SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE CHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12700
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Franklin Real Estate Income Fund
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(Exact name of registrant as specified in its charter)
California 77-0185558
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation
or organization)
P. O. Box 7777, San Mateo, California 94403-7777
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 312-2000
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N/A
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Common Stock Shares Outstanding as of March 31, 1996, Series A: 3,999,515
Common Stock Shares Outstanding as of March 31, 1996, Series B: 319,308
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FRANKLIN REAL ESTATE INCOME FUND
BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(Unaudited)
(Dollars in 000's except per share amounts)
1996 1995
ASSETS
Rental property:
Land $10,326 $10,326
Buildings and improvements 29,712 29,666
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40,038 39,992
Less: accumulated depreciation 5,772 5,521
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34,266 34,471
Cash and cash equivalents 1,377 1,586
Mortgage-backed securities, available for sale 477 512
Deferred rent receivable 761 745
Other assets 775 541
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Total assets $37,656 $37,855
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LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $1,926 $1,937
Tenants' deposits and other liabilities 315 276
Distributions payable 500 500
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Total liabilities 2,741 2,713
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Stockholders' equity:
Common stock, Series A, without par value.
Stated value $10 per share; 10,000,000 shares
authorized; 3,999,515 shares issued and
outstanding in 1996 and 1995 35,702 35,702
Common stock, Series B, without par value.
Stated value $10 per share; 500,000 shares
authorized; 319,308 shares issued and
outstanding in 1996 and 1995 3,193 3,193
Unrealized loss on mortgage-backed securities (4) 2
Accumulated distributions in excess of net income (3,976) (3,755)
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Total stockholders' equity 34,915 35,142
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Total liabilities and stockholders' equity $37,656 $37,855
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See notes to financial statements.
Item 1. Financial Statements
(continued)
FRANKLIN REAL ESTATE INCOME FUND
STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(Dollars in 000's except per share amounts)
1996 1995
Revenue:
Rent $1,107 $1,106
Interest 22 17
Dividends 3 1
Other - 4
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Total revenue 1,132 1,128
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Expenses:
Interest 48 51
Depreciation and amortization 274 286
Operating 265 248
Related party 51 52
Consolidation expense 168 -
General and administrative 47 49
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Total expenses 853 686
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Net income $279 $442
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Net income per share, based on shares
outstanding of Series A common stock of 3,999,515
and 3,999,653 in March 31, 1996 and 1995 $.07 $.11
=============================================================================
Distributions per share, based on shares
outstanding of Series A common stock of 3,999,515
and 3,999,653 in March 31, 1996 and 1995 $.13 $.13
=============================================================================
See notes to financial statements.
Item 1. Financial Statements
(continued)
FRANKLIN REAL ESTATE INCOME FUND
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996
(Unaudited)
(Dollars in 000's)
Common Stock
Series A Series B
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Unrealized Accumulated
Gain/Loss Distributions
on in Excess of
Shares Amount Shares Amount Securities Net Income Total
Balance, beginning
of period 3,999,515 $35,702 319,308 $3,193 $2 $(3,755) $35,142
Unrealized loss
on mortgage-
backed securities - - - - (6) - (6)
Net income - - - - - 279 279
Distributions
declared - - - - - (500) (500)
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Balance, end
of period 3,999,515 $35,702 319,308 $3,193 $(4) $(3,976) $34,915
====================================================================================================
See notes to financial statements.
Item 1. Financial Statements
(continued)
FRANKLIN REAL ESTATE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
(Dollars in 000's)
1996 1995
Cash flows from operating activities:
Net income $279 $442
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 274 286
Increase in deferred rent receivable (16) (16)
Increase in other assets (257) (28)
Increase in tenants' deposits and other liabilities 39 103
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40 345
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Net cash provided by operating activities 319 787
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Cash flows from investing activities:
Improvements to rental property (46) (7)
Disposition of mortgage-backed securities 29 8
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Net cash provided by (used in) investing activities (17) 1
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Cash flows from financing activities:
Distributions paid (500) (500)
Principal payments on note payable (11) (11)
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Net cash used in financing activities (511) (511)
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Net increase (decrease) in cash and cash equivalents (209) 277
Cash and cash equivalents, beginning of period 1,586 973
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Cash and cash equivalents, end of period $1,377 $1,250
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See notes to financial statements.
