UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08034
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FRANKLIN REAL ESTATE SECURITIES TRUST
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1960
(Address of principal executive offices) (Zip code)
MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area Code: (650) 312-2000)
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Date of fiscal year end: 4/30
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Date of reporting period: 4/30/05
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ITEM 1. REPORTS TO STOCKHOLDERS.
APRIL 30, 2005
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ANNUAL REPORT AND SHAREHOLDER LETTER | SECTOR
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WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN REAL ESTATE Eligible shareholders can
SECURITIES FUND sign up for eDelivery at
franklintempleton.com.
See inside for details.
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[LOGO OMITTED]
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE
Franklin Templeton's distinct multi-manager structure combines the specialized
expertise of three world-class investment management groups--Franklin, Templeton
and Mutual Series.
SPECIALIZED EXPERTISE
Each of our portfolio management groups operates autonomously, relying on its
own research and staying true to the unique investment disciplines that underlie
its success.
FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income
investing and also brings expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in
1954, launched what has become the industry's oldest global fund. Today, it
offers investors the broadest global reach in the industry with offices in over
25 countries.
MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of
value investing, searching aggressively for opportunity among what it believes
are undervalued stocks, as well as arbitrage situations and distressed
securities.
TRUE DIVERSIFICATION
Because our management groups work independently and adhere to different
investment approaches, Franklin, Templeton and Mutual Series funds typically
have distinct portfolios. That's why our funds can be used to build truly
diversified allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST
At Franklin Templeton Investments, we seek to consistently provide investors
with exceptional risk-adjusted returns over the long term, as well as the
reliable, accurate and personal service that has helped us become one of the
most trusted names in financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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Not part of the annual report
Contents
SHAREHOLDER LETTER................. 1
ANNUAL REPORT
Franklin Real Estate Securities
Fund .............................. 4
Performance Summary ............... 8
Your Fund's Expenses............... 13
Financial Highlights and
Statement of Investments .......... 15
Financial Statements .............. 21
Notes to Financial Statements ..... 25
Report of Independent Registered
Public Accounting Firm............. 34
Tax Designation.................... 35
Board Members and Officers......... 36
Shareholder Information............ 41
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Annual Report
Franklin Real Estate Securities Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Real Estate Securities Fund
seeks to maximize total return by investing at least 80% of its net assets in
equity securities of companies in the real estate industry, including equity
real estate investment trusts (REITs) and companies that derive at least half of
their assets or revenues from the ownership, construction, management or sale of
residential, commercial or industrial real estate.1
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PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 4/30/05
[PIE CHART OMITTED]
Real Estate Investment Trusts ................ 72.8%
Real Estate Development ...................... 7.7%
Finance, Rental & Leasing .................... 4.7%
Financial Conglomerates ...................... 1.4%
Short-Investments and Other Net Assets ....... 13.4%
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This annual report for Franklin Real Estate Securities Fund covers the fiscal
year ended April 30, 2005.
PERFORMANCE OVERVIEW
Franklin Real Estate Securities Fund - Class A posted a +36.07% cumulative total
return for the year under review. The Fund slightly underperformed its narrow
benchmark, the Dow Jones Wilshire Real Estate Securities Index,
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PERFORMANCE DATA QUOTED 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. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL
1-800/342-5236 FOR MOST RECENT MONTH-END PERFORMANCE.
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1. Equity REITs are real estate companies that own and manage income-producing
properties such as apartments or hotels. The income, primarily rent from these
properties, is generally passed on to investors in the form of dividends. These
companies provide experienced property management teams and generally
concentrate on a specific geographic region and property type.
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 19.
4 | Annual Report
which returned 37.03%. On the other hand, the Fund far outpaced its broad
benchmark, the Standard & Poor's 500 Composite Index (S&P 500), which returned
6.33% for the same period.2 You can find the Fund's long-term performance data
in the Performance Summary beginning on page 8.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended April 30, 2005, domestic economic expansion showed
staying power across most industries, sectors and regions. Gross domestic
product (GDP) rose at an annualized 3.8% rate in fourth quarter 2004 and an
annualized 3.5% in first quarter 2005, benefiting from greater business
investment, sizable inventory buildup and consumer spending. Although booming
demand for imported goods and materials fueled the trade gap, U.S. dollar
depreciation supported manufacturing activity and made U.S. exports more
competitive in the global market.
The labor market firmed as employment increased and the unemployment rate
dropped from 5.5% to 5.2% during the reporting period.3 Hiring rebounded in many
industries, bolstered by healthy business spending and solid business
confidence. High energy prices cooled consumer sentiment. Although core retail
sales generally held strong, they weakened toward period-end. Oil prices hit a
new high of $57.27 on April 1 before declining to $49.72 on April 30.4
The Federal Reserve Board raised the federal funds target rate from 1.00% to
2.75% and said it will respond to changes in economic prospects as needed to
fulfill its obligation to maintain price stability. Inflation remained
relatively contained for the 12 months ended April 30, 2005, as measured by the
2.2% rise for the core Consumer Price Index, which excludes volatile food and
energy costs. Pricing pressures were somewhat eased by continued competition,
globalization and offshoring, as many companies held back in passing along
higher commodity and energy costs to consumers.
