UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-08034
Franklin Real Estate Securities Trust
(Exact name of registrant as specified in charter)
_One Franklin Parkway, San Mateo, CA 94403-1906
(Address of principal executive offices) (Zip code)
_Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906
(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
Date of fiscal year end: _4/30
Date of reporting period: _10/31/16
Item 1. Reports to Stockholders.
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| Contents | |
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| Semiannual Report | |
| Franklin Real Estate Securities Fund | 3 |
| Performance Summary | 7 |
| Your Fund’s Expenses | 9 |
| Financial Highlights and Statement of Investments | 10 |
| FinancialStatements | 16 |
| Notes to Financial Statements | 20 |
| Shareholder Information | 27 |
Visit franklintempleton.com for fund updates, to access your account, or to find helpful financial planning tools.
2 Semiannual Report
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Semiannual Report
Franklin Real Estate Securities Fund
This semiannual report for Franklin Real Estate Securities Fund covers the period ended October 31, 2016.
Your Fund’s Goal and Main Investments
The Fund seeks to maximize total return by investing at least 80% of its net assets in equity securities of companies operating in the real estate industry predominantly in the U.S., including real estate investment trusts (REITs) and companies that derive at least half of their assets or revenues from the ownership, construction, management, operation, development or sale of commercial or residential real estate.1
Performance Overview
For the six months ended October 31, 2016, the Fund’s Class A shares delivered a +0.89% cumulative total return. In comparison, the Standard & Poor’s (S&P®) U.S. Property Index, which tracks the investable universe of publicly traded U.S. property companies, produced a +1.64% total return.2 You can find the Fund’s long-term performance data in the Performance Summary beginning on page 7.
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
Economic and Market Overview
The U.S. economy expanded during the six months under review. The economy grew at a faster pace in 2016’s third quarter than in the second quarter, mainly due to personal consumption expenditures, exports, private inventory investment, federal government spending and nonresidential fixed investment. Manufacturing conditions remained volatile but generally expanded, and the services sector continued to grow. The unemployment rate decreased slightly from 5.0% in
| | | | |
| Portfolio Composition | | | |
| Based on Total Net Assets as of 10/31/16 | | | |
| Retail REITs | 25.0 | % | | |
| Residential REITs | 16.6 | % | | |
| Office REITs | 15.8 | % | | |
| Health Care REITs | 12.0 | % | | |
| Specialized REITs | 11.1 | % | | |
| Industrial REITs | 9.4 | % | | |
| Hotel & Resort REITs | 4.1 | % | | |
| Diversified REITs | 4.0 | % | | |
| Other | 1.0 | % | | |
| Short-Term Investments & | | | | |
| Other Net Assets | 1.0 | % | | |
| | | | |
April to 4.9% at period-end.3 Monthly retail sales were volatile but grew during most of the review period. Inflation, as measured by the Consumer Price Index, remained relatively subdued for most of the period, but rose slightly toward period-end.
The U.S. Federal Reserve (Fed) kept its target interest rate at 0.25–0.50% at its September meeting. The Fed noted that although the case for raising rates has strengthened, it will wait for further evidence of continued progress toward its objectives.
1. A REIT is a type of real estate company that is dedicated to owning and usually operating income-producing real estate properties such as apartments, hotels, industrial properties, office buildings or shopping centers. Equity REITs generally receive income from rents received, are generally operated by experienced property management teams and typically concentrate on a specific geographic region or property type.
2. Source: Morningstar.
The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio.
3. Source: Bureau of Labor Statistics.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
The SOI begins on page 14.
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FRANKLIN REAL ESTATE SECURITIES FUND
U.S. equity markets rose during the review period, benefiting from mostly upbeat economic data and better corporate earnings in the U.S., signs of improvement in the Chinese and European economies, and ongoing expansionary monetary policies from key central banks. A rally in crude oil prices and the Fed’s decision to keep interest rates unchanged at its September meeting further boosted investor confidence. However, the U.K.’s historic vote to leave the European Union (also known as “Brexit”) and global growth concerns weighed on market sentiment. The broad U.S. stock market ended the six-month period higher, as measured by the Standard & Poor’s® 500 Index.
Investment Strategy
We are research-driven, fundamental investors with an active investment strategy. We use a bottom-up security selection process that incorporates macro-level views in our evaluation process. We analyze individual stock and real estate market fundamentals to provide regional, property type and company-size perspectives in identifying local cyclical and thematic trends that highlight investment opportunities.
Manager’s Discussion
During the six months ended October 31, 2016, security selection in the specialty sector contributed to the Fund’s performance relative to the S&P U.S. Property Index. Most of the contributing effects resulted from a lack of exposure to securities that performed poorly, such as correctional facility-focused REITs Corrections Corporation of America and GEO Group. Within the hotel/resort sector, the Fund’s investment in Summit Hotel Properties, a premium select-service focused hotel REIT, also contributed to the Fund’s performance. Despite a challenging lodging fundamentals backdrop with a negative revenue growth outlook, we believe the stock’s outperformance was largely due to the company’s lack of exposure to major gateway cities in coastal markets where lodging fundamentals remained challenging due to increased supply, softer international travel and other lodging alternatives. The company’s focus on non-gateway and non-coastal markets continued to benefit its operations as the company consistently generated strong results with revenue growth above the industry average. The company was active on the acquisitions front for the past 12 to 18 months through acquisitions funded by lower quality asset sales. Summit’s upgraded current portfolio started to show in its results as well. Although we had an unfavorable view of the lodging sector and remained underweighted to the sector, we maintained our overweighted position in Summit.
An overweighting in the industrial property sector further supported relative Fund performance. Shares of Duke Realty, a major industrial REIT, outperformed the Fund’s benchmark during the reporting period, reflecting continued strength of industrial fundamentals, which we have continued to favor given our expectations that tenant demand for space, especially related to e-commerce, should continue to outpace supply. We believe the company’s strategy to exit suburban office space with softer fundamentals as it successfully reduced its exposure to this segment could also explain the stock’s recent outperformance during the reporting period. We maintained our overweighted position as we believe Duke, with a solid pre-leased development pipeline, well-respected and strong management and solid balance sheet remains well-positioned to benefit from healthy industrial fundamentals.
