Your Fund's Objective:
The Franklin Real Estate Securities Fund seeks to maximize total return by
investing in securities of companies in the real estate industry, primarily
equity real estate investment trusts (REITs).
Equity real estate investment trusts (REITs) are real estate companies that own
and manage income-producing properties such as apartments or hotels. The income,
primarily rent from these properties, is generally passed on to investors in the
form of dividends. These companies provide experienced property management teams
and generally concentrate on a specific geographic region and property type.
June 17, 1996
Dear Shareholder:
We are pleased to bring you the third annual report of the Franklin Real Estate
Securities Fund, which covers the fiscal year ended April 30, 1996.
The U.S. real estate market continued to improve during the reporting period. In
general, limited new property development and strong demand for space resulted
in rising occupancy levels and rental rates. However, real estate fundamentals
typically vary according to property type or geographic region. For example,
over the past year, the retail sector experienced a period of weak demand and
overbuilding, while hotel properties enjoyed stronger demand and limited new
development. Although demand for real estate remained weak in the Northeast,
strong job growth caused demand to rise in the West. We are pleased to report
that, within this environment, the fund's Class I shares delivered a one-year
total return of +24.25%, as discussed in the Performance Summary on page 6. This
surpassed the fund's benchmark, the unmanaged Wilshire Real Estate Securities
Index, which posted a total return of +19.39% for the same period.
This strong performance was primarily the result of our long-term investment
strategy, which focuses on property types and geographic regions with strong
supply and demand fundamentals. Within each property sector, we target stocks
with strong growth prospects and attractive valuations. As a result, we
concentrated the majority of the fund's investments during the reporting period
in the apartment, hotel, industrial and self-storage property types, where we
anticipated the most favorable supply and demand characteristics.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Although apartments remain the fund's largest property type weighting, we
reduced our exposure to this sector over the course of the fiscal year, from
30.2% to 22.2% of total net assets. The positions we sold were beginning to
experience slower growth due to rapidly rising property operating expenses, or
weakness in specific regional markets caused by increased levels of new property
development or declining job and population growth. We continue to hold
positions of high-quality apartment operators with strong cash flow growth, such
as Equity Residential Properties Trust and Security Capital Pacific Trust.
Recognizing that certain California apartment markets seemed to be poised for
recovery, we increased our holdings of Bay Apartment Communities, Inc. and
Irvine Apartment Communities, Inc., two California-based equity REITs.
In the hotel sector, growing demand for rooms continued to outpace new
construction during the year, driving room and occupancy rates higher.
Anticipating that this trend should continue, we increased the fund's exposure
to the hotel sector, from 14.2% of total net assets on April 30, 1995 to 17.3%
on April 30, 1996. Several new hotel positions added to the portfolio were
Starwood Lodging Trust, Red Lion Hotels, Inc. and Patriot American Hospitality,
Inc. Our core holdings in this property type include FelCor Suite Hotels, Inc.,
Winston Hotels, Inc. and Host Marriott Corporation.
Three other positions were added to the fund's portfolio during the fiscal year.
First, we purchased shares of Security Capital US Realty, a company that owns
strategic equity positions in both private and public U.S.- based real estate
companies. We also initiated positions in Southern Energy Homes, Inc. and
Belmont Homes, Inc., two manufactured-home builders located in the Southeast. We
see an opportunity to participate in the continued growth of this industry as
home buyers shift to more affordable alternatives such as manufactured homes.
Our exposure to the retail sector remained limited because we believe this
industry faces significant obstacles, including lower profit margins, increased
competition and slow sales growth. Within this sector, we continued to focus on
the leading owners and operators of regional malls, shopping centers and factory
outlets that, in our opinion, are well-positioned to benefit in the future by
acquiring retail properties from distressed sellers.
Looking forward, we will remain focused on identifying those property types and
geographic areas exhibiting the most favorable supply and demand fundamentals.
Within each sector, we will continue to emphasize attractively valued securities
of well-managed companies generating strong cash flow and dividend growth. In
our opinion, the real estate industry should continue to benefit from lim-ited
new development and steady demand for space from both new and existing tenants,
and we therefore believe that the securities held in the fund's portfolio offer
attractive total return potential.
This discussion reflects the strategies we employed for the fund during the
fiscal year, and includes our opinions as of the close of the period. Since
economic and market conditions are constantly changing, our strategies and our
evaluations, conclusions and decisions regarding portfolio holdings may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities we purchase or sell for the fund.