Despite a generally strong economy and improving corporate fundamentals,
investors faced a stock market influenced partly by rising inflation, the
fluctuating dollar and interest rate hikes during the period. Corporate profits
2. Source: Standard & Poor's Micropal. The Dow Jones Wilshire Real Estate
Securities Index is a broad measure of the performance of publicly traded real
estate securities, such as real estate investment trusts and real estate
operating companies. The index is capitalization weighted and rebalanced
monthly, and returns are calculated on a buy-and-hold basis. The S&P 500
consists of 500 stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its market
value. The S&P 500 is one of the most widely used benchmarks of U.S. equity
performance. The indexes are unmanaged and include reinvested dividends. One
cannot invest directly in an index, nor is an index representative of the Fund's
portfolio.
3. Source: Bureau of Labor Statistics.
4. Source: Bloomberg Energy/Commodity Service.
Annual Report | 5
rebounded and dividend payments surged to a record level, with U.S. companies
paying out $181 billion in 2004.5 The pace of initial public offerings (IPOs)
remained strong through much of the reporting period, supporting investor
confidence. The blue chip stocks of the Dow Jones Industrial Average gained
1.84% for the period under review, while the broader S&P 500 rose 6.33%, and the
technology-heavy NASDAQ Composite Index increased 0.66%.6
Real estate markets were buoyant during the Fund's fiscal year, as capital
continued to flow into the sector. Real estate was attractive primarily due to
its historically stable growth and cash flow profile compared with the broader
stock and bond markets. Furthermore, capital from banks and other lenders was
readily available, helping private investors obtain financing for their real
estate investments.
INVESTMENT STRATEGY
We use a fundamental, value-oriented, long-term approach, focusing primarily on
the market price of a company's securities relative to our evaluation of the
company's long-term earnings, asset value and cash flow growth potential. In
addition, we analyze supply and demand trends and outlooks for various property
types and regional markets while evaluating company management and a security's
underlying properties.
MANAGER'S DISCUSSION
During the year under review, three real estate investment trusts proved to be
our best performers in terms of absolute and relative total returns. Rouse had
the largest positive impact on the Fund's performance. In August 2004, Rouse
(sold by period-end) was acquired at a 33% premium to its stock price, which
helped drive the Fund's performance versus the benchmark Dow Jones Wilshire Real
Estate Securities Index (Index). Vornado Realty Trust had the second largest
positive contribution to Fund returns, as the company delivered excellent core
results while also participating in the consolidation of retailers such as Sears
and Toys R Us. Macerich also had a significant positive contribution as the
company's retail properties performed well during the period.
5. Source: Standard & Poor's, "2005 Buybacks Soar to Record Levels, Says S&P,"
standardandpoors.com, 4/7/05.
6. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price
weighted based on the average market price of 30 blue chip stocks of companies
that are generally industry leaders. See footnote 1 for a description of the S&P
500. The NASDAQ Composite Index measures all international domestic and common
stocks listed on The NASDAQ Stock Market. The index is market value weighted and
includes more than 3,000 companies.
6 | Annual Report
Despite the Fund's excellent results, there were a few detractors to our overall
results. For example, our holding in mortgage financier Fannie Mae had a
negative impact on performance based largely on widespread investor concerns
regarding the legitimacy and quality of the company's regulatory and accounting
methods, issues which surfaced during the year following a government- sponsored
investigation. Consistent with our strategy, we continued to hold Fannie Mae
stock at period-end, based on our belief that the company's franchise should
remain intact and that growth should resume pending settlement of the current
regulatory and accounting issues.
The Fund sold its position in Starwood Hotels & Resorts Worldwide during the
fiscal year, as we felt the stock had become fully valued. Starwood shares
continued to increase in value after the sale, so that not owning the stock
negatively impacted Fund performance versus the Index.
The Fund's holding in Trustreet Properties was a relatively weak performer
during the past year. While the stock delivered a positive total return it
lagged its peers by a significant margin, as its earnings growth was fairly
weak. The Fund no longer holds this security.
Thank you for your continued participation in Franklin Real Estate Securities
Fund. We look forward to serving your future investment needs.
[PHOTO OF ALEX W. PETERS OMITTED]
/S/ALEX W. PETERS
Alex W. Peters, CFA
Portfolio Manager
Franklin Real Estate Securities Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF APRIL 30, 2005, 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 ADVISER 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.
TOP 10 HOLDINGS
4/30/05
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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General Growth Properties Inc. 4.6%
REAL ESTATE INVESTMENT TRUSTS
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The Macerich Co. 4.1%
REAL ESTATE INVESTMENT TRUSTS
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Equity Residential 3.2%
REAL ESTATE INVESTMENT TRUSTS
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The St. Joe Co. 3.1%
REAL ESTATE DEVELOPMENT
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Simon Property Group Inc. 3.1%
REAL ESTATE INVESTMENT TRUSTS
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ProLogis 3.0%
REAL ESTATE INVESTMENT TRUSTS
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Vornado Realty Trust 3.0%
REAL ESTATE INVESTMENT TRUSTS
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iStar Financial Inc. 2.8%
REAL ESTATE INVESTMENT TRUSTS
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Forest City Enterprises Inc., A 2.7%
REAL ESTATE DEVELOPMENT
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Public Storage Inc. 2.3%
REAL ESTATE INVESTMENT TRUSTS
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Annual Report | 7
Performance Summary as of 4/30/05
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
due 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.
