting commissions and fees
and any other fees and costs, including due diligence, qualification of
securities for sale in various states, listing of securities on a securities
exchange, printing, engraving and other expenses and taxes incurred in
connection with the issuance, distribution, transfer, registration, marketing
and listing of the Company's securities, including compensation of employees
of the Advisor and direct expenses of officers and employees of the Advisor
and affiliates while directly engaged in such activities on behalf of the
Company;
(e) fees, salaries and other employment costs, taxes and
expenses paid to Directors, officers and employees of the Company, including
persons who may be employees of the Advisor, other than officers of the
Advisor, or of any company which controls, is controlled by or is under
common control with the Advisor, incurred with respect to and allocable to
the prudent operation and business of the Company, other than as provided
under Section 13(a) above.
(f) fees and expenses paid to independent contractors,
appraisers, consultants, managers and other agents retained by or on behalf
of the Company and expenses (including expenses for Persons who may also be
officers or employees of the Advisor) connected with the acquisition,
financing, refinancing, disposition and ownership of real estate interests or
other property, including insurance premiums, legal services, brokerage and
sales commissions, maintenance, repair and improvement of property;
(g) expenses of maintaining and managing real estate
interests;
(h) insurance as required by the Directors (including
Directors' liability insurance);
(i) the expenses of organizing, revising, amending,
converting, modifying or terminating the Company;
(j) expenses connected with payments of dividends or
interest or distributions in cash or any other form made or caused to be made
by the Directors to holders of securities of the Company;
(k) all expenses connected with communications to holders
of securities of the Company and the other bookkeeping and clerical work
necessary in maintaining relations with holders of securities, including the
cost of printing and mailing certificates for securities, proxy solicitation
materials and reports to holders of the Company's securities;
(1) the cost of any accounting, statistical or
bookkeeping equipment necessary for the maintenance of the books and records
of the Company;
(m) transfer agent's, registrar's, dividend disbursing
agent's, dividend reinvestment plan agent's and indenture trustee's fees and
charges;
(n) legal, accounting and auditing fees and expenses not
included in (d) and (f) of this Section 14; and
(o) other ordinary and necessary expenses of the business
and affairs of the Company, other than those allocable to the Advisor under
Section 13 above.
The Company shall reimburse the Advisor or its affiliates for the
cost of rent, goods or materials furnished or advanced by them for the
benefit of the Company, and for services rendered for the benefit of the
Company. The Company's costs for services and goods provided by the Advisor
to the Company shall be based upon the cost to the Advisor and an allocable
portion of the actual compensation (including employment taxes and benefits)
of Persons involved plus an appropriate share of overhead allocable to each
Person who rendered services for the benefit of and on the business affairs
of the Company. The amounts charged to the Company by the Advisor and its
Affiliates shall not exceed those which the Company would be required to pay
to independent parties for comparable rent, materials, goods or services.
15. REFUND BY ADVISOR. In addition to the provisions of
Section 10 hereof, within 60 days after the end of any calendar year which
begins following the date the Company first commences operations after
reaching its minimum capital subscription amount, the Advisor will refund to
the Company the amount, if any, by which the Operating Expenses (as defined
in this Section 15) of the Company during such Calendar Year exceeded the
greater of (a) 2% of the Average Invested Assets or (b) 25% of Net Income
unless the Independent Directors of the Company shall have affirmatively
determined that due to unusual and non-recurring factors, such higher level
of Operating Expenses is justified for such year. For the purposes of this
Section 15, "Operating Expenses" during the Calendar Year means the aggregate
annual expenses of every character regarded as Operating Expenses in
accordance with generally accepted accounting principles, as determined by
independent accountants selected by the Directors, including regular
compensation payable to the Advisor, excluding, however, the following: (i)
the cost of money borrowed by the Company; (ii) taxes on income and taxes and
assessments on real property and all other taxes applicable to the Company;
(iii) expenses of acquiring, financing, refinancing, disposing of,
maintaining, managing and owning real estate equity interests or other
property (including the costs of legal services, brokerage and sales
commissions, maintenance, repair and improvement of property); (iv) insurance
as required by the Directors (including any Directors' liability insurance);
(v) expenses of organizing, revising, amending, converting, or terminating
the Company; (vi) expenses connected with payments of dividends or interest
or distributions in cash or any other form made or caused to be made by the
Directors to holders of securities of the Company; (vii) all expenses
connected with communications to holders of securities of the Company and the
other bookkeeping and clerical work necessary in maintaining relations with
holders of securities of the Company, including the cost of printing and
mailing certificates for securities and proxy solicitation materials and
reports to holders of securities of the Company; (viii) transfer agent's,
registrar's, dividend disbursing agent's, warrant agent's, dividend
reinvestment plan agent's and indenture trustee's fees and charges, (ix)
other legal, accounting and auditing fees and expenses; and (x) non-cash
expenditures (including depreciation, amortization and bad debt reserve).