Of course, there are special 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 discussed in the fund's prospectus.
We appreciate your participation in the Franklin Real Estate Securities Fund and
welcome any comments or suggestions you may have.
Sincerely,
Charles B. Johnson
Chairman of the Board
Franklin Real Estate Securities Fund
Performance Summary
Class I
The Franklin Real Estate Securities Fund Class I shares provided a total return
of +24.25% for the one-year period ended April 30, 1996. Total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains distributions, and does not include the initial sales charge.
As measured by net asset value, the price of the fund's Class I shares increased
$2.06 per share, from $10.58 on April 30, 1995 to $12.64 on April 30, 1996.
During the reporting period, Class I shareholders received 47 cents ($0.47) per
share in dividend income. Of course, past performance does not guarantee future
results, and dividends will vary depending on income earned by the fund.
The graph on page 7 compares the performance of the fund's Class I shares since
inception, with the performance of the Standard & Poor's 500 Stock Index(R) (S&P
500(R)) and the Wilshire Real Estate Securities Index. The S&P 500 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. Of course, such unmanaged market
indices have inherent performance differentials in comparison with any fund.
They don't include management fees to cover salaries of security analysts or
portfolio managers, or take into account commissions or market spreads involved
with buying and selling stocks. And, unlike indices, mutual funds are never 100%
invested because of the need to have cash on hand to redeem shares. In addition,
the performance shown for the fund includes the maximum initial sales charge,
all fund expenses and account fees. If operating expenses such as the Franklin
Real Estate Securities Fund's had been applied to these indices, their
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in an index directly. Past
performance is not predictive of future results.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Real Estate Securities Fund
Class I
Periods ended April 30, 1996
Since
Inception
1-Year (1/3/94)
Cumulative Total Return1 24.25% 35.03%
Average Annual Total Return2 18.64% 11.56%
Value of $10,000
Investment3 $11,864 $12,897
1. Cumulative total return measures 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 measures the average annual change in value of an
investment over the specified periods and includes the maximum 4.5% initial
sales charge.
3. These figures represent the value of a
hypothetical $10,000 investment in the fund over the specified periods and
include the maximum 4.5% initial sales charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. 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 predictive of future results.
The fund's manager has agreed in advance to waive a portion of its 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, upon notice to the fund's
Board of Trustees.
Performance Summary
Class II
The Franklin Real Estate Securities Fund Class II shares provided a total return
of +23.21% for the one-year period ended April 30, 1996. Total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains distributions, and does not include sales charges.
As measured by net asset value, the price of the fund's Class II shares
increased $1.97 per share, from $10.59 at inception on May 1, 1995 to $12.56 on
April 30, 1996. During the reporting period, Class II shareholders received 45.5
cents ($0.455) per share in dividend income. Of course, past performance does
not guarantee future results, and dividends will vary depending on income earned
by the fund.
The graph on page 9 compares the perform-ance of the fund's Class II shares
since inception, with the performance of the Standard & Poor's 500 Stock
Index(R) (S&P 500(R)) and the Wilshire Real Estate Securities Index. The S&P 500
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. Of course, such
unmanaged market indices have inherent performance differentials in comparison
with any fund. They don't include management fees to cover salaries of security
analysts or portfolio managers, or take into account commissions or market
spreads involved with buying and selling stocks. And, unlike indices, mutual
funds are never 100% invested because of the need to have cash on hand to redeem
shares. In addition, the performance shown for the fund includes sales charges,
all fund expenses and account fees. If operating expenses such as the Franklin
Real Estate Securities Fund's had been applied to these indices, their
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in an index directly. Past
performance is not predictive of future results.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Real Estate Securities Fund
Class II
Period ended April 30, 1996
1-Year
Cumulative Total Return1 23.21%
Average Annual Total Return2 20.95%
Value of $10,000 Investment3 $12,095
1. Cumulative total return measures the change in value of an investment over
the specified period and does not include the 1.0% initial sales charge or the
1.0% contingent deferred sales charge (CDSC), applicable to shares redeemed
within the first 18 months of investment.
2. Average annual total return measures the change in value of an investment
over the specified period and includes the 1.0% initial sales charge and the
1.0% CDSC, applicable to shares redeemed within the first 18 months of
investment.
