- --------------------------------------------------------------------------------
YOUR FUND'S OBJECTIVE
The Franklin Real Estate Securities Fund seeks to maximize total
return by investing in securities of companies operating in the real estate
industry, primarily equity real estate investment trusts (REITs).
June 15, 1995
Dear Shareholder:
We are pleased to bring you the second annual report of the Franklin Real Estate
Securities Fund, which covers the fiscal year ended April 30, 1995.
The fund focuses primarily on equity real estate investment trusts (REITs), but
may also invest in securities issued by homebuilders and developers. Equity
REITs are real estate companies that own and manage income-producing properties,
such as apartments or shopping centers. The income, primarily rent from these
properties, is generally passed through to investors in the form of dividends.
Equity REIT management teams attempt to increase property income and,
consequently, dividend payments, by raising rents on existing properties and by
acquiring or developing new properties. These companies have experienced
property management teams and generally concentrate on a specific geographic
region and/or property type.
Over the past fiscal year, the real estate market continued to benefit from the
lack of new development across most property types. At the same time, demand for
space from both new and existing tenants remained strong, resulting in
absorption of vacant space. Unfortunately, the performance of equity REITs did
not reflect these improved real estate fundamentals. Following their strong
performance in the first four months of 1994, REITs underperformed the overall
stock market for the remainder of the year. The significant rise in interest
rates throughout 1994, and the large amounts of stock issued by new and existing
REITs, resulted in lower share prices for many of these securities.
Real estate stocks, represented by the unmanaged Wilshire Real Estate Securities
Index, produced a total return of -2.03% for the one-year period ended April
30, 1995. As shown in the Performance Summary on page 4, your fund reported a
total return of -0.48% for this same period, which earned it the #1 ranking out
of 13 real estate funds, as measured by Lipper Analytical Services, Inc., a
nationally recognized mutual fund research organization.*
Our strategy continues to center on investing in REITs with strong growth
prospects and attractive valuations. We believe that companies focusing on a
single property type and maintaining a dominant position in their local markets
should have a competitive advantage in terms of future growth opportunities. The
*Lipper rankings do not include sales charges; past expense limitations
increased the fund's total returns. Rankings may have been different if these
factors had been considered.
Past performance is not indicative of future results.
<PAGE>
- --------------------------------------------------------------------------------
result of our approach ia a high-quality portfolio of stocks with stable and
growing dividends and excellent total return prospects. There are, of course,
risks involved with investing in a non-diversified fund concentrating in
real estate securities, such as declines in the value of real estate and
increased susceptibility to adverse economic or regulatory developments.
These risks are further discussed in the fund's prospectus.
On April 30, 1995, the fund's largest investment weighting was in apartment
REITs, which represented 30.2% of total net assets. Rising occupancy rates for
many of these apartments allowed for significant rent increases during the
reporting period. Although some new development is occurring within this
property type, we believe that demand will continue to outpace supply, which
could result in higher rent levels. Core holdings within this group include
Equity Residential Properties Trust, Security Capital Pacific Trust, and Merry
Land & Investment Co.
In the hotel sector, new development has been limited over the past several
years, which has set the stage for rising occupancy rates and higher room rates.
Demand for hotel rooms increased by 4.5% in 1994, while new supply of rooms
expanded by just 1.4%.* Recognizing that such dramatic improvements in the hotel
sector could lead to strong cash-flow growth, we increased the fund's weighting
in hotel properties, from 4.2% of total net assets on April 30, 1994, to 14.2%
on April 30, 1995. Our core holdings include FelCor Suite Hotels, Inc., Winston
Hotels, Inc., and Host Marriott Corp.
*Source: Smith Travel Research
"GRAPHIC MATERIAL (1) OMITTED - SEE APPENDIX". 2
"GRAPHIC MATERIAL (2) OMITTED - SEE APPENDIX".