PRICE AND DISTRIBUTION INFORMATION
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CLASS A (SYMBOL: FREEX) CHANGE 4/30/05 4/30/04
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Net Asset Value (NAV) +$5.36 $25.99 $20.63
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DISTRIBUTIONS (5/1/04-4/30/05)
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Dividend Income $0.5334
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Long-Term Capital Gain $1.4823
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TOTAL $2.0157
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CLASS B (SYMBOL: FBREX) CHANGE 4/30/05 4/30/04
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Net Asset Value (NAV) +$5.32 $25.77 $20.45
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DISTRIBUTIONS (5/1/04-4/30/05)
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Dividend Income $0.3364
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Long-Term Capital Gain $1.4823
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TOTAL $1.8187
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CLASS C (SYMBOL: FRRSX) CHANGE 4/30/05 4/30/04
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Net Asset Value (NAV) +$5.29 $25.66 $20.37
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DISTRIBUTIONS (5/1/04-4/30/05)
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Dividend Income $0.3298
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Long-Term Capital Gain $1.4823
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TOTAL $1.8121
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ADVISOR CLASS (SYMBOL: FRLAX) CHANGE 4/30/05 4/30/04
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Net Asset Value (NAV) +$5.38 $26.06 $20.68
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DISTRIBUTIONS (5/1/04-4/30/05)
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Dividend Income $0.5943
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Long-Term Capital Gain $1.4823
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TOTAL $2.0766
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Franklin Real Estate Securities Fund paid distributions derived from long-term
capital gains of $1.4823 per share in December 2004. The Fund designates such
distributions as capital gain dividends per Internal Revenue Code Section 852
(b)(3).
8 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE
MAXIMUM SALES CHARGES.
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CLASS A 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +36.07% +135.69% +288.89%
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Average Annual Total Return 2 +28.23% +17.30% +13.87%
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Value of $10,000 Investment 3 $12,823 $22,208 $36,638
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Avg. Ann. Total Return (3/31/05) 4 +5.97% +17.91% +13.41%
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CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
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Cumulative Total Return 1 +35.12% +127.22% +132.30%
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Average Annual Total Return 2 +31.12% +17.63% +14.25%
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Value of $10,000 Investment 3 $13,112 $22,522 $23,230
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Avg. Ann. Total Return (3/31/05) 4 +7.64% +18.24% +13.75%
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CLASS C 1-YEAR 5-YEAR 10-YEAR INCEPTION (5/1/95)
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Cumulative Total Return 1 +35.07% +127.11% +260.78% +260.78%
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Average Annual Total Return 2 +34.07% +17.83% +13.69% +13.69%
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Value of $10,000 Investment 3 $13,407 $22,711 $36,078 $36,078
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Avg. Ann. Total Return (3/31/05) 4 +10.61% +18.43% N/A +13.38%
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ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +36.46% +138.74% +304.38%