16. OTHER ACTIVITIES. Nothing in this Agreement shall
prevent the Advisor or any of its officers, directors or employees or any of
its affiliates from engaging in other business activities related to real
estate investments, from making investments permitted to the Company by the
Company's Bylaws or from acting as advisor to any other person or entity even
though having investment policies similar to the Company (including another
real estate investment trust). The Advisor and its officers, directors or
employees and any of its Affiliates shall be free from any obligation to
present to the Company any particular investment opportunity which comes to
the Advisor or such persons, regardless of whether such opportunity is within
the Company's investment policies, provided, that the Advisor will give due
consideration to the investment objectives and financial capabilities of the
Company in determining whether to present an investment opportunity to the
Company or to another entity for which the Advisor provides similar services.
17. TERM: TERMINATION OF AGREEMENT. This Agreement shall
continue in force through December 31, 1999, and thereafter it may be renewed
annually, subject to the approval thereof by a majority of the Independent
Directors. Notice of renewal shall be given in writing by the Directors to
the Advisor not less than 60 days before the expiration of this Agreement or
of any extension of this Agreement. Notwithstanding any other provision to
the contrary, this Agreement may be terminated for any reason upon 60 days'
written notice by the Company to the Advisor or 180 days' written notice by
the Advisor to the Company, in the former case by the action of the
Directors, the Independent Directors or a majority of the shareholders of the
Company.
18. AMENDMENTS. This Agreement shall not be changed,
modified, terminated or discharged in whole or in part except by an
instrument in writing signed by both parties, or their respective successors
or assigns, or otherwise as provided in this Agreement.
19. ASSIGNMENT. This Agreement shall not be assignable
by the Advisor without the consent of the Company, except an assignment to an
Affiliate of the Advisor, or to a corporation, association, trust or other
successor organization which may take over the property and carry on the
affairs of the Advisor. A proper assignment or any other assignment of this
Agreement by the Advisor shall bind the assignee under this Agreement and by
the terms of the assignment in the same manner as the Advisor is bound. This
Agreement shall not be assignable by the Company without the consent of the
Advisor, except in the case of assignment by the Company to a corporation,
association, trust or other organization which is a successor to the
Company. The successor shall be bound under this Agreement and by the terms
of said assignment in the same manner as the Company is bound.
20. DEFAULT, BANKRUPTCY, ETC. At the option solely of
the Directors, this Agreement shall be and become terminated immediately upon
written notice of termination from the Directors to the Advisor if any of the
following events shall occur:
(a) If the Advisor shall violate any provision of
this Agreement, and after notice of the violation shall not have cured the
default within thirty (30) days or begun action within thirty (30) days to
cure the default which shall be completed with reasonable diligence; or
(b) If the Advisor shall be adjudged bankrupt or
insolvent by a court of competent jurisdiction, or an order shall be made by
a court of competent jurisdiction for the appointment of a receiver,
liquidator or trustee of the Advisor or of all or substantially all of its
property by reason of the foregoing, or approving any petition filed against
the Advisor for its reorganization, and the adjudication or order shall
remain in force or unstayed for a period of thirty (30) days; or
(c) If the Advisor shall institute proceedings for
voluntary bankruptcy or shall file a petition seeking reorganization under
the federal bankruptcy laws, or for relief under any law for the relief of
debtors, or shall consent to the appointment of a receiver for itself or for
all or substantially all its property, or shall make a general assignment for
the benefit of its creditors, or shall admit in writing its inability to pay
its debts generally as they become due.