<PAGE>
- --------------------------------------------------------------------------------
We also increased our exposure to self-storage facilities, from 2.8% of total
net assets on April 30, 1994 to 7.5% on April 30, 1995. In general, this
property type has high operating margins, low capital expenditure requirements,
and a low degree of tenant-sensitivity to rent increases. Our favorite holdings
within this group include Storage USA, Inc. and Storage Trust Realty.
Looking forward, the prospects for investing in equity REITs remain quite
attractive due to a unique combination of stable dividend yields, strong
industry fundamentals, and favorable growth opportunities. Moreover, the amount
of stock issued by new REITs has declined substantially, and many pre-existing
REITs have recently increased their dividends. Therefore, we believe that an
investment in the Franklin Real Estate Securities Fund could be an excellent way
for investors to participate in the overall strength of the real estate market
across the nation.
We appreciate your participation in the Franklin Real Estate Securities Fund and
look forward to any comments or suggestions you may have.
Sincerely,
Charles B. Johnson
Chairman of the Board
IMPORTANT NEWS FOR SHAREHOLDERS OF THE
FRANKLIN REAL ESTATE SECURITIES FUND
On May 1, 1995, Franklin Templeton added a second pricing structure for many of
its funds. Your fund now offers TWO CLASSES OF SHARES designated as "Class I"
and "Class II." The primary differences between the two classes are outlined
below:
Class I Shares will continue to have the same pricing structure, which is the
standard front-end sales charge (with breakpoints) and annual 12b-1 Plan fees.
Class II Shares have a different pricing structure with a lower initial sales
charge than Class I shares; however, they have higher annual 12b-1 Plan fees.
Also, with certain exceptions, a contingent deferred sales charge (back-end
sales charge) will generally be assessed on Class II shares redeemed within
eighteen months of a purchase.
Each class of shares will bear, pro rata, all of the common expenses of the
fund, (for example, management fees). The 12b-1 Plan fees for Class I and Class
II are different, and are assessed only with respect to the particular class.
The different expenses borne by each class of shares will result in different
net asset values, dividends and ultimately different total performance.
All fund shares outstanding before May 1, 1995 have been designated as Class I
shares. PLEASE NOTE THERE HAVE BEEN NO CHANGES TO YOUR EXISTING CLASS I ACCOUNT.
The new development is only the addition of Class II shares, which are now
available with many of our funds.
PLEASE NOTE THAT NEITHER YOUR ACCOUNT NOR ITS PRICING STRUCTURE HAS CHANGED, but
you will notice the new "Class I" share designation on all future account
statements and fund correspondence.
In assessing whether your future investments should be in Class I or Class II
shares, we encourage you to consult your investment representative.
3
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The Franklin Real Estate Securities Fund reported a total return of -0.48% for
the fiscal year ended April 30, 1995. Total return measures the change in value
of an investment, assumes reinvestment of dividends, and does not include the
maximum initial sales charge.
The fund's share price, as measured by net asset value, decreased from $10.92 on
April 30, 1994 to $10.58 on April 30, 1995. During the reporting period,
shareholders received 28 cents ($0.28) per share in dividend income. Of course,
past performance is not indicative of future results, and dividends will vary
depending on income earned by the fund.
The graph below compares the fund's performance since inception, with the
performances of the Standard & Poor's 500 Stock Index(R) (S&P 500) and the
Wilshire Real Estate Securities Index. The S&P 500(R) is an index of widely held
common stocks covering a variety of industries, whereas the Wilshire is an index
of publicly traded real estate securities, including both REITs and real estate
operating companies. Please note that the fund's performance differs from the
performance of the indices because the indices are unmanaged, do not contain
cash (the fund generally carries a certain percentage of cash at any given
time), and do not include sales charges or management fees. Of course, one
cannot invest directly in an index.
"GRAPHIC MATERIAL (3) OMITTED - SEE APPENDIX".