FRANKLIN REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1 - ORGANIZATION
Franklin Real Estate Income Fund (the "Company") is a California corporation
formed on August 7, 1987 for the purpose of investing in income-producing
real property. The Company is a real estate investment trust ("REIT") having
elected to qualify as a REIT under the applicable provisions of the Internal
Revenue Code since 1988. Under the Internal Revenue Code and applicable
state income tax law, a qualified REIT is not subject to income tax if at
least 95% of its taxable income is currently distributed to its stockholders
and other REIT tests are met. The Company has distributed at least 95% of
its taxable income and intends to distribute substantially all of its taxable
income in the future. Accordingly, no provision is made for income taxes in
these financial statements.
As of March 31, 1996, the Company's real estate portfolio consisted of the
Mira Loma Shopping Center located in Reno, Nevada; a 40% undivided interest
in the Shores Office Complex located in Redwood City, California; three
separate R&D buildings in the Northport Business Park located in Fremont,
California; and the Glen Cove Center located in Vallejo, California. The
Company has also purchased two small parcels of land located adjacent to the
Mira Loma Shopping Center. The Company has completed its property
acquisition phase and no additional property acquisitions are currently
anticipated.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited financial statements contain all adjustments
(consisting of normal recurring accruals) which are necessary, in the opinion
of management, for a fair presentation. The statements, which do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, should be read in
conjunction with the Company's financial statements for the year ended
December 31, 1995
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company has an agreement with Franklin Properties, Inc. (the "Advisor"),
to administer the day-to-day operations of the Company. Under the terms of
the agreement, which is renewable annually, the Advisor will receive
quarterly, an annualized fee equal to 1% of invested assets and .4% of
mortgage investments. The fee is subordinate to declared dividends to Series
A common stock shareholders totaling at least an 8% per annum non-cumulative
non-compounded return on their adjusted price per share, as defined.
Accordingly, no advisory fee was paid to the Advisor.
At March 31, 1996, cash equivalents included $193,000, which was invested in
Franklin Money Fund, an investment company managed by an affiliate of the
Advisor. Dividends earned from Franklin Money Fund totaled $3,000 for the
three month period ended March 31, 1996.
FRANKLIN REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
The agreements between the Company and the Advisor, or affiliates, provide
for certain types of compensation and payments including but not limited to
the following, for those services rendered for the three month period ended
March 31, 1996:
Reimbursement for data processing, accounting and
certain other expenses, charged to related party expense $7,000
Property management fee, charged to
related party expense $44,000
Leasing commission, capitalized and amortized
over the term of the related lease $66,000
NOTE 4 - COMMON STOCK, WARRANTS AND INCOME PER SHARE
Series A and Series B common stock have the same voting rights.
Distributions from sources other than cash from the sale or refinancing of
the Company's property are to be paid in the following order of priority:
first to the Series A stockholders until they receive an 8% per annum
non-cumulative non-compounded return on their adjusted price per share, as
defined; then to the Series A and Series B stockholders in proportion of
their respective number of shares. All distributions are declared at the
discretion of the Directors of the Company. To date, the Board of Directors
has not declared any distributions to be payable to any shares of outstanding
Series B common stock.
Since Series A common stock has not received an 8% per annum non-cumulative
non-compounded return on its adjusted purchase price, and since Series B
common stock does not participate in earnings until such 8% return is
received by the Series A common stock, net income per share is not applicable
to Series B common stock.
Warrants were issued with each share of Series A common stock purchased
during the offering period, without additional cost to the stockholders. The
number of warrants issued with each share varied depending upon the number of
shares outstanding at the time the warrants were issued. The Warrants were
exercisable at a price of $10.00 per share for a 12-month period which
expired on January 31, 1996. No warrants were exercised.
NOTE 5 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the three month period ended March 31, 1996, the Company paid interest on
the note payable of $48,000.