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Average Annual Total Return 2 +36.46% +19.01% +15.00%
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Value of $10,000 Investment 3 $13,646 $23,874 $40,438
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Avg. Ann. Total Return (3/31/05) 4 +12.79% +19.62% +14.53%
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PERFORMANCE DATA QUOTED 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, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 9
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
CLASS A (5/1/95-4/30/05)
[LINE CHART]
Franklin Real Estate Dow Jones Wilshire
Securities Fund S&P 500 6 Real Estate Index 6
5/1/95 $9,421 $10,000 $10,000
5/31/95 $9,786 $10,399 $10,331
6/30/95 $9,955 $10,640 $10,511
7/31/95 $10,178 $10,993 $10,680
8/31/95 $10,401 $11,020 $10,810
9/30/95 $10,686 $11,485 $11,009
10/31/95 $10,472 $11,444 $10,668
11/30/95 $10,632 $11,946 $10,779
12/31/95 $11,215 $12,176 $11,404
1/31/96 $11,502 $12,590 $11,561
2/29/96 $11,650 $12,707 $11,790
3/31/96 $11,669 $12,829 $11,886
4/30/96 $11,706 $13,018 $11,939
5/31/96 $11,984 $13,354 $12,206
6/30/96 $12,104 $13,404 $12,450
7/31/96 $12,039 $12,813 $12,339
8/31/96 $12,604 $13,083 $12,863
9/30/96 $12,975 $13,819 $13,185
10/31/96 $13,234 $14,200 $13,542
11/30/96 $13,651 $15,272 $14,104
12/31/96 $14,860 $14,970 $15,609
1/31/97 $15,051 $15,905 $15,832
2/28/97 $15,032 $16,029 $15,842
3/31/97 $15,128 $15,372 $15,896
4/30/97 $14,746 $16,289 $15,382
5/31/97 $15,271 $17,280 $15,841
6/30/97 $15,949 $18,054 $16,626
7/31/97 $16,360 $19,489 $17,173
8/31/97 $16,302 $18,398 $17,046
9/30/97 $17,783 $19,405 $18,727
10/31/97 $17,162 $18,758 $17,931
11/30/97 $17,515 $19,626 $18,291
12/31/97 $17,818 $19,962 $18,699
1/31/98 $17,631 $20,183 $18,436
2/28/98 $17,483 $21,638 $18,200
3/31/98 $17,887 $22,745 $18,558
4/30/98 $17,394 $22,974 $17,974
5/31/98 $17,237 $22,579 $17,801
6/30/98 $17,050 $23,496 $17,707
7/31/98 $15,917 $23,246 $16,474
8/31/98 $14,361 $19,889 $14,763
9/30/98 $15,119 $21,163 $15,589
10/31/98 $15,021 $22,883 $15,376
11/30/98 $15,208 $24,269 $15,665
12/31/98 $15,082 $25,667 $15,441
1/31/99 $14,597 $26,740 $15,107
2/28/99 $14,418 $25,909 $14,987
3/31/99 $14,397 $26,945 $14,906
4/30/99 $15,987 $27,988 $16,494
5/31/99 $16,187 $27,329 $16,774
6/30/99 $15,924 $28,844 $16,490
7/31/99 $15,197 $27,945 $15,859
8/31/99 $14,924 $27,806 $15,621
9/30/99 $14,334 $27,045 $14,917
10/31/99 $14,007 $28,756 $14,640
11/30/99 $13,691 $29,340 $14,409
12/31/99 $14,232 $31,067 $14,951
1/31/00 $14,210 $29,506 $15,013
2/29/00 $13,909 $28,949 $14,726
3/31/00 $14,592 $31,779 $15,370
4/30/00 $15,545 $30,823 $16,466
5/31/00 $15,892 $30,192 $16,662
6/30/00 $16,657 $30,937 $17,224
7/31/00 $18,099 $30,453 $18,770
8/31/00 $17,486 $32,344 $18,095
9/30/00 $17,966 $30,637 $18,682
10/31/00 $17,276 $30,507 $17,870
11/30/00 $17,425 $28,103 $18,272
12/31/00 $18,621 $28,241 $19,542
1/31/01 $18,996 $29,243 $19,737
2/28/01 $18,668 $26,578 $19,326
3/31/01 $18,557 $24,895 $19,341
4/30/01 $19,025 $26,828 $19,803
5/31/01 $18,932 $27,008 $20,356
6/30/01 $19,866 $26,351 $21,449
7/31/01 $19,369 $26,092 $21,021
8/31/01 $19,795 $24,460 $21,755
9/30/01 $18,762 $22,485 $20,465
10/31/01 $18,069 $22,914 $19,700
11/30/01 $19,396 $24,671 $20,976
12/31/01 $20,044 $24,887 $21,584
1/31/02 $20,032 $24,524 $21,677
2/28/02 $20,506 $24,051 $22,174
3/31/02 $21,729 $24,956 $23,539
4/30/02 $22,021 $23,444 $23,683
5/31/02 $22,264 $23,271 $23,922
6/30/02 $22,667 $21,614 $24,413
7/31/02 $21,388 $19,930 $22,900
8/31/02 $21,375 $20,060 $22,910
9/30/02 $20,399 $17,882 $21,899
10/31/02 $19,479 $19,455 $20,809
11/30/02 $20,163 $20,599 $21,839
12/31/02 $20,384 $19,389 $22,158
1/31/03 $19,841 $18,882 $21,510
2/28/03 $20,195 $18,598 $21,827
3/31/03 $20,569 $18,777 $22,382
4/30/03 $21,467 $20,325 $23,323
5/31/03 $22,922 $21,394 $24,661
6/30/03 $23,707 $21,668 $25,142
7/31/03 $24,626 $22,050 $26,601
8/31/03 $24,818 $22,479 $26,886
9/30/03 $25,573 $22,241 $27,792
10/31/03 $26,075 $23,499 $28,215
11/30/03 $27,247 $23,705 $29,438
12/31/03 $28,057 $24,947 $30,374