<TABLE>
FRANKLIN REAL ESTATE SECURITIES FUND
Periods ended April 30, 1995
- -------------------------------------------------------
<CAPTION>
SINCE
INCEPTION
ONE-YEAR (1/03/94)
- -------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -0.48% 8.68%
Average Annual Total Return(2) -4.92% 2.86%
- -------------------------------------------------------
</TABLE>
1. Cumulative total return shows the change in value of an investment over the
specified periods and does not include the maximum 4.5% initial sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the specified periods and includes the maximum 4.5% initial
sales charge.
All total return calculations assume reinvestment of dividends. Investment
return and principal value will fluctuate with market conditions and you may
have a gain or loss when you sell your shares. Past performance is not
indicative of future results.
The fund's manager has agreed in advance to waive a portion of the management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, the fund's total return would have been
lower. The waiver may be discontinued at any time.
The historical total return figures shown above pertain only to Class I shares
of the fund. Class II shares, which the fund began offering on May 1, 1995, are
subject to different fees and expenses, which will affect their performance.
Total return figures for Class II shares are not yet available. Please see the
prospectus for more details regarding Class I and Class II shares.
*Includes all sales charges and represents the change in value of an investment
over the period shown. Total return assumes reinvestment of dividends. Past
performance is not predictive of future results.
**Indices are unmanaged and include reinvested dividends.
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS 93.9%
EQUITY REIT - APARTMENTS 30.2%
11,000 Amli Residential Properties Trust.................................................. $ 200,750
6,000 Avalon Properties, Inc............................................................. 117,750
14,000 Bay Apartment Communities, Inc. ................................................... 252,000
10,000 Camden Properties Trust ........................................................... 210,000
7,900 Charles E. Smith Residential Realty, Inc. ......................................... 179,725
3,600 Columbus Realty Trust ............................................................. 64,800
20,000 Equity Residential Properties Trust ............................................... 535,000
18,500 Evans Withycombe Residential, Inc. ................................................ 346,875
8,000 Gables Residential Trust .......................................................... 147,000
8,000 Irvine Apartment Communities, Inc.................................................. 126,000
25,000 Merry Land & Investment Co. ....................................................... 471,875
16,000 Mid-America Apartments Communities, Inc. .......................................... 400,000
15,000 Oasis Residential, Inc. ........................................................... 328,125
14,000 Post Properties, Inc............................................................... 414,750
30,000 Security Capital Pacific Trust .................................................... 525,000
16,000 South West Property Trust ......................................................... 190,000
15,000 Summit Properties, Inc. ........................................................... 249,375
20,000 United Dominion Realty Trust, Inc. ................................................ 280,000
-----------
5,039,025
-----------
EQUITY REIT - DIVERSIFIED 1.7%
7,000 Colonial Properties Trust ......................................................... 160,125
4,700 TriNet Corporate Realty Trust, Inc. ............................................... 117,500
-----------
277,625
-----------
EQUITY REIT - HEALTH CARE 3.7%
5,500 Health Care Property Investors, Inc................................................ 166,375
6,000 Nationwide Health Properties, Inc. ................................................ 216,750
10,000 OMEGA Healthcare Investors, Inc. .................................................. 238,750
-----------
621,875
-----------
EQUITY REIT - HOTELS 11.4%
40,000 Equity Inns, Inc. ................................................................. 460,000
22,000 FelCor Suite Hotels, Inc. ......................................................... 514,250
30,000 RFS Hotel Investors, Inc. ......................................................... 435,000
50,000 Winston Hotels, Inc. .............................................................. 500,000
-----------
1,909,250
-----------
EQUITY REIT - INDUSTRIAL 9.1%
12,000 CenterPoint Properties Corp. ...................................................... 228,000
8,000 Duke Realty Investment, Inc. ...................................................... 218,000
14,000 Liberty Property Trust ............................................................ 260,750
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (CONT.)
EQUITY REIT - INDUSTRIAL (CONT.)