3. This figure represents the value of a hypothetical $10,000 investment in the
fund over the specified period and includes all sales charges.
All calculations assume reinvestment of dividends and capital gains at net asset
value. 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 predictive of future results.
The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operat-ing 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, upon notice to the fund's Board of
Trustees.
<TABLE>
<CAPTION>
FRANKLIN REAL ESTATE SECURITIES TRUST
Franklin Real Estate Securities Fund
Statement of Investments in Securities and Net Assets, April 30, 1996
Value
Shares (Note 1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 88.5%
Equity REIT - Apartments 22.1%
25,000 Amli Residential Properties Trust ............................................... $ 496,875
40,000 Bay Apartment Communities, Inc. ................................................. 1,005,000
27,000 Camden Property Trust ........................................................... 641,250
42,000 Equity Residential Properties Trust ............................................. 1,354,500
32,400 Evans Withycombe Residential, Inc. .............................................. 700,650
25,000 Gables Residential Trust ........................................................ 590,625
34,000 Irvine Apartment Communities, Inc. .............................................. 680,000
38,000 Oasis Residential, Inc. ......................................................... 855,000
24,000 Post Properties, Inc. ........................................................... 807,000
40,000 Security Capital Pacific Trust .................................................. 835,000
43,000 South West Property Trust ....................................................... 585,875
15,000 Summit Properties, Inc. ......................................................... 286,875
----------
8,838,650
----------
Equity REIT - Health Care 4.5%
14,000 Health Care Property Investors, Inc. ............................................ 441,000
25,000 Nationwide Health Properties, Inc. .............................................. 496,875
31,000 Omega Healthcare Investors, Inc. ................................................ 868,000
----------
1,805,875
----------
Equity REIT - Hotels 12.3%
77,000 Equity Inns, Inc. ............................................................... 914,375
46,500 FelCor Suite Hotels, Inc. ....................................................... 1,354,313
27,000 Patriot American Hospitality, Inc. .............................................. 752,625
26,000 Starwood Lodging Trust .......................................................... 861,250
88,000 Winston Hotels, Inc. ............................................................ 1,034,000
----------
4,916,563
----------
Equity REIT - Industrial 8.6%
23,000 CenterPoint Properties Corp. .................................................... 554,875
20,000 Duke Realty Investment, Inc. .................................................... 592,500
32,000 Liberty Property Trust .......................................................... 660,000
31,500 Security Capital Industrial Trust ............................................... 543,375
18,000 Spieker Properties, Inc. ........................................................ 468,000
25,000 Weeks Corp. ..................................................................... 609,375
----------
3,428,125
----------
Equity REIT - Mixed Property Type 1.4%
23,500 Colonial Properties Trust ....................................................... 564,000
----------
Equity REIT - Office 3.9%
20,000 Beacon Properties Corp. ......................................................... $ 512,500
15,000 Crescent Real Estate Equities, Inc. ............................................. 508,125
18,100 Highwoods Properties, Inc. ...................................................... 547,525
----------
1,568,150
----------
Equity REIT - Residential Communities 3.9%
27,000 Manufactured Home Communities, Inc. ............................................. 509,625
20,000 ROC Communities, Inc. ........................................................... 472,500
22,000 Sun Communities, Inc. ........................................................... 574,750
----------
1,556,875
----------
Equity REIT - Retail - Community Shopping Centers 2.9%
12,500 Developers Diversified Realty Corp. ............................................. 364,060
12,000 Kimco Realty Corp. .............................................................. 312,000