1/31/04 $29,101 $25,405 $31,505
2/29/04 $29,910 $25,758 $32,153
3/31/04 $31,365 $25,370 $34,053
4/30/04 $26,927 $24,972 $29,326
5/31/04 $28,585 $25,314 $31,549
6/30/04 $29,488 $25,806 $32,487
7/31/04 $29,791 $24,952 $32,682
8/31/04 $32,070 $25,052 $35,228
9/30/04 $32,303 $25,323 $35,160
10/31/04 $33,931 $25,710 $37,057
11/30/04 $35,267 $26,750 $38,807
12/31/04 $37,071 $27,660 $40,947
1/31/05 $34,904 $26,986 $37,588
2/28/05 $35,791 $27,553 $38,733
3/31/05 $35,270 $27,066 $38,315
4/30/05 $36,638 $26,553 $40,187
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
CLASS A 4/30/05
- ---------------------------------------
1-Year +28.23%
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5-Year +17.30%
- ---------------------------------------
10-Year +13.87%
- ---------------------------------------
CLASS B (1/1/99-4/30/05)
[LINE CHART]
Franklin Real Estate Dow Jones Wilshire
Securities Fund S&P 500 6 Real Estate Index 6
1/1/99 $10,000 $10,000 $10,000
1/31/99 $9,679 $10,418 $9,784
2/28/99 $9,553 $10,094 $9,706
3/31/99 $9,539 $10,498 $9,654
4/30/99 $10,587 $10,905 $10,682
5/31/99 $10,712 $10,647 $10,863
6/30/99 $10,531 $11,238 $10,680
7/31/99 $10,049 $10,887 $10,271
8/31/99 $9,860 $10,834 $10,117
9/30/99 $9,462 $10,537 $9,661
10/31/99 $9,246 $11,203 $9,481
11/30/99 $9,029 $11,431 $9,332
12/31/99 $9,375 $12,104 $9,683
1/31/00 $9,360 $11,496 $9,723
2/29/00 $9,153 $11,279 $9,537
3/31/00 $9,594 $12,381 $9,954
4/30/00 $10,224 $12,009 $10,664
5/31/00 $10,438 $11,763 $10,791
6/30/00 $10,941 $12,053 $11,155
7/31/00 $11,878 $11,865 $12,156
8/31/00 $11,473 $12,601 $11,719
9/30/00 $11,780 $11,936 $12,099
10/31/00 $11,318 $11,886 $11,573
11/30/00 $11,409 $10,949 $11,834
12/31/00 $12,185 $11,003 $12,656
1/31/01 $12,423 $11,393 $12,782
2/28/01 $12,200 $10,355 $12,516
3/31/01 $12,123 $9,699 $12,526
4/30/01 $12,423 $10,453 $12,825
5/31/01 $12,346 $10,523 $13,183
6/30/01 $12,957 $10,267 $13,891
7/31/01 $12,624 $10,166 $13,614
8/31/01 $12,887 $9,530 $14,089
9/30/01 $12,205 $8,760 $13,254
10/31/01 $11,752 $8,927 $12,758
11/30/01 $12,604 $9,612 $13,585
12/31/01 $13,022 $9,696 $13,978
1/31/02 $13,006 $9,555 $14,039
2/28/02 $13,307 $9,371 $14,361
3/31/02 $14,083 $9,723 $15,245
4/30/02 $14,273 $9,134 $15,338
5/31/02 $14,416 $9,067 $15,493
6/30/02 $14,671 $8,421 $15,811
7/31/02 $13,839 $7,765 $14,831
8/31/02 $13,823 $7,816 $14,838
9/30/02 $13,182 $6,967 $14,182
10/31/02 $12,584 $7,580 $13,477
11/30/02 $13,012 $8,025 $14,144
12/31/02 $13,152 $7,554 $14,350
1/31/03 $12,783 $7,357 $13,930
2/28/03 $13,013 $7,246 $14,136
3/31/03 $13,234 $7,316 $14,495
4/30/03 $13,816 $7,919 $15,105
5/31/03 $14,743 $8,335 $15,971
6/30/03 $15,234 $8,442 $16,283
7/31/03 $15,812 $8,591 $17,227
8/31/03 $15,928 $8,758 $17,412
9/30/03 $16,404 $8,665 $17,999
10/31/03 $16,711 $9,155 $18,273
11/30/03 $17,451 $9,236 $19,065
12/31/03 $17,957 $9,720 $19,671
1/31/04 $18,612 $9,898 $20,404
2/29/04 $19,117 $10,036 $20,823
3/31/04 $20,033 $9,884 $22,054
4/30/04 $17,192 $9,729 $18,993
5/31/04 $18,234 $9,863 $20,432
6/30/04 $18,801 $10,054 $21,040
7/31/04 $18,987 $9,722 $21,166
8/31/04 $20,425 $9,761 $22,814
9/30/04 $20,562 $9,866 $22,771
10/31/04 $21,580 $10,017 $23,999
11/30/04 $22,420 $10,422 $25,133
12/31/04 $23,561 $10,777 $26,519
1/31/05 $22,164 $10,514 $24,343
2/28/05 $22,704 $10,735 $25,085
3/31/05 $22,364 $10,545 $24,814
4/30/05 $23,230 $10,345 $26,026
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
CLASS B 4/30/05
- ---------------------------------------
1-Year +31.12%
- ---------------------------------------
5-Year +17.63%
- ---------------------------------------
Since Inception (1/1/99) +14.25%
- ---------------------------------------
10 | Annual Report
Performance Summary (CONTINUED)
CLASS C (5/1/95-4/30/05)
[LINE CHART]
Franklin Real Estate Dow Jones Wilshire
Securities Fund S&P 500 6 Real Estate Index 6
5/1/95 $10,000 $10,000 $10,000
5/31/95 $10,368 $10,399 $10,331
6/30/95 $10,548 $10,640 $10,511
7/31/95 $10,765 $10,993 $10,680
8/31/95 $11,001 $11,020 $10,810
9/30/95 $11,294 $11,485 $11,009
10/31/95 $11,067 $11,444 $10,668
11/30/95 $11,218 $11,946 $10,779
12/31/95 $11,831 $12,176 $11,404