22,400 Security Capital Industrial Trust ................................................. $ 350,000
8,000 Spieker Properties, Inc. .......................................................... 156,000
14,000 Weeks Corp. ....................................................................... 306,250
-----------
1,519,000
-----------
EQUITY REIT - OFFICE 4.2%
10,000 Beacon Properties Corp. ........................................................... 196,250
8,500 Crescent Real Estate Equities, Inc................................................. 244,375
12,000 Highwoods Properties, Inc. ........................................................ 264,000
-----------
704,625
-----------
EQUITY REIT - RECREATION .6%
5,200 National Golf Properties, Inc. .................................................... 101,400
-----------
EQUITY REIT - RESIDENTIAL COMMUNITIES 4.0%
20,000 Manufactured Home Communities, Inc................................................. 315,000
7,000 ROC Communities, Inc............................................................... 140,875
9,500 Sun Communities, Inc............................................................... 203,063
-----------
658,938
-----------
EQUITY REIT - RETAIL - COMMUNITY SHOPPING CENTERS 4.8%
9,000 Developers Diversified Realty Corp. ............................................... 247,500
4,000 Federal Realty Investment Trust ................................................... 81,500
4,000 Kimco Realty Corp. ................................................................ 151,000
9,500 Vornado Realty Trust .............................................................. 320,625
-----------
800,625
-----------
EQUITY REIT - RETAIL - OUTLET CENTERS 3.2%
7,500 Chelsea GCA Realty, Inc. .......................................................... 182,813
7,000 Horizon Outlet Centers ............................................................ 154,000
3,900 McArthur Glen Realty Corp. ........................................................ 51,675
6,000 Tanger Factory Outlet Centers, Inc. ............................................... 140,250
-----------
528,738
-----------
EQUITY REIT - RETAIL - REGIONAL MALLS 5.8%
12,000 DeBartolo Realty Corp. ............................................................ 166,500
8,500 General Growth Properties Trust ................................................... 172,125
8,000 Mills Corp. ....................................................................... 136,000
10,500 Simon Property Group, Inc. ........................................................ 249,375
12,000 The Macerich Co. .................................................................. 241,500
-----------
965,500
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (CONT.)
EQUITY REIT - STORAGE 7.5%
14,400 Storage Equities, Inc. ............................................................ $ 232,200
25,000 Storage Trust Realty .............................................................. 509,375
18,000 Storage USA, Inc. ................................................................. 515,250
-----------
1,256,825
-----------
HOME BUILDERS 4.3%
9,000 (a)Beazer Homes USA, Inc. ............................................................ 128,250
5,000 Centex Corp. ...................................................................... 120,000
5,000 (a)Hovnanian Enterprises, Inc., Class A .............................................. 26,875
8,000 Kaufman & Broad Homes Corp. ....................................................... 105,000
6,000 Lennar Corp. ...................................................................... 99,000
17,500 (a)NVR, Inc. ......................................................................... 118,125
7,000 (a)U.S. Home Corp. ................................................................... 127,750
-----------
725,000
-----------
HOTEL 2.8%
42,000 (a)Host Marriott Corp. ............................................................... 462,000
-----------
REAL ESTATE DEVELOPMENT - COMMERCIAL .6%
6,000 Rouse Co. ......................................................................... 105,750
-----------
TOTAL COMMON STOCKS (COST $16,156,372) ...................................... 15,676,176
-----------
CONVERTIBLE PREFERRED STOCKS .1%
500 (b)Catellus Development Corp., $3.625 cvt. pfd., Series B (COST $24,875) ............. 20,625
-----------
TOTAL COMMON STOCKS AND CONVERTIBLE PREFERRED STOCKS (COST $16,181,247) ..... 15,696,801
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
------
<S> <C>
(c,d)RECEIVABLES FROM REPURCHASE AGREEMENTS 5.6%
$ 945,162 Joint Repurchase Agreement, 5.975%, 05/01/95 (Maturity Value $936,735)
(COST $936,269)
Collateral: U.S. Treasury Notes, 4.75% - 9.00%, 07/15/96 - 01/31/00 ............. 936,269
-----------
TOTAL INVESTMENTS (COST $17,117,516) 99.6% ............................. 16,633,070
OTHER ASSETS AND LIABILITIES, NET .4% .................................. 61,204
-----------
NET ASSETS 100.0% ...................................................... $16,694,274
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, APRIL 30, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
(NOTE 1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
At April 30, 1995, the net unrealized depreciation based on the cost of investments
for income tax purposes of $17,117,516 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost .................................................. $ 389,918
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value .................................................. (874,364)
-----------
Net unrealized depreciation ..................................................... $ (484,446)
===========
</TABLE>
PORTFOLIO ABBREVIATIONS:
REIT - Real Estate Investment Trust
(a)Non-income producing.