NOTE 6 - SUBSEQUENT EVENT
On May 7, 1996, the Company merged into Franklin Select Real Estate Income
Fund ("Select") on the basis described in the Joint Proxy
Statement/Prospectus dated November 13, 1995. Prior to the merger, the
Company declared a final cash distribution in the amount of $.09 per share to
shareholders of record on May 7, 1996, holding Series A common stock. Under
the terms of the merger, as fully described in the Joint Proxy
Statement/Prospectus dated November 13, 1995, each share of the Company's
Series A and Series B common stock will be exchanged for 1.286 shares of
Select Series A and Series B common stock, respectively. Because of the
merger, this is the Company's final report.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
and Results of Operations
Introduction
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the Financial Statements and
Notes thereto.
Results of Operations
COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
Net income for the three month period ended March 31, 1996 decreased
$163,000, or 37%, compared to the same period in 1995 primarily due to
consolidation expenses of $168,000 related to the proposed merger of the
Company with Franklin Select Real Estate Income Fund and Franklin Advantage
Real Estate Income Fund. See PART II, Item 4. "Submission of Matters to a
Vote of Security Holders" for additional information regarding the merger.
Total expenses increased for the three month period ended March 31, 1996 by
$167,000, or 24%, from $686,000 in 1995 to $853,000. The increase in total
expenses is attributable to the following factors: a decrease in interest
expense of $3,000; a decrease in depreciation and amortization of $12,000,
or 4%; an increase in operating expenses of $17,000, or 7%; a decrease in
related party expense of $1,000, or 2%; an increase in consolidation expense
of $168,000 or 100%, and a decrease in general and administrative expense of
$2,000, or 4%.
Operating expenses for the three month period ended March 31, 1996, increased
$17,000 compared to the same period in 1995. The increase was primarily due
to a property tax refund received in 1995 totaling $41,000 that reduced that
year's operating expenses. This effect was partially offset by a decrease in
bad debt expense in 1996 of $15,000, and minor reductions in other expense
accounts.
Consolidation expense increased $168,000 as a result of the proposed
consolidation.
Liquidity and Capital Resources
The Company's principal source of capital for the acquisition of properties
was the proceeds from the initial public offering of its stock. The Company
completed its property acquisition phase in 1994 and no further acquisitions
are anticipated. The Company's cash flow been its principal source of
capital for property improvements, leasing costs and the payments of
quarterly distributions. At March 31, 1996, the Company's cash reserves,
including mortgage backed securities, aggregated $1,854,000. The Company's
investment in mortgage-backed securities consists of GNMA, adjustable rate
pass-through certificates in which payments of principal and interest are
guaranteed by GNMA. However, changes in market interest rates cause the
security's market value to fluctuate, which could result in a gain or loss to
the Company if the securities are sold before maturity.
As of March 31, 1996, one of the Company's properties was subject to secured
financing with an outstanding balance of approximately $1,926,000.
Otherwise, the Company's properties are owned free of any indebtedness.
Interest on the note accrues at a variable rate of 1.5% in excess of the
Union Bank Reference Rate. Monthly installments of principal and interest
commenced August 1, 1994, and continue until maturity of the note on May 1,
1999. Principal installments are payable in the amount of $3,700 per month.
The note may be prepaid in whole or in part at any time without penalty. For
the foreseeable future, management believes that the Company's current
sources of capital will continue to be adequate to meet both its operating
requirements and the payment of distributions.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources (Continued)
Net cash provided by operating activities for the three month period ended
March 31, 1996 decreased $468,000 to $319,000 compared to the same period in
1995. The decrease in cash flow is primarily attributable to consolidation
expense of $168,000; payment of annual insurance premiums in January, 1996,
of $120,000; and an increase in leasing commissions paid of $128,000. The
remainder of the change in cash flow is due to changes in tenant deposits and
other liability accounts.
Net cash provided by (used in) investing activities for the three month
period ended March 31, 1996, decreased $18,000 when compared to the same
period in 1995. The decrease was due to an increase in improvements to
rental property offset by increase in principal payments received from
mortgage-backed securities.
Net cash used in financing activities remained unchanged.
Funds from Operations for the three month period ended March 31, 1996
decreased $175,000, or 24%, to $553,000 compared to the same period in 1995.