The Fund’s positioning in the apartments sector also contributed to relative returns.4 Shares of apartment operator Post Properties rose over the reporting period after the company announced it would be acquired by competitor
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| Top 10 Holdings | | |
| 10/31/16 | | |
| Company | % of Total | |
| Sector/Industry | Net Assets | |
| Simon Property Group Inc. | 9.0 | % |
| Retail REITs | | |
| Prologis Inc. | 4.2 | % |
| Industrial REITs | | |
| Ventas Inc. | 4.1 | % |
| Health Care REITs | | |
| AvalonBay Communities Inc. | 3.6 | % |
| Residential REITs | | |
| Welltower Inc. | 3.3 | % |
| Health Care REITs | | |
| Public Storage | 3.3 | % |
| Specialized REITs | | |
| Boston Properties Inc. | 3.0 | % |
| Office REITs | | |
| Realty Income Corp. | 2.9 | % |
| Retail REITs | | |
| Digital Realty Trust Inc. | 2.7 | % |
| Specialized REITs | | |
| Alexandria Real Estate Equities Inc. | 2.6 | % |
| Office REITs | | |
4. Apartment sector holdings can be found under Residential REITS in the SOI.
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FRANKLIN REAL ESTATE SECURITIES FUND
Mid-America Apartment (sold by period-end) in a merger that would create the largest U.S.-based apartment REIT by number of units.
Conversely, stock selection and an underweighting in the health care property sector detracted from relative performance over the reporting period. Shares of HCP, a large-capitalization health care REIT in which the Fund maintains an underweighted investment, outperformed during the reporting period. Investor sentiment for the company steadily improved, particularly after the departure of its chief executive officer (CEO) and management change this past summer and investor expectations that the company would reposition itself with a better growth profile. HCP’s initial repositioning plans included a spin-off of its skilled nursing facility segment as future government reimbursement remains a main risk for this health care segment as well as other asset sales with the proceeds to be used for deleveraging and future growth. HCP was also expected to announce a new CEO with a strong possibility that its current chief financial officer would take this role, which we believe could be received positively by investors. We held our position but remained underweighted to the stock during the reporting period and thus did not participate in the stock’s outperformance as we wanted to see more concrete progress in terms of execution by its new management.
Within the triple-net leasing sector, much of the detraction from performance came from a lack of exposure to stocks that performed well over the reporting period. Stock selection in this sector also detracted from relative Fund performance.
In addition, security selection in the office space sector weighed on results. Shares of Boston Properties, a well-respected large-capitalization office REIT with a high quality office portfolio located in major gateway cities, underperformed during the reporting period. We believe this decline largely reflected the prevailing negative investor sentiment toward office REITs that focus on gateway office markets such as New York City where the company has some large-block vacancies to fill due to known move-outs. We expect Manhattan office fundamentals should slow down with moderate rent growth largely due to upcoming supply in this market. Additionally, given the company’s major development projects, such as the Salesforce Tower in San Francisco, we believe investors grew concerned about the additional pre-leasing that the company has to take care of with regard to its current development projects. As a result, analysts expect earnings growth to remain muted in the near term given all the leasing and pre-leasing the company has to address. The management has a strong, long-term track record in terms of successful execution on leasing and capital allocation in different real estate cycles. We maintained our overweighted position to the stock despite the company’s near-term challenges as we expect Boston Properties to be successful in terms of leasing its current and future office portfolio, which we believe should help the company generate above-average future core growth.
Other individual detractors from Fund performance over the reporting period included self-storage company CubeSmart.5 Shares lost ground over the reporting period after an extended period of outperformance. Negative investor sentiment for storage REITs was largely due to premium storage REIT valuations and investor expectations for a deceleration of fundamentals next year.
5. Self-storage sector holdings can be found under specialized REITS in the SOI.
See www.franklintempletondatasources.com for additional data provider information.
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FRANKLIN REAL ESTATE SECURITIES FUND
Thank you for your continued participation in Franklin Real Estate Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of October 31, 2016, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
FRANKLIN REAL ESTATE SECURITIES FUND
Performance Summary as of October 31, 2016
The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund’s dividends and capital gain distributions, if any, and any unrealized gains or losses.
Performance as of 10/31/161
Cumulative total return excludes sales charges. Average annual total returns include maximum sales charges. Sales charges will vary depending on the size of the investment and the class of share purchased. The maximum is 5.75% and the minimum is 0%. Class A: 5.75% maximum initial sales charge; Advisor Class: no sales charges. For other share classes, visit franklintempleton.com.
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| | Cumulative | | Average Annual | | Average Annual | |
| Share Class | Total Return2 | | Total Return3 | | Total Return (9/30/16)4 | |
| A | | | | | | |
| 6-Month | +0.89 | % | -4.90 | % | | |
| 1-Year | +4.67 | % | -1.33 | % | +10.40 | % |
| 5-Year | +64.89 | % | +9.21 | % | +13.62 | % |
| 10-Year | +26.54 | % | +1.78 | % | +2.93 | % |
| Advisor | | | | | | |
| 6-Month | +1.02 | % | +1.02 | % | | |
| 1-Year | +4.95 | % | +4.95 | % | +17.46 | % |
| 5-Year | +67.06 | % | +10.81 | % | +15.26 | % |
| 10-Year | +29.74 | % | +2.64 | % | +3.81 | % |
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown. For most recent month-end performance, go to franklintempleton.com or call (800) 342-5236.
See page 8 for Performance Summary footnotes.
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Semiannual Report 7
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| FRANKLIN REAL ESTATE SECURITIES FUND | |
| PERFORMANCE SUMMARY | | |
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| Total Annual Operating Expenses5 | |
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| Share Class | | | |
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| A | 1.00% | | |
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| Advisor | 0.75% | | |
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| Each class of shares is available to certain eligible investors and has different annual fees and expenses, as described in the prospectus. | |
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| All investments involve risks, including possible loss of principal. The Fund concentrates in securities of companies in the real estate industry, which involve | |
| special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. The | |
| Fund’s investments in REITs involve additional risks; since REITs typically are invested in a limited number of projects or in a particular market segment, they are | |
| more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Loss of status as a qualified | |
| REIT under the U.S. federal tax laws could adversely affect the value of a particular REIT or the market for REITs, as a whole. Also, the Fund is a nondiversified | |
| fund and investing in a nondiversified fund involves the risk of greater price fluctuation than a more diversified portfolio. The Fund is actively managed but there | |
| is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main | |
| investment risks. | | |
1. The Fund has a fee waiver associated with any investment it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed
through its current fiscal year-end. Fund investment results reflect the fee waiver; without this waiver, the results would have been lower.
2. Cumulative total return represents the change in value of an investment over the periods indicated.
3. Average annual total return represents the average annual change in value of an investment over the periods indicated. Return for less than one year, ifany,hasnotbeen
annualized.
4. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter.
5. Figures are as stated in the Fund’s current prospectus and may differ from the expense ratios disclosed in the Your Fund’s Expenses and Financial Highlights sections in this
report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown.
8 Semiannual Report
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FRANKLIN REAL ESTATE SECURITIES FUND
Your Fund’s Expenses
As a Fund shareholder, you can incur two types of costs: (1) transaction costs, including sales charges (loads), as applicable, on Fund purchases and redemptions; and (2) ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The table below shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated.
Actual Fund Expenses
The table below provides information about actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of Fund expenses, is used to calculate the “Ending Account Value” for each class of shares. You can estimate the expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number in the row for your class of shares under the headings “Actual” and “Expenses Paid During Period” (if Actual Expenses Paid During Period were $7.50, then 8.6 x $7.50 = $64.50). In this illustration, the actual expenses paid this period are $64.50.
Hypothetical Example for Comparison with Other Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other funds. To do so, compare this 5% hypothetical example for the class of shares you hold with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transactional costs. Therefore, information under the heading “Hypothetical” is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transactional costs were included, your total costs would have been higher.
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| | | | | | | Actual | | Hypothetical | | |
| | | | | (actual return after expenses) | | (5% annual return before expenses) | | |
| | | | | | | Expenses | | | | Expenses | Net | |
| | | Beginning | | Ending | | Paid During | | Ending | | Paid During | Annualized | |
| Share | | Account | | Account | | Period | | Account | | Period | Expense | |
| Class | | Value 5/1/16 | | Value 10/31/16 | | 5/1/16–10/31/161,2 | | Value 10/31/16 | | 5/1/16–10/31/161,2 | Ratio2 | |
| A | $ | 1,000 | $ | 1,008.90 | $ | 4.96 | $ | 1,020.27 | $ | 4.99 | 0.98 | % |
| C | $ | 1,000 | $ | 1,005.00 | $ | 8.74 | $ | 1,016.48 | $ | 8.79 | 1.73 | % |
| R6 | $ | 1,000 | $ | 1,011.10 | $ | 2.74 | $ | 1,022.48 | $ | 2.75 | 0.54 | % |
| Advisor | $ | 1,000 | $ | 1,010.20 | $ | 3.70 | $ | 1,021.53 | $ | 3.72 | 0.73 | % |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above–in the far right column–multiplied by the simple average account value
over the period indicated, and then multiplied by 184/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include acquired fund fees and expenses.
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FRANKLIN REAL ESTATE SECURITIES TRUST
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| Financial Highlights | | | | | | | | | | | | | | | | | | |
| Franklin Real Estate Securities Fund | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | | |
| | | October 31, 2016 | | | | | | Year Ended April 30, | | | | |
| | | (unaudited) | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Class A | | | | | | | | | | | | | | | | | | |
| Per share operating performance | | | | | | | | | | | | | | | | | | |
| (for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | |
| Net asset value, beginning of period | $ | 22.65 | | $ | 21.49 | | $ | 19.31 | | $ | 19.29 | | $ | 16.78 | | $ | 15.26 | |
| Income from investment operationsa: | | | | | | | | | | | | | | | | | | |
| Net investment incomeb | | 0.28 | | | 0.48 | c | | 0.30 | | | 0.26 | | | 0.23 | | | 0.14 | |
| Net realized and unrealized gains (losses) | | (0.07 | ) | | 1.05 | | | 2.17 | | | —d | | | 2.49 | | | 1.46 | |
| Total from investment operations | | 0.21 | | | 1.53 | | | 2.47 | | | 0.26 | | | 2.72 | | | 1.60 | |
| Less distributions from net investment income . | | (0.29 | ) | | (0.37 | ) | | (0.29 | ) | | (0.24 | ) | | (0.21 | ) | | (0.08 | ) |
| Net asset value, end of period | $ | 22.57 | | $ | 22.65 | | $ | 21.49 | | $ | 19.31 | | $ | 19.29 | | $ | 16.78 | |
| |
| Total returne | | 0.89 | % | | 7.17 | % | | 12.95 | % | | 1.49 | % | | 16.38 | % | | 10.59 | % |
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| Ratios to average net assetsf | | | | | | | | | | | | | | | | | | |
| Expenses before waiver and payments by | | | | | | | | | | | | | | | | | | |
| affiliates | | 0.98 | % | | 1.00 | % | | 0.99 | % | | 1.05 | % | | 1.03 | % | | 1.14 | % |
| Expenses net of waiver and payments by | | | | | | | | | | | | | | | | | | |
| affiliates | | 0.98 | %g,h | | 1.00 | %g | | 0.99 | %g | | 1.04 | % | | 1.03 | % | | 1.14 | % |
| Net investment income | | 2.28 | % | | 2.21 | %c | | 1.41 | % | | 1.43 | % | | 1.33 | % | | 0.92 | % |
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| Supplemental data | | | | | | | | | | | | | | | | | | |
| Net assets, end of period (000’s) | $ | 365,954 | | $ | 364,981 | | $ | 381,925 | | $ | 303,815 | | $ | 347,101 | | $ | 262,991 | |
| Portfolio turnover rate | | 22.27 | % | | 24.21 | % | | 24.12 | % | | 17.04 | % | | 22.69 | % | | 23.43 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.11 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.71%.
dAmount rounds to less than $0.01 per share.
eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
hBenefit of expense reduction rounds to less than 0.01%.