(b)See Note 7 regarding Rule 144A securities.
(c)Face amount for repurchase agreements is for the underlying collateral.
(d)See Note 1(e) regarding Joint Repurchase Agreements.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1995
ASSETS:
<S> <C>
Investments in securities, at value
(identified cost $16,181,247) $15,696,801
Receivables from repurchase agreements,
at value and cost 936,269
Cash 23,316
Receivables:
Dividends and interest 70,086
Receivable from investment manager 65,500
Investment securities sold 58,906
Capital shares sold 15,077
Unamortized organization costs 9,980
-----------
Total assets 16,875,935
-----------
Liabilities:
Payables:
Investment securities purchased 133,085
Capital shares repurchased 18,154
Distribution fees 8,468
Shareholder servicing costs 961
Accrued expenses and other liabilities 20,993
-----------
Total liabilities 181,661
-----------
Net assets, at value $16,694,274
===========
Net assets consist of:
Undistributed net investment income $ 272,168
Unrealized depreciation on investments (484,446)
Accumulated net realized gain 24,873
Capital shares 15,777
Additional paid-in capital 16,865,902
-----------
Net assets, at value $16,694,274
===========
Computation of net asset value and
offering price per share:
Net asset value*
($16,694,274 (PI) 1,577,732
shares outstanding) $10.58
===========
Maximum offering price
(100/95.5 of $10.58) $11.08
===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1995
<S> <C> <C>
Investment income:
Dividends $595,739
Interest 72,746
--------
Total income $ 668,485
Expenses:
Distribution fees (Note 6) 25,837
Shareholder servicing costs (Note 6) 9,370
Reports to shareholders 19,816
Registration fees 30,530
Professional fees 10,319
Amortization of organization costs
(Note 2) 2,722
Custodian fees 1,331
Other 953
Payments from manager (Note 6) (68,222)
--------
Total expenses 32,656
---------
Net investment income 635,829
---------
Realized and unrealized gain (loss)
on investments:
Net realized gain 24,873
Net unrealized depreciation (661,697)
---------
Net realized and unrealized loss
on investments (636,824)
---------
Net decrease in net assets resulting
from operations $ (995)
=========
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED APRIL 30, 1995 AND THE PERIOD ENDED APRIL 30, 1994
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
APRIL 30, 1995 APRIL 30, 1994*
-------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income........................................................... $ 635,829 $ 30,886
Net realized gain from security transactions.................................... 24,873 --
Net unrealized appreciation (depreciation) on investments....................... (661,697) 177,251
----------- ----------
Net increase (decrease) in net assets resulting from operations............. (995) 208,137
Distributions to shareholders from undistributed net investment income........... (394,547) --
Increase in net assets from capital share transactions (Note 4).................. 11,455,576 5,326,103
----------- ----------
Net increase in net assets.................................................. 11,060,034 5,534,240
Net assets:
Beginning of period.............................................................. 5,634,240 100,000
----------- ----------
End of period (including undistributed net investment income of
$272,168 - 1995 and $30,886 - 1994)............................................. $16,694,274 $5,634,240
=========== ==========
</TABLE>
*January 3, 1994 (effective date of registration) to April 30, 1994.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Real Estate Securities Trust (the Trust) is an open-end,
non-diversified management investment company (mutual fund) registered under the
Investment Company Act of 1940 as amended. The Trust currently consists of one
fund, Franklin Real Estate Securities Fund (the Fund). The Fund will begin
offering two classes of shares, Class I and Class II, effective May 1, 1995.