13,000 Vornado Realty Trust ............................................................ 490,750
----------
1,166,810
----------
Equity REIT - Retail - Outlet Centers 2.0%
14,000 Chelsea GCA Realty, Inc. ........................................................ 399,000
16,500 Tanger Factory Outlet Centers, Inc. ............................................. 404,250
----------
803,250
----------
Equity REIT - Retail - Regional Malls 4.7%
27,800 DeBartolo Realty Corp. .......................................................... 430,900
22,500 The Macerich Company ............................................................ 435,938
28,000 The Mills Corp. ................................................................. 493,500
22,000 Simon Property Group, Inc. ...................................................... 506,000
----------
1,866,338
----------
Equity REIT - Storage 7.4%
46,000 Public Storage, Inc. ............................................................ 943,000
62,000 Storage Trust Realty ............................................................ 1,356,250
20,000 Storage USA, Inc. ............................................................... 662,500
----------
2,961,750
----------
Home Builders 7.1%
14,000 aBeazer Homes USA, Inc. .......................................................... 224,000
40,000 Belmont Homes, Inc. ............................................................. 905,000
7,000 Centex Corp. .................................................................... 189,000
19,000 Kaufman & Broad Homes Corp. ..................................................... 268,375
6,000 Lennar Corp. .................................................................... 150,000
17,500 a,dVR, Inc. ........................................................................ 177,188
33,000 aSouthern Energy Homes, Inc. ..................................................... $ 581,625
13,000 aU.S. Home Corp. ................................................................. 323,375
----------
2,818,563
----------
Hotels 5.0%
85,500 aHost Marriott Corp. ............................................................. 1,143,563
38,000 aRed Lion Hotels, Inc. ........................................................... 836,000
----------
1,979,563
----------
Mixed Property Type 2.6%
100,000 aSecurity Capital US Realty ...................................................... 1,016,000
----------
Total Common Stocks (Cost $31,662,621) .......................................... 35,290,512
----------
Convertible Preferred Stocks .1%
500 bCatellus Development Corp., $3.625 cvt. pfd., Series B (Cost $24,875) ........... 26,000
----------
1,684,800 Total Common Stocks and Convertible Preferred Stocks (Cost $31,687,496)...... 35,316,512
----------
Face
Amount
- ----------
cReceivables from Repurchase Agreements 11.2%
$4,449,469 Joint Repurchase Agreement, 5.326%, 5/01/96 (Maturity Value $4,465,603)
(Cost $4,464,942)
Bear Stearns and Co., Inc., (Maturity Value $894,801)
Collateral: U.S. Treasury Notes, 5.625% - 8.75%, 04/30/97 - 10/31/00
B. T. Securities Corp., (Maturity Value $894,801)
Collateral: U.S. Treasury Notes, 6.125% - 7.25%, 11/30/96 - 05/15/98
Donaldson, Lufkin & Jenrette, (Maturity Value $894,801)
Collateral: U.S. Treasury Notes, 5.625% - 8.875%, 02/28/97 - 11/15/99
Fuji Securities, Inc., (Maturity Value $894,801)
Collateral : U.S. Treasury Bills, 09/26/96 - 01/09/97
U.S. Treasury Notes, 6.25% - 9.125%, 05/15/99 - 08/31/00
SBC Capital Markets, Inc., (Maturity Value $886,399)
Collateral: U.S. Treasury Notes, 6.875% - 8.25%, 07/15/98 - 07/31/99 ........ 4,464,942
----------
Total Investments (Cost $36,152,438) 99.7% ........................... 39,781,454
Other Assets and Liabiilities, Net 0.3% .............................. 134,881
----------
Net Assets 100.0% .................................................... $39,916,335
==========
At April 30, 1996, the net unrealized appreciation based on the
cost of investments for income tax purposes of $36,152,438 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there was an excess of value over tax cost ............................. $ 3,741,643
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value.............................. (112,627)
----------
Net unrealized appreciation ................................................... $ 3,629,016
==========
PORTFOLIO ABBREVIATION:
REIT - Real Estate Investment Trust
aNon-income producing.
bPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
cFace amount for repurchase agreements is for the underlying collateral. See
Note 1(f) regarding Joint Repurchase Agreement.