10 Semiannual Report | The accompanying notes are an integral part of these financial statements. franklintempleton.com
FRANKLIN REAL ESTATE SECURITIES TRUST
FINANCIAL HIGHLIGHTS
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| Franklin Real Estate Securities Fund (continued) | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | | |
| | | October 31, 2016 | | | | | | Year Ended April 30, | | | | | | | |
| | | (unaudited) | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Class C | | | | | | | | | | | | | | | | | | |
| Per share operating performance | | | | | | | | | | | | | | | | | | |
| (for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | |
| Net asset value, beginning of period | $ | 21.86 | | $ | 20.75 | | $ | 18.66 | | $ | 18.65 | | $ | 16.20 | | $ | 14.77 | |
| Income from investment operationsa: | | | | | | | | | | | | | | | | | | |
| Net investment incomeb | | 0.18 | | | 0.30 | c | | 0.13 | | | 0.12 | | | 0.10 | | | 0.02 | |
| Net realized and unrealized gains (losses) | | (0.06 | ) | | 1.02 | | | 2.11 | | | —d | | | 2.40 | | | 1.42 | |
| Total from investment operations | | 0.12 | | | 1.32 | | | 2.24 | | | 0.12 | | | 2.50 | | | 1.44 | |
| Less distributions from net investment income . | | (0.21 | ) | | (0.21 | ) | | (0.15 | ) | | (0.11 | ) | | (0.05 | ) | | (0.01 | ) |
| Net asset value, end of period | $ | 21.77 | | $ | 21.86 | | $ | 20.75 | | $ | 18.66 | | $ | 18.65 | | $ | 16.20 | |
| |
| Total returne | | 0.50 | % | | 6.40 | % | | 12.07 | % | | 0.73 | % | | 15.47 | % | | 9.77 | % |
| |
| Ratios to average net assetsf | | | | | | | | | | | | | | | | | | |
| Expenses before waiver and payments by | | | | | | | | | | | | | | | | | | |
| affiliates | | 1.73 | % | | 1.75 | % | | 1.74 | % | | 1.80 | % | | 1.78 | % | | 1.89 | % |
| Expenses net of waiver and payments by | | | | | | | | | | | | | | | | | | |
| affiliates | | 1.73 | %g,h | | 1.75 | %g | | 1.74 | %g | | 1.79 | % | | 1.78 | % | | 1.89 | % |
| Net investment income | | 1.53 | % | | 1.46 | %c | | 0.66 | % | | 0.68 | % | | 0.58 | % | | 0.17 | % |
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| Supplemental data | | | | | | | | | | | | | | | | | | |
| Net assets, end of period (000’s) | $ | 81,120 | | $ | 82,147 | | $ | 89,328 | | $ | 68,914 | | $ | 77,324 | | $ | 58,296 | |
| Portfolio turnover rate | | 22.27 | % | | 24.21 | % | | 24.12 | % | | 17.04 | % | | 22.69 | % | | 23.43 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.11 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 0.96%.
dAmount rounds to less than $0.01 per share.
eTotal return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
hBenefit of expense reduction rounds to less than 0.01%.
franklintempleton.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 11
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| FRANKLIN REAL ESTATE SECURITIES TRUST | | | | | | | | | | | | |
| FINANCIAL HIGHLIGHTS | | | | | | | | | | | | |
| |
| |
| Franklin Real Estate Securities Fund (continued) | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | |
| | | October 31, 2016 | | | Year Ended April 30, | | | | |
| | | (unaudited) | | | 2016 | | | 2015 | | | 2014 | a |
| Class R6 | | | | | | | | | | | | |
| Per share operating performance | | | | | | | | | | | | |
| (for a share outstanding throughout the period) | | | | | | | | | | | | |
| Net asset value, beginning of period | $ | 22.83 | | $ | 21.67 | | $ | 19.46 | | $ | 19.30 | |
| Income from investment operationsb: | | | | | | | | | | | | |
| Net investment incomec | | 0.33 | | | 0.58 | d | | 0.41 | | | 0.34 | |
| Net realized and unrealized gains (losses) | | (0.07 | ) | | 1.05 | | | 2.19 | | | 0.14 | |
| Total from investment operations | | 0.26 | | | 1.63 | | | 2.60 | | | 0.48 | |
| Less distributions from net investment income. | | (0.34 | ) | | (0.47 | ) | | (0.39 | ) | | (0.32 | ) |
| Net asset value, end of period | $ | 22.75 | | $ | 22.83 | | $ | 21.67 | | $ | 19.46 | |
| |
| Total returne | | 1.11 | % | | 7.66 | % | | 13.47 | % | | 2.69 | % |
| |
| Ratios to average net assetsf | | | | | | | | | | | | |
| Expenses before waiver and payments by affiliates | | 0.54 | % | | 0.54 | % | | 0.54 | % | | 0.57 | % |
| Expenses net of waiver and payments by affiliates. | | 0.54 | %g,h | | 0.54 | %g | | 0.54 | %g | | 0.56 | % |
| Net investment income | | 2.72 | % | | 2.67 | %d | | 1.86 | % | | 1.91 | % |
| |
| Supplemental data | | | | | | | | | | | | |
| Net assets, end of period (000’s) | $ | 92,033 | | $ | 104,392 | | $ | 106,725 | | $ | 97,224 | |
| Portfolio turnover rate. | | 22.27 | % | | 24.21 | % | | 24.12 | % | | 17.04 | % |
aFor the year May 1, 2013 (effective date) to April 30, 2014.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $0.11 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 2.17%.
eTotal return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of waiver and payments by affiliates rounds to less than 0.01%.
hBenefit of expense reduction rounds to less than 0.01%.
12 Semiannual Report | The accompanying notes are an integral part of these financial statements. franklintempleton.com
| | | | | | | | | | | | | | | | | | |
| | | | | | FRANKLIN REAL ESTATE SECURITIES TRUST | |
| | | | | | | | | | | | FINANCIAL HIGHLIGHTS | |
| |
| |
| Franklin Real Estate Securities Fund (continued) | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | | |
| | | October 31, 2016 | | | | | | Year Ended April 30, | | | | |
| | | (unaudited) | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| Advisor Class | | | | | | | | | | | | | | | | | | |
| Per share operating performance | | | | | | | | | | | | | | | | | | |
| (for a share outstanding throughout the period) | | | | | | | | | | | | | | | | | | |
| Net asset value, beginning of period | $ | 22.83 | | $ | 21.67 | | $ | 19.46 | | $ | 19.43 | | $ | 16.92 | | $ | 15.38 | |
| Income from investment operationsa: | | | | | | | | | | | | | | | | | | |
| Net investment incomeb | | 0.31 | | | 0.54 | c | | 0.33 | | | 0.29 | | | 0.27 | | | 0.16 | |
| Net realized and unrealized gains (losses) | | (0.07 | ) | | 1.04 | | | 2.23 | | | 0.03 | | | 2.51 | | | 1.50 | |
| Total from investment operations | | 0.24 | | | 1.58 | | | 2.56 | | | 0.32 | | | 2.78 | | | 1.66 | |
| Less distributions from net investment income . | | (0.32 | ) | | (0.42 | ) | | (0.35 | ) | | (0.29 | ) | | (0.27 | ) | | (0.12 | ) |
| Net asset value, end of period | $ | 22.75 | | $ | 22.83 | | $ | 21.67 | | $ | 19.46 | | $ | 19.43 | | $ | 16.92 | |
| |
| Total returnd | | 1.02 | % | | 7.44 | % | | 13.24 | % | | 1.79 | % | | 16.64 | % | | 10.91 | % |
| |
| Ratios to average net assetse | | | | | | | | | | | | | | | | | | |
| Expenses before waiver and payments by | | | | | | | | | | | | | | | | | | |
| affiliates | | 0.73 | % | | 0.75 | % | | 0.74 | % | | 0.80 | % | | 0.78 | % | | 0.89 | % |
| Expenses net of waiver and payments by | | | | | | | | | | | | | | | | | | |
| affiliates | | 0.73 | %f,g | | 0.75 | %f | | 0.74 | %f | | 0.79 | % | | 0.78 | % | | 0.89 | % |
| Net investment income | | 2.53 | % | | 2.46 | %c | | 1.66 | % | | 1.68 | % | | 1.58 | % | | 1.17 | % |
| |
| Supplemental data | | | | | | | | | | | | | | | | | | |
| Net assets, end of period (000’s) | $ | 29,066 | | $ | 22,346 | | $ | 17,644 | | $ | 12,402 | | $ | 108,076 | | $ | 10,542 | |
| Portfolio turnover rate | | 22.27 | % | | 24.21 | % | | 24.12 | % | | 17.04 | % | | 22.69 | % | | 23.43 | % |
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and
repurchases of the Fund’s shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $0.11 per share related to income received in the form of a special dividend in connection with certain Fund
holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.96%.