Class I shares will be sold with a higher front-end sales charge. Class II
shares will be sold with a lower front-end sales charge, but may be subject to a
contingent deferred sales charge. Each class of shares will have the same
rights, except with respect to the effect of the respective sales charges, the
distribution fees borne by each class, voting rights on matters affecting a
single class, and the exchange privilege of each class.
On May 1, 1995, all previously outstanding shares will become Class I shares.
Realized and unrealized gains or losses and net investment income, other than
class specific expenses, will be allocated daily to each class of shares based
upon the relative proportion of net assets of each class.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. SECURITY VALUATION: Portfolio securities listed on a securities exchange or
on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is no
such reported sale, within the range of the most recent quoted bid and ask
prices. Other securities for which market quotations are readily available are
valued at current market values, obtained from pricing services, which are based
on a variety of factors, including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific securities. Portfolio securities which are
traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined by
the Manager. Other securities for which market quotations are not available, if
any, are valued in accordance with procedures established by the Board of
Trustees.
The fair values of securities restricted as to resale, if any, are determined
following procedures established by the Board of Trustees.
b. INCOME TAXES: The Trust intends to continue to qualify for the tax treatment
applicable to regulated investment companies under the Internal Revenue Code and
to make the requisite distributions to its shareholders which will be sufficient
to relieve it from income and excise taxes. Therefore, no income tax provision
is required.
c. SECURITY TRANSACTIONS: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the basis of specific identification for
both financial statement and income tax purposes.
d. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily.
A portion of the distributions received by the Fund from investments in Real
Estate Investment Trust (REIT) securities may be characterized as tax basis
return of capital (ROC) distributions, which are not recorded as dividend
income, but reduce the cost basis of the REIT securities. ROC distributions
exceeding the cost basis of the REIT security are recognized by the Fund as
capital gain.
e. REPURCHASE AGREEMENTS: The Trust may enter into a Joint Repurchase Agreement
whereby its uninvested cash balance is deposited into a joint cash account to be
used to invest in one or more repurchase agreements with government securities
dealers recognized by the Federal Reserve Board and/or member banks of the
Federal Reserve System. The value and face amount of the Joint Repurchase
Agreement are allocated to the Trust based on its pro rata interest.
11
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
e. REPURCHASE AGREEMENTS (CONT.)
In a repurchase agreement, the Trust purchases a U.S. government security from a
dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Trust to
the seller, collateralized by the underlying security. The transaction requires
the initial collateralization of the seller's obligation by U.S. government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Trust, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Trust's custodian and held until resold to the
dealer or bank. At April 30, 1995, all outstanding joint repurchase agreement
held by the Trust had been entered into on April 28, 1995.
2. UNAMORTIZED ORGANIZATION COSTS
The organization costs of the Trust are amortized on a straight-line basis over
a period of five years from January 3, 1994 (the effective date of registration
under the Securities Act of 1933). In the event Franklin Resources, Inc. (which
was the sole shareholder prior to the effective date) redeems its seed money
shares within the five-year period, the pro rata share of the then-unamortized
deferred organization cost will be deducted from the redemption price paid to
Franklin Resources, Inc. New investors purchasing shares of the Trust subsequent
to that date bear such costs during the amortization period only as such charges
are accrued daily against investment income.
3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At April 30, 1995 for tax purposes, the Trust had accumulated undistributed net
realized gains of $24,873.
For tax purposes, the aggregate cost of securities and unrealized depreciation
of the Trust are the same as for financial statement purposes at April 30, 1995.