1/31/96 $12,115 $12,590 $11,561
2/29/96 $12,272 $12,707 $11,790
3/31/96 $12,292 $12,829 $11,886
4/30/96 $12,321 $13,018 $11,939
5/31/96 $12,606 $13,354 $12,206
6/30/96 $12,713 $13,404 $12,450
7/31/96 $12,645 $12,813 $12,339
8/31/96 $13,224 $13,083 $12,863
9/30/96 $13,606 $13,819 $13,185
10/31/96 $13,871 $14,200 $13,542
11/30/96 $14,303 $15,272 $14,104
12/31/96 $15,555 $14,970 $15,609
1/31/97 $15,747 $15,905 $15,832
2/28/97 $15,717 $16,029 $15,842
3/31/97 $15,797 $15,372 $15,896
4/30/97 $15,394 $16,289 $15,382
5/31/97 $15,939 $17,280 $15,841
6/30/97 $16,635 $18,054 $16,626
7/31/97 $17,048 $19,489 $17,173
8/31/97 $16,978 $18,398 $17,046
9/30/97 $18,511 $19,405 $18,727
10/31/97 $17,855 $18,758 $17,931
11/30/97 $18,208 $19,626 $18,291
12/31/97 $18,519 $19,962 $18,699
1/31/98 $18,301 $20,183 $18,436
2/28/98 $18,146 $21,638 $18,200
3/31/98 $18,550 $22,745 $18,558
4/30/98 $18,021 $22,974 $17,974
5/31/98 $17,856 $22,579 $17,801
6/30/98 $17,649 $23,496 $17,707
7/31/98 $16,468 $23,246 $16,474
8/31/98 $14,852 $19,889 $14,763
9/30/98 $15,629 $21,163 $15,589
10/31/98 $15,515 $22,883 $15,376
11/30/98 $15,691 $24,269 $15,665
12/31/98 $15,554 $25,667 $15,441
1/31/99 $15,049 $26,740 $15,107
2/28/99 $14,851 $25,909 $14,987
3/31/99 $14,829 $26,945 $14,906
4/30/99 $16,456 $27,988 $16,494
5/31/99 $16,653 $27,329 $16,774
6/30/99 $16,368 $28,844 $16,490
7/31/99 $15,620 $27,945 $15,859
8/31/99 $15,323 $27,806 $15,621
9/30/99 $14,708 $27,045 $14,917
10/31/99 $14,367 $28,756 $14,640
11/30/99 $14,037 $29,340 $14,409
12/31/99 $14,572 $31,067 $14,951
1/31/00 $14,549 $29,506 $15,013
2/29/00 $14,227 $28,949 $14,726
3/31/00 $14,914 $31,779 $15,370
4/30/00 $15,886 $30,823 $16,466
5/31/00 $16,221 $30,192 $16,662
6/30/00 $17,005 $30,937 $17,224
7/31/00 $18,456 $30,453 $18,770
8/31/00 $17,824 $32,344 $18,095
9/30/00 $18,297 $30,637 $18,682
10/31/00 $17,587 $30,507 $17,870
11/30/00 $17,729 $28,103 $18,272
12/31/00 $18,927 $28,241 $19,542
1/31/01 $19,299 $29,243 $19,737
2/28/01 $18,963 $26,578 $19,326
3/31/01 $18,843 $24,895 $19,341
4/30/01 $19,299 $26,828 $19,803
5/31/01 $19,191 $27,008 $20,356
6/30/01 $20,133 $26,351 $21,449
7/31/01 $19,613 $26,092 $21,021
8/31/01 $20,024 $24,460 $21,755
9/30/01 $18,967 $22,485 $20,465
10/31/01 $18,259 $22,914 $19,700
11/30/01 $19,590 $24,671 $20,976
12/31/01 $20,239 $24,887 $21,584
1/31/02 $20,214 $24,524 $21,677
2/28/02 $20,672 $24,051 $22,174
3/31/02 $21,881 $24,956 $23,539
4/30/02 $22,178 $23,444 $23,683
5/31/02 $22,401 $23,271 $23,922
6/30/02 $22,807 $21,614 $24,413
7/31/02 $21,495 $19,930 $22,900
8/31/02 $21,470 $20,060 $22,910
9/30/02 $20,478 $17,882 $21,899
10/31/02 $19,533 $19,455 $20,809
11/30/02 $20,213 $20,599 $21,839
12/31/02 $20,418 $19,389 $22,158
1/31/03 $19,855 $18,882 $21,510
2/28/03 $20,213 $18,598 $21,827
3/31/03 $20,559 $18,777 $22,382
4/30/03 $21,454 $20,325 $23,323
5/31/03 $22,898 $21,394 $24,661
6/30/03 $23,657 $21,668 $25,142
7/31/03 $24,571 $22,050 $26,601
8/31/03 $24,751 $22,479 $26,886
9/30/03 $25,481 $22,241 $27,792
10/31/03 $25,961 $23,499 $28,215
11/30/03 $27,114 $23,705 $29,438
12/31/03 $27,903 $24,947 $30,374
1/31/04 $28,913 $25,405 $31,505
2/29/04 $29,699 $25,758 $32,153
3/31/04 $31,129 $25,370 $34,053
4/30/04 $26,710 $24,972 $29,326
5/31/04 $28,336 $25,314 $31,549
6/30/04 $29,207 $25,806 $32,487
7/31/04 $29,497 $24,952 $32,682
8/31/04 $31,727 $25,052 $35,228
9/30/04 $31,944 $25,323 $35,160
10/31/04 $33,532 $25,710 $37,057
11/30/04 $34,828 $26,750 $38,807
12/31/04 $36,593 $27,660 $40,947
1/31/05 $34,428 $26,986 $37,588
2/28/05 $35,286 $27,553 $38,733
3/31/05 $34,742 $27,066 $38,315
4/30/05 $36,078 $26,553 $40,187
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
CLASS C 4/30/05
- ---------------------------------------
1-Year +34.07%
- ---------------------------------------
5-Year +17.83%
- ---------------------------------------
10-Year +13.69%
- ---------------------------------------
ADVISOR CLASS (5/1/95-4/30/05) 5
[LINE CHART]
Franklin Real Estate Dow Jones Wilshire
Securities Fund S&P 500 6 Real Estate Index 6
5/1/95 $10,000 $10,000 $10,000
5/31/95 $10,388 $10,399 $10,331
6/30/95 $10,567 $10,640 $10,511