The Advisor agrees that if any of the events specified in
subsections (b) and (c) of this Section 20 shall occur, it will give written
notice of the event to the Directors within seven (7) days after the
occurrence of the event.
21. ACTION UPON TERMINATION. From and after the
effective date of termination of this Agreement, pursuant to Sections 17, 19
or 20 herein, the Advisor shall not be entitled to compensation for further
services performed after the date of termination, but shall be paid all
compensation accruing to the date of termination, including compensation
which may have been earned but deferred.
The Advisor shall promptly upon termination:
(a) pay over to the Company all moneys collected and held
for the account of the Company pursuant to this Agreement, after deducting
any accrued compensation and reimbursement for its expenses to which it is
then entitled;
(b) deliver to the Directors a full accounting, including
a statement showing all payments collected by it and a statement of all
moneys held by it, covering the period following the date of the last
accounting furnished to the Directors;
(c) deliver to the Directors all property and documents
of the Company then in the custody of the Advisor except for copies of
documents, which the Advisor may keep; and
(d) cooperate with the Directors to provide an orderly
management transition.
22. CHANGE OF NAME. Upon termination of this Agreement
by either party, the Directors shall forthwith cause the name of the Company
to be changed to a name not containing the name "Franklin" or any
approximations or abbreviations of that name and sufficiently dissimilar to
that name as to be unlikely to cause confusion with that name.
23. INDEMNIFICATION. The Advisor, its officers,
directors, shareholders, employees, agents, subsidiaries and assigns shall be
indemnified by the Company against any liability to the Company or its
shareholders resulting from errors in judgment or other acts or omissions,
whether or not disclosed, unless a court of competent jurisdiction determines
that the liabilities or losses resulted from fraud, negligence, misconduct or
other breach of fiduciary duty by that Person.
24. MISCELLANEOUS. The Advisor assumes no responsibility
under this Agreement other than to perform the services called for in good
faith, and shall not be responsible for any action of the Directors in
following or declining to follow any advice or recommendations of the
Advisor. Neither the Advisor nor its shareholders, directors, officers or
employees shall be liable to the Company, the Directors, the holders of
securities of the Company or to any successor or assigns of the Company
except by reason of acts constituting the negligent performance of their
duties.
25. NOTICES. Any notice, report or other communication
required or permitted to be given hereunder shall be in writing unless some
other method of giving such notice, report or other communication is accepted
by the party to whom it is given, and shall be given by being delivered at
the following addresses:
The Directors and/or the Company:
Franklin Select Realty Trust
777 Mariners Island Boulevard
San Mateo, California 94403-7777
The Advisor:
Franklin Properties, Inc.
777 Mariners Island Boulevard
San Mateo, California 94403-7777
Either party may at any time give notice in writing to the other party of a
change of its address for the purpose of this Section 25.
26. HEADINGS. The section headings have been inserted
for convenience of reference only and shall not be construed to affect the
meaning, construction or effect of this Agreement.
27. GOVERNING LAW. The provisions of this Agreement
shall be construed and interpreted in accordance with the laws of the State
of California as they apply to agreements solely among California residents
to be executed and performed entirely in California.
28. EXECUTION. This instrument is executed and made on
behalf of the Company by an officer who is a Director of the Company, not
individually but solely as an officer pursuant to the Company's Bylaws and
the obligations under this Agreement are not binding upon, nor shall resort
be had to the private property of, any of the Directors, shareholders,
officers, employees or agents of the Company personally, but bind only the
Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
COMPANY:
FRANKLIN SELECT REALTY TRUST
By /s/ David P. Goss
President
ADVISOR:
FRANKLIN PROPERTIES, INC.
By /s/ David P. Goss
President
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 20, 1999, on our audits of the consolidated
financial statements and financial statement schedule of the Company as of
December 31, 1998 and 1997 and for each of the three years in the period
ended December 31, 1998, which is included in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
San Francisco, California
March 4, 1999
<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-31-1998
<PERIOD-END> DEC-31-1998
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0
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<TOTAL-LIABILITY-AND-EQUITY> 133,892
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