4. TRUST SHARES
At April 30, 1995, there was an unlimited number of $.01 par value shares of
beneficial interest authorized. Transactions in the Trust's shares for the year
ended April 30, 1995 and the period ended April 30, 1994 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
APRIL 30, 1995 APRIL 30, 1994+
------------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ------- ----------
<S> <C> <C> <C> <C>
Shares sold ............................................... 832,752 $ 8,930,068 387,262 $4,040,622
Shares issued in reinvestment of distributions............. 28,085 288,993 -- --
Shares redeemed ........................................... (127,508) (1,332,755) (41) (447)
Changes from exercise of exchange privilege
Shares sold .............................................. 534,616 5,749,100 119,351 1,293,160
Shares redeemed .......................................... (206,118) (2,179,830) (667) (7,232)
---------- ----------- ------- ----------
Net increase .............................................. 1,061,827 $11,455,576 505,905 $5,326,103
========== =========== ======= ==========
</TABLE>
+January 3, 1994 (effecive date of registration) to April 30, 1994.
12
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the year
ended April 30, 1995 aggregated $12,414,493 and $435,282, respectively.
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., ("Manager"), under the terms of a management agreement,
provides investment advice, administrative services, office space and facilities
to the Trust, and receives fees computed monthly on the net assets of the Trust
at an annualized rate of 5/8 of 1% of the first $100 million of average daily
net assets of the Trust, 1/2 of 1% of average daily net assets in excess of $100
million up to $250 million, 45/100 of 1% of average daily net assets in excess
of $250 million up to $10 billion, 44/100 of 1% of average daily net assets in
excess of $10 billion up to $12.5 billion, 42/100 of 1% of average daily net
assets in excess of $12.5 billion up to $15 billion and 40/100 of 1% of average
daily net assets in excess of $15 billion. The terms of the management agreement
provide that aggregate annual expenses of the Trust be limited to the extent
necessary to comply with the limitations set forth in the laws, regulations and
administrative interpretations of the states in which the Trust's shares are
registered. The Trust's expenses did not exceed these limitations; however, for
the year ended April 30, 1995, Franklin Advisers, Inc. agreed in advance to
waive the management fees of $81,809, and made payments of $68,222 for other
expenses as shown in the Statement of Operations.
In its capacity as underwriter for the shares of the Trust, Franklin/Templeton
Distributors, Inc. received commissions on sales of the Trust's shares for the
year ended April 30, 1995 totaling $383,480, of which $369,432 was paid to other
dealers. Commissions are deducted from the gross proceeds received from the sale
of the shares of the Trust, and as such are not expenses of the Trust.
Under the terms of a shareholder service agreement with Franklin/Templeton
Investor Services, Inc., the Trust pays costs on a per shareholder account
basis. Such costs incurred for the year ended April 30, 1995 aggregated $9,370,
of which $7,354 was paid to Franklin/Templeton Investor Services, Inc.
Under the terms of a distribution agreement pursuant to Rule 12b-1 of the
Investment Company Act of 1940, the Trust will reimburse Franklin/Templeton
Distributors, Inc. in an amount up to 0.25% per annum of the Trust's average
daily net assets for costs incurred in the promotion, offering and marketing of
the Trust's shares. Fees incurred by the Trust under the agreement aggregated
$25,837 for the year ended April 30, 1995.
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc. and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.
At April 30, 1995, Franklin Resources, Inc. owned 13% of the Trust's outstanding
shares.
7. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Trust values these
securities as disclosed in Note 1.
At April 30, 1995, the Trust held 144A security with a value of $20,625,
representing 0.12% of the Trust's net assets. See the accompanying Statement of
Investments in Securities and Net Assets for specific information on such
security.