dSee Note 7 regarding restricted securities.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN REAL ESTATE SECURITIES TRUST
Franklin Real Estate Securities Fund
Financial Statements
Statement of Assets and Liabilities
April 30, 1996
Assets:
<S> <C>
Investments in securities, at value (identified cost $31,687,496)................................ $35,316,512
Receivables from repurchase agreements, at value and cost........................................ 4,464,942
Cash............................................................................................. 128,517
Receivables:
Capital shares sold............................................................................. 445,727
Dividends and interest.......................................................................... 54,536
Unamortized organization costs (Note 2).......................................................... 7,259
----------
Total assets................................................................................ 40,417,493
----------
Liabilities:
Payables:
Investment securities purchased................................................................. 442,192
Capital shares repurchased........................................................................ 5,006
Distribution fees............................................................................... 31,313
Management fees................................................................................. 18,393
Shareholder servicing costs..................................................................... 3,427
Accrued expenses and other liabilities........................................................... 827
----------
Total liabilities........................................................................... 501,158
----------
Net assets, at value.............................................................................. $39,916,335
==========
Net assets consist of:
Undistributed net investment income.............................................................. $ 373,600
Net unrealized appreciation on investments....................................................... 3,629,016
Undistributed net realized gain.................................................................. 123,399
Class I capital shares........................................................................... 29,807,636
Class II capital shares.......................................................................... 5,982,684
----------
Net assets, at value.............................................................................. $39,916,335
==========
Net asset value per share for Class I* ($33,634,236 / 2,660,576 shares outstanding)............... $12.64
----------
Maximum offering price per share for Class I (100/95.5 of $12.64)................................. $13.24
==========
Net asset value per share for Class II* ($6,282,099 / 500,271 shares outstanding)................. $12.56
----------
Maximum offering price per share for Class II (100/99 of $12.56).................................. $12.69
==========
*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.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN REAL ESTATE SECURITIES TRUST
Franklin Real Estate Securities Fund
Financial Statements (cont.)
Statement of Operations
for the year ended April 30, 1996
Investment income:
<S> <C>
Dividends.............................................................................. $1,207,948
Interest (Note 1)...................................................................... 156,805
----------
Total income...................................................................... $1,364,753
Expenses:
Management fees (Note 6)............................................................... 169,354
Distribution fees - Class I (Note 6)................................................... 56,275
Distribution fees - Class II (Note 6).................................................. 23,122
Registration fees...................................................................... 33,137
Reports to shareholders................................................................ 26,619
Shareholder servicing costs (Note 6)................................................... 27,535
Professional fees...................................................................... 9,550
Amortization of organization costs (Note 2)............................................ 2,722
Custodian fees......................................................................... 2,333
Other.................................................................................. 3,405
Management fees waived by manager (Note 6)............................................. (155,262)
----------
Total expenses.................................................................... 198,790
----------
Net investment income............................................................ 1,165,963
----------
Realized and unrealized gain on investments:
Net realized gain...................................................................... 123,399
Net unrealized appreciation............................................................ 4,113,462
----------
Net realized and unrealized gain on investments......................................... 4,236,861
----------
Net increase in net assets resulting from operations.................................... $5,402,824
==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN REAL ESTATE SECURITIES TRUST
Franklin Real Estate Securities Fund
Financial Statements (cont.)
Statements of Changes in Net Assets
for the years ended April 30, 1996 and 1995
Year Ended Year Ended
4/30/96 4/30/95
---------- ----------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income......................................................... $ 1,165,963 $ 635,829
Net realized gain from security transactions.................................. 123,399 24,873
Net unrealized appreciation (depreciation) on investments..................... 4,113,462 (661,697)
---------- ----------
Net increase (decrease) in net assets resulting from operations........... 5,402,824 (995)
Distributions to shareholders from undistributed net investment income:
Class I....................................................................... (993,820) (394,547)
Class II...................................................................... (95,584) --
Increase in net assets from capital share transactions (Note 3)................ 18,908,641 11,455,576
---------- ----------
Net increase in net assets................................................ 23,222,061 11,060,034
Net assets:
Beginning of year.............................................................. 16,694,274 5,634,240
---------- ----------
End of year (including undistributed net investment income of
$348,727 - 1996 and $272,168 - 1995) ......................................... $39,916,335 $16,694,274
========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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 seeks to
provide investors with a high level of total return. In connection with this
objective, the Fund will invest primarily in securities of companies operating
in the real estate industry.
The Fund offers two classes of shares, Class I and Class II. Class I shares are
sold with a higher front-end sales charge than Class II shares. Each class of
shares may be subject to a contingent deferred sales charge, and has 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.
The offering of Class II shares began May 1, 1995, at which time all previously
outstanding shares became Class I shares.
The following is a summary of significant accounting policies consistently
followed by the Fund 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 for which
market quotations are readily available are valued at the last sale price or, if
there is no sale price, within the range of the most recent quoted bid and asked
prices. Other securities are valued based on a variety of factors, including
yield, risk, maturity, trade activity and recent developments related to the
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. The Fund may utilize a
pricing service, bank or broker/dealer experienced in such matters to perform
any of the pricing functions, under procedures approved by the Board of Trustees
(the Board). Securities for which market quotations are not available are valued
in accordance with procedures established by the Board.
