Franklin Real Estate Securities Trust
Notes to Financial Statements (unaudited)
Franklin Real Estate Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Real Estate Securities Trust (Trust) is registered under the Investment Company Act of
1940, as amended, (1940 Act) as an open-end investment company, consisting of one fund, the
Franklin Real Estate Securities Fund (Fund). The Fund offers four classes of shares: Class A,
Class B, Class C, and Advisor Class. Effective March 1, 2005, the Fund no longer offered Class B
shares for purchase. As disclosed in the applicable prospectus Class B shares convert to Class A
shares after eight years of investment, therefore all Class B shares will convert to Class A by
March 2013. Each class of shares differs by its initial sales load, contingent deferred sales charges,
distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund s significant accounting policies.
a. Financial Instrument Valuation
The Fund s investments in financial instruments are carried at fair value daily. Fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly transac-
tion between market participants on the measurement date. Under procedures approved by the
Fund s Board of Trustees (the Board), the Fund s administrator, investment manager and other
affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC
provides administration and oversight of the Fund s valuation policies and procedures, which
are approved annually by the Board. Among other things, these procedures allow the Fund to
utilize independent pricing services, quotations from securities and financial instrument dealers,
and other market sources to determine fair value.
Equity securities and exchange traded funds listed on an exchange or on the NASDAQ National
Market System are valued at the last quoted sale price or the official closing price of the day,
respectively. Over-the-counter securities are valued within the range of the most recent quoted
bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued
according to the broadest and most representative market. Certain equity securities are valued
based upon fundamental characteristics or relationships to similar securities. Investments in
open-end mutual funds are valued at the closing net asset value.
The Fund has procedures to determine the fair value of financial instruments for which market
prices are not reliable or readily available. Under these procedures, the VLOC convenes on a reg-
ular basis to review such financial instruments and considers a number of factors, including
significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily
employs a market-based approach which may use related or comparable assets or liabilities,
recent transactions, market multiples, book values, and other relevant information for the
investment to determine the fair value of the investment. An income-based valuation approach
may also be used in which the anticipated future cash flows of the investment are discounted to
calculate fair value. Discounts may also be applied due to the nature or duration of any restric-
tions on the disposition of the investments. Due to the inherent uncertainty of valuations of such
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Franklin Real Estate Securities Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Real Estate Securities Fund
| 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
| a. | Financial Instrument Valuation (continued) |
investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
b. Income Taxes
It is the Fund s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of October 31, 2012, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
c. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
Distributions received by the Fund from certain securities may be a return of capital (ROC). Such distributions reduce the cost basis of the securities, and any distributions in excess of the cost basis are recognized as capital gains.
Semiannual Report | 23
Franklin Real Estate Securities Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Real Estate Securities Fund
| 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
| d. | Accounting Estimates |
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those estimates.
e. Guarantees and Indemnifications
Under the Trust s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2012, there were an unlimited number of shares authorized ($0.01 par value).
Transactions in the Fund s shares were as follows:
Franklin Real Estate Securities Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Real Estate Securities Fund
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund invests in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
8. SPECIAL SERVICING AGREEMENT
The Fund, which is an eligible underlying investment of one or more of the Franklin Templeton Fund Allocator Series Funds (Allocator Funds), participates in a Special Servicing Agreement (SSA) with the Allocator Funds and certain service providers of the Fund and the Allocator Funds. Under the SSA, the Fund may pay a portion of the Allocator Funds expenses (other than any asset allocation, administrative, and distribution fees) to the extent such payments are less than the amount of the benefits realized or expected to be realized by the Fund (e.g., due to reduced costs associated with servicing accounts) from the investment in the Fund by the Allocator Funds. The Allocator Funds are either managed by Franklin Advisers, Inc. or administered by FT Services. For the period ended October 31, 2012, the Fund was held by one or more of the Allocator Funds and the amount of expenses borne by the Fund is noted in the Statement of Operations. At October 31, 2012, 15.79% of the Fund s outstanding shares were held by one or more of the Allocator Funds.
9. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matures on January 18, 2013. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended October 31, 2012, the Fund did not use the Global Credit Facility.
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Franklin Real Estate Securities Trust
Shareholder Information
Franklin Real Estate Securities Fund
Proxy Voting Policies and Procedures
The Fund s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Fund s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission s website at sec.gov. The filed form may also be viewed and copied at the Commission s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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