13
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
8. FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
year are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 3, 1994++
APRIL 30, 1995 TO APRIL 30, 1994
-------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value at beginning of year............................................. $10.92 $10.00
------ ------
Net investment income ........................................................... .39 .06
Net realized and unrealized gain (loss) on securities ........................... (.45) .86
------- ------
Total from investment operations ................................................ (.06) .92
------- ------
Distributions from net investment income ........................................ (.28) --
------- -------
Net asset value at end of year................................................... $10.58 $10.92
======= =======
Total Return*.................................................................... (.48%) 9.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in $000s) ............................................ $16,694 $5,634
Ratio of expenses to average net assets.......................................... .25% .25%+
Ratio of expenses to average net assets
(excluding waiver and payment by manager)++...................................... 1.40% 2.91%+
Ratio of net investment income to average net assets ............................ 4.86% 3.19%+
Portfolio turnover rate ......................................................... 3.74% --%
</TABLE>
*Total return measures the change in value of an investment over the period
indicated and is not annualized. It does not include the maximum 4.5% initial
sales charge and assumes reinvestment of dividends and capital gains, if
any, at net asset value.
+Annualized.
++During the periods indicated, the Manager agreed in advance to waive its
management fees and made payments of other expenses incurred by the Trust.
++Effective date of registration.
The percentage of income dividends paid by the Fund during the fiscal year ended
April 30, 1995, which qualified for the 70% dividends received deduction for
corporations, was 0.74%. The Trust hereby designates these amounts as dividends
qualifying for the dividends received deductions under Internal Revenue Code
Section 854(b)(2).
14
<PAGE>
FRANKLIN REAL ESTATE SECURITIES TRUST
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
Franklin Real Estate Securities Trust:
We have audited the accompanying statement of assets and liabilities of the
Franklin Real Estate Securities Trust, including the statement of investments in
securities and net assets, as of April 30, 1995, and the related statement of
operations for the year then ended, the statements of changes in net assets and
the financial highlights for each of the periods indicated thereon. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significiant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Real Estate Securities Trust as of April 30, 1995, the results of its
operations for the year then ended, the changes in its net assets, and the
financial highlights for each of the periods indicated thereon, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 2, 1995
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
15
<PAGE>
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304 (a) of REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie chart format the fund's securities breakdown by
geographic location as a percentage of the fund's total net assets.
<TABLE>
<CAPTION>
Geographic Breakdown on 4/30/95
<S> <C>
Southeast 33.1
National 23.5
Southwest 13.4
Midwest 10
Northeast 8.1
Northwest 5.9
Cash 6
</TABLE>
GRAPHIC MATERIAL (2)
This chart shows in pie chart format the fund's securities breakdown by
property type as a percentage of the fund's total net assets.
<TABLE>
<CAPTION>
Property-Type Breakdown on 4/30/95
<S> <C>
Apartments 30.2
Hotels 14.2
Retail 13.8
Industrial 9.1
Storage Centers 7.5
Homebuilders 4.3
Office 4.2
Manufactured Home Parks 3.9
Health Care 3.7
Other 3.1
Cash 6
</TABLE>
GRAPHIC MATERIAL(3)
The following line graph hypothetically compares the performance of the
Franklin Real Estate Securities Fund to that of the S & P 500 Stock Index
and the Wilshire Real Estate Securities Index on a $10,000 investment
from 1/3/94 to 4/30/95.
<TABLE>
<CAPTION>
4/30/95 Franklin S&P Wilshire
Real Index Real Estate
Estate Index
<S> <C> <C> <C>
1/3/94 $9,551 $10,000 $10,000
1/31/94 $9,790 $10,340 $10,300
2/28/94 $10,334 $10,060 $10,721
3/31/94 $10,201 $9,621 $10,225
4/30/94 $10,430 $9,744 $10,339
5/31/94 $10,621 $9,904 $10,554
6/30/94 $10,392 $9,661 $10,347
7/31/94 $10,382 $9,978 $10,370
8/31/94 $10,401 $10,387 $10,363
9/30/94 $10,267 $10,134 $10,190
10/31/94 $9,943 $10,362 $9,817
11/30/94 $9,589 $9,985 $9,433
12/31/94 $10,468 $10,133 $10,164
1/31/95 $10,125 $10,395 $9,836
2/28/95 $10,302 $10,800 $10,144
3/31/95 $10,400 $11,119 $10,203
4/30/95 $10,380 $11,446 $10,129
</TABLE>