The fair values of securities restricted as to resale are determined following
procedures established by the Board.
b. Income Taxes:
The Fund 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
the Fund from income and excise taxes.
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.
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.
Realized and unrealized gains or losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
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. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
f. Repurchase Agreements
The Fund 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
Fund based on its pro-rata interest.
A repurchase agreement is accounted for as a loan by the Fund to the seller,
collateralized by underlying U.S. government securities, which are delivered to
the Fund's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the Fund, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. At April 30, 1996, all
outstanding repurchase agreements held by the Fund had been entered into on that
date.
g. Expense Allocation:
Common expenses incurred by the Fund are allocated between the classes based on
the ratio of net assets of each class to the combined net assets. In all other
respects, expenses are charged to each class as incurred on a specific
identification basis.
2. UNAMORTIZED ORGANIZATION COSTS
The organization costs of the Fund 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 that 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 costs will be deducted from the
redemption price paid to Franklin Resources, Inc. New investors purchasing
shares of the Fund subsequent to that date bear such costs during the
amortization period only as such charges are accrued daily against investment
income.
<TABLE>
<CAPTION>
3. TRUST SHARES
At April 30,1996, there were an unlimited number of $.01 par value shares of
beneficial interest authorized. Transactions for the years ended April 30, 1996
and April 30, 1995 were as follows:
Year Ended Year ended
April 30, 1996 April 30, 1995
------------------ ------------------
Class I shares: Shares Amount Shares Amount
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Shares sold.................................................. 1,592,210 $19,010,690 1,367,368 $14,679,168
Shares issued in reinvestment of distributions............... 70,974 833,948 28,085 288,993
Shares redeemed.............................................. (580,330) (6,918,681) (333,626) (3,512,585)
-------- ---------- -------- ----------
Net increase................................................. 1,082,854 $12,925,957 1,061,827 $11,455,576
======== ========== ======== ==========
Year Ended
April 30, 1996
-----------------
Class II shares*: Shares Amount
-------- ---------
<S> <C> <C>
Shares sold.................................................. 498,647 $5,965,246
Shares issued in reinvestment of distributions............... 7,698 90,146
Shares redeemed.............................................. (6,084) (72,708)
-------- ---------
Net increase................................................. 500,261 $5,982,684
======== =========
* Effective date of Class II shares was May 1, 1995.
</TABLE>
4. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At April 30, 1996 for tax purposes, the Trust had accumulated net realized gains
of $123,399.
For tax purposes, the aggregate cost of securities and unrealized appreciation
of the Trust are the same as for financial statement purposes at April 30, 1996.
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended April 30, 1996, aggregated $19,214,574 and
$3,519,107, respectively.
<TABLE>
<CAPTION>
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement:
Under the terms of a management agreement, Franklin Advisers, Inc. (Advisers)
provides investment advice, administrative services, office space and facilities
to the Fund and receives fees computed monthly on the average daily net assets
of the Fund as follows:
Annualized Fee Rate Average Daily Net Assets
-------------- ---------------------------------------------------
<C> <C>
0.625% First $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
</TABLE>
Fees are further reduced on net assets over $10 billion. The terms of the
management agreement provide that aggregate annual expenses of the Fund 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
Fund's shares are registered. For the year ended April 30, 1996, the Fund's
expenses did not exceed these limitations. However, Advisers agreed in advance
to waive management fees and assume payment of other expenses, as noted in the
statement of operations, in an effort to minimize the Fund's expenses.
b. Shareholder Services Agreement:
Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc. (Investor Services), the Fund pays costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Fund for
the year ended April 30, 1996, aggregated $27,535 of which $23,998 was paid to
Investor Services.
c. Distribution Plans and Underwriting Agreement:
Under the terms of distribution plans pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plans), the Fund will reimburse Franklin/Templeton
Distributors, Inc. (Distributors), in an amount up to a maximum of 0.25% per
annum for Class I and 0.65% per annum for Class II, of the average daily net
assets of such class of the Fund, for costs incurred in the promotion, offering
and marketing of the Fund's shares. The Plans do not permit nor require payments
of excess costs after termination. Fees incurred by the Fund under the Plans
aggregated $79,397 for the year ended April 30, 1996.