The decrease is primarily due to the increase in consolidation expense as
described under "Results of Operations" above. The Company believes that
Funds from Operations is helpful in understanding a property portfolio in
that such calculation reflects income from operating activities and the
properties' ability to support general operating expenses and interest
expense before the impact of certain activities, such as gains and losses
from property sales and changes in the accounts receivable and accounts
payable. However, it does not measure whether income is sufficient to fund
all of the Company's cash needs including principal amortization, capital
improvements and distributions to shareholders. Funds from Operations should
not be considered an alternative to net income or any other GAAP measurement
of performance or as an alternative to cash flows from operating, investing,
or financing activities as a measure of liquidity. As defined by the
National Association of Real Estate Investment Trusts, Funds from Operations
is net income ( computed in accordance with GAAP ), excluding gains or losses
from debt restructuring and sales of property, plus depreciation and
amortization, and after adjustment for unconsolidated joint ventures. The
Company reports Funds from Operations in accordance with the NAREIT
definition. For the periods presented, Funds from Operations represents net
income plus depreciation and amortization. The measure of Funds from
Operations as reported by the Company may not be comparable to similarly
titled measures of other companies that follow different definitions.
Impact of Inflation
The Company's management believes that inflation may have a positive effect
on the Company's property portfolio, but this effect generally will not be
fully realized until such properties are sold or exchanged. On some leases,
the Company collects overage rents based on increased sales and increased
base rentals as a result of cost of living adjustments. The Company's policy
of negotiating leases which incorporate operating expense "pass-through"
provisions is intended to protect the Company against increased operating
costs resulting from inflation.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion
and Analysis of Financial Condition
and Results of Operations
Distributions
Distributions are declared quarterly at the discretion of the Board of
Directors. The Company's present distribution policy is to at least annually
evaluate the current distribution rate in light of anticipated tenant
turnover over the next two or three years, the estimated level of associated
improvements and leasing commissions, planned capital expenditures, any debt
service requirements and the Company's other working capital requirements.
After balancing these considerations, and considering the Company's earnings
and cash flow, the level of its liquid reserves and other relevant factors,
the Company seeks to establish a distribution rate which:
i) provides a stable distribution which is sustainable despite short
term fluctuations in property cash flows;
ii) maximizes the amount of cash flow paid out as distributions
consistent with the above listed objective; and
iii) complies with the Internal Revenue Code requirement that a REIT
annually pay out as distributions not less than 95% of its
taxable income.
For the three-month period ended March 31, 1996, the Company declared
distributions totaling $500,000.
PART II - OTHER INFORMATION
Item 4. Submission of Matters
to Vote of Security Holders
On November 2, 1995, the Boards of Directors of the Company and of two other
real estate investment trusts that Franklin Properties, Inc. advises,
Franklin Advantage Real Estate Income Fund ("Advantage") and Franklin Select
Real Estate Income Fund ("Select"), authorized the execution of a Merger
Agreement and the filing of a Joint Proxy Statement/Prospectus with the
Securities and Exchange Commission. The Prospectus was filed on November 13,
1995, and became effective on March 14, 1996.
At a Special Meeting of Shareholders held on May 7, 1996, the proposed merger
of the Company with Advantage and Select was approved. Among other
requirements, completion of the merger was subject to the approval of a
majority of the outstanding shares of each of the three companies. The
actual tabulation of the vote was as follows:
FOR AGAINST ABSTAIN
Franklin Real Estate Income Fund 54.34% 20.84% 3.12%
Franklin Select Real Estate Income Fund 52.30% 24.78% 2.66%
Franklin Advantage Real Estate Income Fund 73.79% 4.05% 2.43%
In the merger, the Company and Advantage were merged into Select, which will
be renamed Franklin Select Realty Trust. Shares of Select will be issued in
exchange for the shares of the Company and Advantage on the basis described
in the Joint Proxy Statement/Prospectus.
There were no other matters submitted to a vote of security holders during
the quarter covered by this report.
Item 6. Exhibits and Reports on Form 8-K
(a) Not applicable
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
March 31, 1996.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN REAL ESTATE INCOME FUND
By:/s/David P. Goss
David P. Goss
Chief Executive Officer
Date: May 12, 1996