dTotal return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of waiver and payments by affiliates rounds to less than 0.01%.
gBenefit of expense reduction rounds to less than 0.01%.
franklintempleton.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 13
| | | |
| FRANKLIN REAL ESTATE SECURITIES TRUST | | | |
| |
| |
| |
| |
| Statement of Investments, October 31, 2016 (unaudited) | | | |
| Franklin Real Estate Securities Fund | | | |
| | Shares | | Value |
| |
| Common Stocks 99.0% | | | |
| Diversified REITs 4.0% | | | |
| Spirit Realty Capital Inc | 768,900 | $ | 9,157,599 |
| VEREIT Inc | 1,460,700 | | 13,730,580 |
| | | | 22,888,179 |
| Health Care REITs 12.0% | | | |
| HCP Inc | 419,800 | | 14,378,150 |
| OMEGA Healthcare Investors Inc | 149,700 | | 4,764,951 |
| Physicians Realty Trust | 348,300 | | 6,885,891 |
| Ventas Inc | 345,420 | | 23,402,205 |
| Welltower Inc | 277,300 | | 19,003,369 |
| | | | 68,434,566 |
| Homebuilding 0.5% | | | |
| D.R. Horton Inc | 95,600 | | 2,756,148 |
| Hotel & Resort REITs 4.1% | | | |
| Host Hotels & Resorts Inc | 656,800 | | 10,167,264 |
| Summit Hotel Properties Inc | 542,100 | | 7,041,879 |
| Sunstone Hotel Investors Inc | 464,035 | | 5,828,279 |
| | | | 23,037,422 |
| Hotels, Resorts & Cruise Lines 0.5% | | | |
| Hilton Worldwide Holdings Inc | 120,300 | | 2,718,780 |
| Industrial REITs 9.4% | | | |
| Duke Realty Corp | 537,300 | | 14,050,395 |
| First Industrial Realty Trust Inc | 349,600 | | 9,232,936 |
| Prologis Inc | 462,861 | | 24,142,830 |
| Rexford Industrial Realty Inc | 279,000 | | 5,875,740 |
| | | | 53,301,901 |
| Office REITs 15.8% | | | |
| Alexandria Real Estate Equities Inc | 138,000 | | 14,877,780 |
| Boston Properties Inc | 142,100 | | 17,120,208 |
| Brandywine Realty Trust | 384,400 | | 5,958,200 |
| Highwoods Properties Inc | 222,400 | | 11,037,712 |
| Kilroy Realty Corp | 177,400 | | 12,742,642 |
| Mack-Cali Realty Corp | 334,200 | | 8,582,256 |
| SL Green Realty Corp | 110,100 | | 10,814,022 |
| Vornado Realty Trust | 93,445 | | 8,669,827 |
| | | | 89,802,647 |
| Residential REITs 16.6% | | | |
| American Homes 4 Rent, A | 554,900 | | 11,713,939 |
| Apartment Investment & Management Co., A | 259,500 | | 11,436,165 |
| AvalonBay Communities Inc | 120,072 | | 20,553,925 |
| Camden Property Trust | 120,100 | | 9,780,944 |
| Education Realty Trust Inc | 142,300 | | 6,060,557 |
| Equity Lifestyle Properties Inc | 162,400 | | 12,316,416 |
| Equity Residential | 217,044 | | 13,402,467 |
| Essex Property Trust Inc | 28,763 | | 6,157,871 |
| UDR Inc | 90,162 | | 3,152,965 |
| | | | 94,575,249 |
14 Semiannual Report
franklintempleton.com
FRANKLIN REAL ESTATE SECURITIES TRUST
STATEMENT OF INVESTMENTS (UNAUDITED)
| | | |
| Franklin Real Estate Securities Fund (continued) | | | |
| | Shares | | Value |
| |
| Common Stocks (continued) | | | |
| Retail REITs 25.0% | | | |
| CBL & Associates Properties Inc | 218,800 | $ | 2,341,160 |
| Equity One Inc | 306,100 | | 8,723,850 |
| Federal Realty Investment Trust | 40,000 | | 5,809,200 |
| General Growth Properties Inc | 361,900 | | 9,029,405 |
| Kimco Realty Corp | 458,000 | | 12,187,380 |
| The Macerich Co | 48,821 | | 3,455,550 |
| National Retail Properties Inc | 163,700 | | 7,467,994 |
| Realty Income Corp | 274,000 | | 16,231,760 |
| Regency Centers Corp | 184,600 | | 13,304,122 |
| Simon Property Group Inc | 274,700 | | 51,083,212 |
| Washington Prime Group Inc | 227,200 | | 2,383,328 |
| Weingarten Realty Investors | 269,800 | | 9,769,458 |
| | | | 141,786,419 |
| Specialized REITs 11.1% | | | |
| Coresite Realty Corp | 104,300 | | 7,691,082 |
| CubeSmart | 300,100 | | 7,823,607 |
| CyrusOne Inc | 181,600 | | 8,101,176 |
| Digital Realty Trust Inc | 165,300 | | 15,443,979 |
| Extra Space Storage Inc | 70,300 | | 5,142,445 |
| Public Storage | 88,300 | | 18,871,476 |
| | | | 63,073,765 |
| Total Common Stocks (Cost $366,636,777) | | | 562,375,076 |
| |
| |
| |
| Short Term Investments (Cost $3,659,592) 0.6% | | | |
| |
| Money Market Funds 0.6% | | | |
| a,b Institutional Fiduciary Trust Money Market Portfolio | 3,659,592 | | 3,659,592 |
| Total Investments (Cost $370,296,369) 99.6% | | | 566,034,668 |
| Other Assets, less Liabilities 0.4% | | | 2,137,759 |
| Net Assets 100.0% | | $ | 568,172,427 |
See Abbreviations on page 26.