In its capacity as underwriter for the shares of the Fund, Distributors receives
commissions on sales of the Fund's shares of beneficial interest. Commissions
are deducted from the gross proceeds received from the sale of the shares of the
Fund, and as such are not expenses of the Fund. Distributors may also make
payments, out of its own resources, to dealers for certain sales of the Fund's
shares. Commissions received by Distributors and the amounts paid to other
dealers for the year ended April 30, 1996 amounted to $503,536 and $452,674,
respectively. Distributors also received contingent deferred sales charges
(CDSC) relating to transactions in the Fund of $487.
d. Other Affiliates and Related Party Transactions:
Certain officers and directors of the Trust are also officers and/or directors
of Distributors, Advisers, and Investor Services (all wholly-owned subsidiaries
of Franklin Resources, Inc.).
At April 30, 1996, Franklin Resources, Inc. owned 7% of the Fund's outstanding
shares.
7. RESTRICTED SECURITIES
A restricted security is a security which has not been registered with the
Securities Exchange Commission pursuant to the Securities Act of 1933. The Funds
may purchase restricted securities through a private offering and they cannot be
sold without prior registration under the Securities Act of 1933 unless such
sale is pursuant to an exemption therefrom. Subsequent costs of registration of
such securities are borne by the issuer. A secondary market exists for certain
privately placed securities. The Fund values these restricted securities as
disclosed in Note 1. At April 30, 1996, the Fund held the following restricted
security:
<TABLE>
<CAPTION>
Shares Security Acquisition Date Cost Value
- ----- ------------------------------------------------- ------------ -------- ---------
<C> <C> <C> <C> <C>
17,500 NVR, Inc......................................... 1/3/94 $125,418 $177,188
</TABLE>
<TABLE>
<CAPTION>
8. FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
year are as follows:
Year ended Year ended January 3, 1994**
April 30, 1996 April 30, 1995 to April 30, 1994
--------- --------- ------------
Class I shares:
Per Share Operating Performance
<S> <C> <C> <C>
Net asset value at beginning of period............................. $10.58 $10.92 $10.00
--------- --------- ------------
Net investment income ............................................. 0.432 0.390 0.060
Net realized & unrealized gain (loss) on securities................ 2.098 (0.450) 0.860
--------- --------- ------------
Total from investment operations .................................. 2.530 (0.060) 0.920
--------- --------- ------------
Distributions from net investment income........................... (0.470) (0.280) --
--------- --------- ------------
Net asset value at end of period .................................. $12.64 $10.58 $10.92
========= ========= ============
Total Return+...................................................... 24.25% (0.48%) 9.20%
Year ended Year ended January 3, 1994**
April 30, 1996 April 30, 1995 to April 30, 1994
--------- --------- ------------
Ratios/Supplemental Data
<S> <C> <C> <C>
Net assets at end of period (in 000's)............................. $33,634 $16,694 $5,634
Ratio of expenses to average net assets++.......................... 0.67% 0.25% 0.25%*
Ratio of expenses to average net assets (excluding
waiver and payments by Manager) (Note 5).......................... 1.24% 1.40% 2.91%*
Ratio of net investment income to average net assets .............. 4.38% 4.86% 3.19%*
Portfolio turnover rate............................................ 14.40% 3.74% -- %
Average commission rate+++......................................... 0.0575 -- --
Class II shares:***
Per Share Operating Performance
Net asset value at beginning of period............................. $10.58
---------
Net investment income.............................................. 0.439
Net realized & unrealized gain (loss) on securities................ 1.996
---------
Total from investment operations................................... 2.435
---------
Distributions from net investment income........................... (0.455)
---------
Net asset value at end of period................................... $12.56
=========
Total Return+...................................................... 23.21%
Ratios/Supplemental Data
Net assets at end of period (in 000's)............................. $6,282
Ratio of expenses to average net assets++.......................... 1.41%
Ratio of expenses to average net assets (excluding
waiver and payments by Manager) (Note 5).......................... 1.98%
Ratio of net investment income to average net assets .............. 3.65%
Portfolio turnover rate............................................ 14.40%
Average commission rate+++......................................... 0.0575
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum initial sales
charge and assumes reinvestment of dividends and capital gains, if any, at net
asset value.
++During the year, Advisers agreed in advance to waive the management fees and
made payments of other expenses.
*Annualized.