7/31/95 $10,803 $10,993 $10,680
8/31/95 $11,040 $11,020 $10,810
9/30/95 $11,342 $11,485 $11,009
10/31/95 $11,115 $11,444 $10,668
11/30/95 $11,285 $11,946 $10,779
12/31/95 $11,904 $12,176 $11,404
1/31/96 $12,209 $12,590 $11,561
2/29/96 $12,366 $12,707 $11,790
3/31/96 $12,386 $12,829 $11,886
4/30/96 $12,425 $13,018 $11,939
5/31/96 $12,720 $13,354 $12,206
6/30/96 $12,848 $13,404 $12,450
7/31/96 $12,779 $12,813 $12,339
8/31/96 $13,378 $13,083 $12,863
9/30/96 $13,772 $13,819 $13,185
10/31/96 $14,047 $14,200 $13,542
11/30/96 $14,489 $15,272 $14,104
12/31/96 $15,773 $14,970 $15,609
1/31/97 $16,248 $15,905 $15,832
2/28/97 $16,238 $16,029 $15,842
3/31/97 $16,340 $15,372 $15,896
4/30/97 $15,928 $16,289 $15,382
5/31/97 $16,505 $17,280 $15,841
6/30/97 $17,237 $18,054 $16,626
7/31/97 $17,691 $19,489 $17,173
8/31/97 $17,629 $18,398 $17,046
9/30/97 $19,228 $19,405 $18,727
10/31/97 $18,568 $18,758 $17,931
11/30/97 $18,959 $19,626 $18,291
12/31/97 $19,288 $19,962 $18,699
1/31/98 $19,096 $20,183 $18,436
2/28/98 $18,937 $21,638 $18,200
3/31/98 $19,373 $22,745 $18,558
4/30/98 $18,851 $22,974 $17,974
5/31/98 $18,681 $22,579 $17,801
6/30/98 $18,479 $23,496 $17,707
7/31/98 $17,265 $23,246 $16,474
8/31/98 $15,582 $19,889 $14,763
9/30/98 $16,413 $21,163 $15,589
10/31/98 $16,296 $22,883 $15,376
11/30/98 $16,508 $24,269 $15,665
12/31/98 $16,374 $25,667 $15,441
1/31/99 $15,860 $26,740 $15,107
2/28/99 $15,666 $25,909 $14,987
3/31/99 $15,654 $26,945 $14,906
4/30/99 $17,367 $27,988 $16,494
5/31/99 $17,595 $27,329 $16,774
6/30/99 $17,310 $28,844 $16,490
7/31/99 $16,534 $27,945 $15,859
8/31/99 $16,237 $27,806 $15,621
9/30/99 $15,597 $27,045 $14,917
10/31/99 $15,243 $28,756 $14,640
11/30/99 $14,900 $29,340 $14,409
12/31/99 $15,492 $31,067 $14,951
1/31/00 $15,480 $29,506 $15,013
2/29/00 $15,141 $28,949 $14,726
3/31/00 $15,890 $31,779 $15,370
4/30/00 $16,938 $30,823 $16,466
5/31/00 $17,316 $30,192 $16,662
6/30/00 $18,158 $30,937 $17,224
7/31/00 $19,727 $30,453 $18,770
8/31/00 $19,072 $32,344 $18,095
9/30/00 $19,595 $30,637 $18,682
10/31/00 $18,844 $30,507 $17,870
11/30/00 $19,007 $28,103 $18,272
12/31/00 $20,325 $28,241 $19,542
1/31/01 $20,733 $29,243 $19,737
2/28/01 $20,388 $26,578 $19,326
3/31/01 $20,276 $24,895 $19,341
4/30/01 $20,786 $26,828 $19,803
5/31/01 $20,684 $27,008 $20,356
6/30/01 $21,716 $26,351 $21,449
7/31/01 $21,174 $26,092 $21,021
8/31/01 $21,639 $24,460 $21,755
9/30/01 $20,513 $22,485 $20,465
10/31/01 $19,770 $22,914 $19,700
11/30/01 $21,218 $24,671 $20,976
12/31/01 $21,930 $24,887 $21,584
1/31/02 $21,930 $24,524 $21,677
2/28/02 $22,447 $24,051 $22,174
3/31/02 $23,779 $24,956 $23,539
4/30/02 $24,125 $23,444 $23,683
5/31/02 $24,390 $23,271 $23,922
6/30/02 $24,846 $21,614 $24,413
7/31/02 $23,434 $19,930 $22,900
8/31/02 $23,434 $20,060 $22,910
9/30/02 $22,367 $17,882 $21,899
10/31/02 $21,361 $19,455 $20,809
11/30/02 $22,109 $20,599 $21,839
12/31/02 $22,369 $19,389 $22,158
1/31/03 $21,760 $18,882 $21,510
2/28/03 $22,162 $18,598 $21,827
3/31/03 $22,566 $18,777 $22,382
4/30/03 $23,577 $20,325 $23,323
5/31/03 $25,171 $21,394 $24,661
6/30/03 $26,032 $21,668 $25,142
7/31/03 $27,054 $22,050 $26,601
8/31/03 $27,277 $22,479 $26,886
9/30/03 $28,108 $22,241 $27,792
10/31/03 $28,673 $23,499 $28,215
11/30/03 $29,957 $23,705 $29,438
12/31/03 $30,855 $24,947 $30,374
1/31/04 $32,016 $25,405 $31,505
2/29/04 $32,903 $25,758 $32,153
3/31/04 $34,505 $25,370 $34,053
4/30/04 $29,634 $24,972 $29,326
5/31/04 $31,467 $25,314 $31,549
6/30/04 $32,467 $25,806 $32,487
7/31/04 $32,814 $24,952 $32,682
8/31/04 $35,331 $25,052 $35,228
9/30/04 $35,595 $25,323 $35,160
10/31/04 $37,399 $25,710 $37,057
11/30/04 $38,881 $26,750 $38,807
12/31/04 $40,875 $27,660 $40,947
1/31/05 $38,491 $26,986 $37,588
2/28/05 $39,481 $27,553 $38,733
3/31/05 $38,917 $27,066 $38,315
4/30/05 $40,438 $26,553 $40,187
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
ADVISOR CLASS 5 4/30/05
- ---------------------------------------
1-Year +36.46%
- ---------------------------------------
5-Year +19.01%
- ---------------------------------------
10-Year +15.00%
- ---------------------------------------
Annual Report | 11