aNon-income producing.
bSee Note 3(f) regarding investments in affiliated management investment companies.
franklintempleton.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 15
FRANKLIN REAL ESTATE SECURITIES TRUST
Financial Statements
Statement of Assets and Liabilities
October 31, 2016 (unaudited)
| | | |
| Franklin Real Estate Securities Fund | | | |
| |
| Assets: | | | |
| Investments in securities: | | | |
| Cost - Unaffiliated issuers | $ | 366,636,777 | |
| Cost - Non-controlled affiliates (Note 3f) | | 3,659,592 | |
| Total cost of investments | $ | 370,296,369 | |
| Value - Unaffiliated issuers | $ | 562,375,076 | |
| Value - Non-controlled affiliates (Note 3f) | | 3,659,592 | |
| Total value of investments | | 566,034,668 | |
| Receivables: | | | |
| Investment securities sold | | 2,845,898 | |
| Capital shares sold | | 607,196 | |
| Dividends | | 275,222 | |
| Other assets | | 117 | |
| Total assets | | 569,763,101 | |
| Liabilities: | | | |
| Payables: | | | |
| Capital shares redeemed | | 1,023,160 | |
| Management fees | | 242,778 | |
| Distribution fees | | 150,198 | |
| Transfer agent fees | | 125,576 | |
| Accrued expenses and other liabilities | | 48,962 | |
| Total liabilities | | 1,590,674 | |
| Net assets, at value | $ | 568,172,427 | |
| Net assets consist of: | | | |
| Paid-in capital | $ | 390,906,102 | |
| Undistributed net investment income | | 4,923,934 | |
| Net unrealized appreciation (depreciation) | | 195,738,299 | |
| Accumulated net realized gain (loss) | | (23,395,908 | ) |
| Net assets, at value | $ | 568,172,427 | |
16 Semiannual Report | The accompanying notes are an integral part of these financial statements. franklintempleton.com
FRANKLIN REAL ESTATE SECURITIES TRUST
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (continued)
October 31, 2016 (unaudited)
| | |
| Franklin Real Estate Securities Fund | | |
| |
| Class A: | | |
| Net assets, at value | $ | 365,954,382 |
| Shares outstanding | | 16,214,154 |
| Net asset value per sharea | $ | 22.57 |
| Maximum offering price per share (net asset value per share ÷ 94.25%) | $ | 23.95 |
| Class C: | | |
| Net assets, at value | $ | 81,119,761 |
| Shares outstanding | | 3,725,783 |
| Net asset value and maximum offering price per sharea | $ | 21.77 |
| Class R6: | | |
| Net assets, at value | $ | 92,032,659 |
| Shares outstanding | | 4,044,958 |
| Net asset value and maximum offering price per share | $ | 22.75 |
| Advisor Class: | | |
| Net assets, at value | $ | 29,065,625 |
| Shares outstanding | | 1,277,554 |
| Net asset value and maximum offering price per share | $ | 22.75 |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
franklintempleton.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 17
FRANKLIN REAL ESTATE SECURITIES TRUST
FINANCIAL STATEMENTS
Statement of Operations
for the six months ended October 31, 2016 (unaudited)
| | | |
| Franklin Real Estate Securities Fund | | | |
| |
| Investment income: | | | |
| Dividends | $ | 9,997,342 | |
| Expenses: | | | |
| Management fees (Note 3a) | | 1,507,583 | |
| Distribution fees: (Note 3c) | | | |
| Class A | | 492,736 | |
| Class C | | 439,942 | |
| Transfer agent fees: (Note 3e) | | | |
| Class A | | 373,747 | |
| Class C | | 83,426 | |
| Class R6 | | 330 | |
| Advisor Class | | 25,825 | |
| Custodian fees (Note 4) | | 2,449 | |
| Reports to shareholders | | 49,549 | |
| Registration and filing fees | | 47,610 | |
| Professional fees | | 20,657 | |
| Trustees’ fees and expenses | | 17,380 | |
| Other | | 6,169 | |
| Total expenses | | 3,067,403 | |
| Expense reductions (Note 4) | | (15 | ) |
| Expenses waived/paid by affiliates (Note 3f) | | (9,823 | ) |
| Net expenses | | 3,057,565 | |
| Net investment income. | | 6,939,777 | |
| Realized and unrealized gains (losses): | | | |
| Net realized gain (loss) from investments. | | 26,592,788 | |
| Net change in unrealized appreciation (depreciation) on investments | | (28,749,677 | ) |
| Net realized and unrealized gain (loss) | | (2,156,889 | ) |
| Net increase (decrease) in net assets resulting from operations | $ | 4,782,888 | |
18 Semiannual Report | The accompanying notes are an integral part of these financial statements. franklintempleton.com
FRANKLIN REAL ESTATE SECURITIES TRUST
FINANCIAL STATEMENTS
| | | | | | |
| Statements of Changes in Net Assets | | | | | | |
| |
| Franklin Real Estate Securities Fund | | | | | | |
| |
| | | Six Months Ended | | | | |
| | | October 31, 2016 | | | Year Ended | |
| | | (unaudited) | | | April 30, 2016 | |
| Increase (decrease) in net assets: | | | | | | |
| Operations: | | | | | | |
| Net investment income | $ | 6,939,777 | | $ | 12,341,008 | |
| Net realized gain (loss) | | 26,592,788 | | | 16,664,018 | |
| Net change in unrealized appreciation (depreciation) | | (28,749,677 | ) | | 8,941,661 | |
| Net increase (decrease) in net assets resulting from operations. | | 4,782,888 | | | 37,946,687 | |
| Distributions to shareholders from: | | | | | | |
| Net investment income: | | | | | | |
| Class A | | (4,731,856 | ) | | (6,024,463 | ) |
| Class C | | (774,882 | ) | | (801,106 | ) |
| Class R6 | | (1,472,606 | ) | | (2,274,410 | ) |
| Advisor Class | | (352,192 | ) | | (360,289 | ) |
| Total distributions to shareholders | | (7,331,536 | ) | | (9,460,268 | ) |
| Capital share transactions: (Note 2) | | | | | | |
| Class A | | 2,860,026 | | | (34,932,065 | ) |
| Class C | | (601,357 | ) | | (10,924,295 | ) |
| Class R6 | | (12,710,137 | ) | | (8,164,611 | ) |
| Advisor Class | | 7,306,539 | | | 3,779,393 | |
| Total capital share transactions | | (3,144,929 | ) | | (50,241,578 | ) |
| Net increase (decrease) in net assets. | | (5,693,577 | ) | | (21,755,159 | ) |
| Net assets: | | | | | | |
| Beginning of period | | 573,866,004 | | | 595,621,163 | |
| End of period | $ | 568,172,427 | | $ | 573,866,004 | |
| Undistributed net investment income included in net assets: | | | | | | |
| End of period | $ | 4,923,934 | | $ | 5,315,693 | |
franklintempleton.com The accompanying notes are an integral part of these financial statements. | Semiannual Report 19
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 (1940 Act) as an open-end management investment company, consisting of one fund, Franklin Real Estate Securities Fund (Fund) and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Fund offers four classes of shares: Class A, Class C, Class R6, and Advisor Class. Each class of shares differs by its initial sales load, contingent deferred sales charges, voting rights on matters affecting a single class, its exchange privilege and fees primarily due to differing arrangements for distribution and transfer agent fees.