**Effective date of registration.
***Effective date of Class II shares was May 1, 1995.
+++Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
</TABLE>
The percentage of income dividends paid by the Fund during the fiscal year ended
April 30, 1996, which qualified for the 70% dividends received deduction for
corporations, was 3.56%. The Fund hereby designates these amounts as dividends
qualifying for the dividends received deductions under Internal Revenue Code
Section 854 (b)(2).
FRANKLIN REAL ESTATE SECURITIES TRUST
Franklin Real Estate Securities Fund
Report of Independent Auditors
To the Shareholders and Board of Trustees of the 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, 1996 and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, 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 audit 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, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements 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, 1996, the results of its
operations for the year then ended, the changes in its net assets for the each
of the two years in the period then ended, 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 3, 1996
FRANKLIN REAL ESTATE SECURITIES FUND
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 U.S. geographic distribution on
April 30, 1996 as a percentage of the fund's total net assets.
<TABLE>
<CAPTION>
Franklin Real Estate Securities Fund
April 30, 1996
U.S. Geographic Allocation
<S> <C>
Southeast 27.1%
National 25.4%
Southwest 13.0%
Northwest 10.4%
Midwest 6.7%
Northeast 5.9%
Cash 11.5%
</TABLE>
GRAPHIC MATERIAL (2)
This chart shows in pie chart format the property-type allocation on April 30,
1996 as a percentage of the fund's total net assets.
<TABLE>
<CAPTION>
Franklin Real Estate Securities Fund
April 30, 1996
Property-Type Allocation
<S> <C>
Apartments 22.2%
Hotels 17.3%
Industrial 8.6%
Storage 7.4%
Home Builders 7.1%
Retail 9.6%
Health Care 4.5%
Office 3.9%
Manufactured Home Parks 3.9%
Other 4.0%
Cash 11.5%
</TABLE>
GRAPHIC MATERIAL (3)
The following line graph hypothetically compares the performance of Franklin
Real Estate Securities Fund - Class I shares to that of the S&P 500 Stock Index
and the Wilshire Real Estate Securities Index, based on a $10,000 investment
from 1/3/94 to 4/30/96.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
1/3/94 9551 10000 10000
1/31/94 9790 10340 10300
2/28/94 10334 10059.79 10721.27
3/31/94 10201 9621.179 10224.88
4/30/94 10430 9744.33 10339.39
5/31/94 10621 9904.137 10554.45
6/30/94 10392 9661.486 10346.53
7/31/94 10382 9978.383 10370.33
8/31/94 10401 10387.5 10363.07
9/30/94 10267 10134.04 10190.01
10/31/94 9943 10362.06 9817.051
11/30/94 9589 9984.879 9433.204
12/31/94 10468 10132.65 10164.28
1/31/95 10125 10395.09 9835.971
2/28/95 10302 10800.5 10143.84
3/31/95 10400 11119.11 10202.67
4/30/95 10380 11446.02 10129.21
5/31/95 10782 11903.86 10464.49
6/30/95 10969 12180.03 10646.57
7/31/95 11214 12584.4 10817.98
8/31/95 11459 12615.86 10949.96
9/30/95 11773 13148.25 11151.44
10/31/95 11538 13100.92 10805.75
11/30/95 11714 13676.05 10918.12
12/31/95 12356 13940 11551.38
1/31/96 12673 14413.96 11710.79
2/29/96 12836 14548.01 11942.66
3/31/96 12856 14687.67 12039.39
4/30/96 12897 14903.58 12093
</TABLE>
GRAPHIC MATERIAL (4)
The following line graph hypothetically compares the performance of Franklin
Real Estate Securities Fund - Class II shares to that of the S&P 500 Stock Index
and the Wilshire Real Estate Securities Index, based on a $10,000 investment
from 5/1/95 to 4/30/96.
<TABLE>
<CAPTION>
Period Ending Fund Index Index
<S> <C> <C> <C>
5/1/95 9897 10000 10000
5/31/95 10262 10400 10331
6/30/95 10439 10641.28 10510.76
7/31/95 10654 10994.57 10679.98
8/31/95 10888 11022.06 10810.28
9/30/95 11178 11487.19 11009.19
10/31/95 10953 11445.83 10667.9
11/30/95 11103 11948.31 10778.85
12/31/95 11709 12178.91 11404.02
1/31/96 11991 12592.99 11561.4
2/29/96 12146 12710.11 11790.31
3/31/96 12165 12832.12 11885.81
4/30/96 12095 13020.76 11939.3
</TABLE>