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 transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Fund’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC 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 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 NAV.
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 VC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VC 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 restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VC 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 may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of October 31, 2016, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on each tax jurisdiction’s statute of limitation.
20 Semiannual Report
franklintempleton.com
FRANKLIN REAL ESTATE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Real Estate Securities Fund (continued)
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 U.S. GAAP. 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. For Real Estate Investment Trust (REIT) securities, the Fund records ROC estimates, if any, on the ex-dividend date and are adjusted once actual tax designations are known.
d. Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP 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 Fund’s organizational documents, its officers and trustees are indemnified by the Fund against certain liabilities arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. Currently, the Fund expects the risk of loss to be remote.
2. Shares of Beneficial Interest
At October 31, 2016, there were an unlimited number of shares authorized ($0.01 par value). Transactions in the Fund’s shares were as follows:
| | | | | | | | | | | |
| | Six Months Ended | | Year Ended | |
| | October 31, 2016 | | April 30, 2016 | |
| | Shares | | | | Amount | | Shares | | | Amount | |
| Class A Shares: | | | | | | | | | | | |
| Shares sold | 1,777,713 | | $ | 43,063,496 | | 2,532,484 | | $ | 54,961,855 | |
| Shares issued in reinvestment of distributions | 195,130 | | | | 4,567,791 | | 270,471 | | | 5,785,357 | |
| Shares redeemed | (1,872,830 | ) | | (44,771,261 | ) | (4,456,988 | ) | | (95,679,277 | ) |
| Net increase (decrease) | 100,013 | | | $ | 2,860,026 | | (1,654,033 | ) | $ | (34,932,065 | ) |
| Class C Shares: | | | | | | | | | | | |
| Shares sold | 422,159 | | | $ | 9,878,059 | | 784,919 | | $ | 16,561,370 | |
| Shares issued in reinvestment of distributions | 33,364 | | | | 752,903 | | 37,341 | | | 775,562 | |
| Shares redeemed | (487,611 | ) | | (11,232,319 | ) | (1,368,796 | ) | | (28,261,227 | ) |
| Net increase (decrease) | (32,088 | ) | | $ | (601,357 | ) | (546,536 | ) | $ | (10,924,295 | ) |
franklintempleton.com
Semiannual Report 21
FRANKLIN REAL ESTATE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | |
| Franklin Real Estate Securities Fund (continued) | | | | | | | | | | |
| |
| 2. Shares of Beneficial Interest (continued) | | | | | | | | | | |
| |
| | Six Months Ended | | Year Ended | |
| | October 31, 2016 | | April 30, 2016 | |
| | Shares | | | Amount | | Shares | | | Amount | |
| Class R6 Shares: | | | | | | | | | | |
| Shares sold | 60,868 | | $ | 1,450,834 | | 67,691 | | $ | 1,480,907 | |
| Shares issued in reinvestment of distributions | 62,411 | | | 1,472,606 | | 105,709 | | | 2,274,410 | |
| Shares redeemed | (650,725 | ) | | (15,633,577 | ) | (526,930 | ) | | (11,919,928 | ) |
| Net increase (decrease) | (527,446 | ) | $ | (12,710,137 | ) | (353,530 | ) | $ | (8,164,611 | ) |
| Advisor Class Shares: | | | | | | | | | | |
| Shares sold | 513,390 | | $ | 12,492,535 | | 518,718 | | $ | 11,446,692 | |
| Shares issued in reinvestment of distributions | 13,474 | | | 318,002 | | 14,543 | | | 313,892 | |
| Shares redeemed | (228,050 | ) | | (5,503,998 | ) | (368,908 | ) | | (7,981,191 | ) |
| Net increase (decrease) | 298,814 | | $ | 7,306,539 | | 164,353 | | $ | 3,779,393 | |
3. Transactions with Affiliates
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| |
| Subsidiary | Affiliation |
| Franklin Templeton Institutional, LLC (FT Institutional) | Investment manager |
| Franklin Templeton Services, LLC (FT Services) | Administrative manager |
| Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter |
| Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
| |
| a. Management Fees | |
The Fund pays an investment management fee to FT Institutional based on the average daily net assets of the Fund as follows:
| | |
| Annualized Fee Rate | | Net Assets |
| 0.625% | | Up to and including $100 million |
| 0.500% | | Over $100 million, up to and including $250 million |
| 0.450% | | Over $250 million, up to and including $7.5 billion |
| 0.440% | | Over $7.5 billion, up to and including $10 billion |
| 0.430% | | Over $10 billion, up to and including $12.5 billion |
| 0.420% | | Over $12.5 billion, up to and including $15 billion |
| 0.400% | | In excess of $15 billion |
For the period ended October 31, 2016, the annualized effective investment management fee rate was 0.491% of the Fund’s average daily net assets.
b. Administrative Fees
Under an agreement with FT Institutional, FT Services provides administrative services to the Fund. The fee is paid by FT Institutional based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
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FRANKLIN REAL ESTATE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Real Estate Securities Fund (continued)
c. Distribution Fees
The Board has adopted distribution plan for each share class, with the exception of Class R6 and Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s Class A reimbursement distribution plan, the Fund reimburses Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plan, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Fund’s Class C compensation distribution plan, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to the maximum annual plan rate. The plan year, for purposes of monitoring compliance with the maximum annual plan rate, is February 1 through January 31.
The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
| | |
| Class A | 0.25 | % |
| Class C | 1.00 | % |
| |
| d. Sales Charges/Underwriting Agreements | | |
Front-end sales charges and contingent deferred sales charges (CDSC) do not represent expenses of the Fund. These charges are deducted from the proceeds of sales of Fund shares prior to investment or from redemption proceeds prior to remittance, as applicable. Distributors has advised the Fund of the following commission transactions related to the sales and redemptions of the Fund’s shares for the period:
| | |
| Sales charges retained net of commissions paid to | | |
| unaffiliated brokers/dealers. | $ | 84,571 |
| CDSC retained | $ | 4,065 |
| |
| e. Transfer Agent Fees | | |
Each class of shares, except for Class R6, pays transfer agent fees to Investor Services for its performance of shareholder servicing obligations and reimburses Investor Services for out of pocket expenses incurred, including shareholder servicing fees paid to third parties. These fees are allocated daily based upon their relative proportion of such classes’ aggregate net assets. Class R6 pays Investor Services transfer agent fees specific to that class.
For the period ended October 31, 2016, the Fund paid transfer agent fees of $483,328, of which $234,837 was retained by Investor Services.
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Semiannual Report 23
FRANKLIN REAL ESTATE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Real Estate Securities Fund (continued)
| 3. | Transactions with Affiliates (continued) |
| f. | Investments in Affiliated Management Investment Companies |
The Fund invests in one or more affiliated management investment companies for purposes other than exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the affiliated management investment companies, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by each affiliate. Prior to May 1, 2013, the waiver was accounted for as a reduction to management fees. During the period ended October 31, 2016, the Fund held investments in affiliated management investment companies as follows:
| | | | | | | | | | | |
| | | | | | | | | | | % of | |
| | | | | | | | | | | Affiliated | |
| | Number of | | | | Number of | | | | | Fund Shares | |
| | Shares Held | | | | Shares | | Value | | | Outstanding | |
| | at Beginning | Gross | Gross | | Held at End | | at End | Investment | Realized | Held at End | |
| | of Period | Additions | Reductions | | of Period | | of Period | Income | Gain (Loss) | of Period | |
| Non-Controlled Affiliates | | | | | | | | | | | |
| Institutional Fiduciary Trust Money Market | | | | | | | | | | | |
| Portfolio | 5,353,674 | 50,764,585 | (52,458,667 | ) | 3,659,592 | $ | 3,659,592 | $ – | $ – | 0.0 | %a |
| |
| aRounds to less than 0.1%. | | | | | | | | | | | |
| |
| g. Waiver and Expense Reimbursements | | | | | | | | | | |
Investor Services has contractually agreed in advance to waive or limit its fees so that the Class R6 transfer agent fees do not exceed 0.01% until August 31, 2017. There were no Class R6 transfer agent fees waived during the period ended October 31, 2016.
h. Other Affiliated Transactions
At October 31, 2016, one or more of the funds in Franklin Fund Allocator Series owned 15.67% of the Fund’s outstanding shares.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended October 31, 2016, the custodian fees were reduced as noted in the the Statement of Operations.
5. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At April 30, 2016, the Fund had capital loss carryforwards of $19,102,558 expiring in 2018.
For tax purposes, the Fund may elect to defer any portion of a post-October capital loss to the first day of the following fiscal year.
At April 30, 2016, the Fund deferred post-October capital losses of $1,700,366.
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FRANKLIN REAL ESTATE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Franklin Real Estate Securities Fund (continued)
At October 31, 2016, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
| | | |
| Cost of investments | $ | 399,482,145 | |
| |
| Unrealized appreciation | $ | 200,150,268 | |
| Unrealized depreciation | | (33,597,745 | ) |
| Net unrealized appreciation (depreciation) | $ | 166,552,523 | |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of wash sales.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the period ended October 31, 2016, aggregated $133,553,019 and $138,307,455, respectively.
7. Concentration of Risk
The Fund invests a large percentage of its total assets in REIT securities. Such concentration may subject the Fund to special risks associated with real estate securities. These securities may be more sensitive to economic or regulatory developments due to a variety of factors such as local, regional, national and global economic conditions, interest rates and tax considerations.
8. 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 $2 billion (Global Credit Facility) which matures on February 10, 2017. 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 0.15% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses in the Statement of Operations. During the period ended October 31, 2016, the Fund did not use the Global Credit Facility.
9. Fair Value Measurements
The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:
- Level 1 – quoted prices in active markets for identical financial instruments
- Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
- Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)
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Semiannual Report 25
FRANKLIN REAL ESTATE SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
|
Franklin Real Estate Securities Fund (continued) |
|
| 9. Fair Value Measurements (continued) |
The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
At October 31, 2016, all of the Fund’s investments in financial instruments carried at fair value were valued using Level 1 inputs.
For detailed categories, see the accompanying Statement of Investments.
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
|
| Abbreviations |
| Selected Portfolio |
| REIT Real Estate Investment Trust |
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FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Shareholder Information
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 Trust, on behalf of 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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Item 2. Code of Ethics.
(a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer.
Item 3. Audit Committee Financial Expert.
(a)(1) The Registrant has an audit committee financial expert serving on its audit committee.
(2) The audit committee financial expert is John B. Wilson and he is "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases.
Item 4. Principal Accountant Fees and Services. N/A
Item 5. Audit Committee of Listed Registrants. N/A
Item 6. Schedule of Investments. N/A
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. N/A
Item 8. Portfolio Managers of Closed-End Management Investment Companies. N/A
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. N/A
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein.
Item 11. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls. There have been no changes in the Registrant’s internal controls or in other factors that could materially affect the internal controls over financial reporting subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR.
Item 12. Exhibits.
(a) (1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN REAL ESTATE SECURITIES TRUST
By /s/ Laura F. Fergerson
Laura F. Fergerson
Chief Executive Officer –
Finance and Administration
Date December 27, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/ Laura F. Fergerson
Laura F. Fergerson
Chief Executive Officer –
Finance and Administration
Date December 27, 2016
By /s/ Gaston Gardey
Gaston Gardey
Chief Financial Officer and
Chief Accounting Officer
Date December 27, 2016