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A NONDIVERSIFIED FUND CONCENTRATING IN THE REAL ESTATE SECTOR
INVOLVES SPECIAL RISKS SUCH AS DECLINES IN THE VALUE OF REAL ESTATE, AND
INCREASED SUSCEPTIBILITY TO ADVERSE ECONOMIC AND REGULATORY DEVELOPMENTS
AFFECTING THE SECTOR. THE FUND'S INVESTMENTS IN SMALL- AND MEDIUM-CAPITALIZATION
STOCKS CARRY SPECIAL RISKS, SINCE THESE SECURITIES HAVE HISTORICALLY DISPLAYED
MORE PRICE VOLATILITY THAN LARGER-CAPITALIZATION STOCKS, PARTICULARLY OVER THE
SHORT TERM. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include a sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes any current, applicable,
maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include any current, applicable, maximum
sales charge.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Effective 1/2/97, the Fund began offering Advisor Class shares, which do not
have sales charges or a Rule 12b-1 plan. Performance quotations for this class
reflect the following methods of calculation: (a) For periods prior to 1/2/97, a
restated figure is used based upon the Fund's Class A performance, excluding the
effect of Class A's maximum initial sales charge, but reflecting the effect of
the Class A Rule 12b-1 fees; and (b) for periods after 1/1/97, actual Advisor
Class performance is used reflecting all charges and fees applicable to that
class. Since 1/2/97 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were +156.37% and +11.97%.
6. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks chosen
for market size, liquidity and industry group representation. Each stock's
weight in the index is proportionate to its market value. The S&P 500 is one of
the most widely used benchmarks of U.S. equity performance. The Dow Jones
Wilshire Real Estate Securities Index is a broad measure of the performance of
publicly traded real estate securities, such as real estate investment trusts
and real estate operating companies. The index is capitalization-weighted and
rebalanced monthly, and returns are calculated on a buy-and-hold basis.
12 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o 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 following table 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 first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
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:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 13
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 10/31/04 VALUE 4/30/05 PERIOD* 10/31/04-4/30/05
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,079.80 $4.33
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.63 $4.21
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,076.50 $8.13
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.96 $7.90
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,075.90 $8.13
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.96 $7.90
- -------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,081.30 $3.04
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.87 $2.96
- -------------------------------------------------------------------------------------------------------
*Expenses are equal to the annualized expense ratio for each class (A: 0.84%; B:
1.58%; C: 1.58%; and Advisor: 0.59%), multiplied by the average account value
over the period, multiplied by 181/365 to reflect the one-half year period.
14 | Annual Report
Franklin Real Estate Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN REAL ESTATE SECURITIES FUND
----------------------------------------------------------
YEAR ENDED APRIL 30,
CLASS A 2005 2004 2003 2002 2001
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $20.63 $16.97 $18.10 $16.26 $13.87
----------------------------------------------------------
Income from investment operations:
Net investment income a ................................ 0.49 0.55 0.63 0.66 0.64
Net realized and unrealized gains (losses) ............. 6.88 3.74 (1.11) 1.82 2.41
----------------------------------------------------------
Total from investment operations ........................ 7.37 4.29 (0.48) 2.48 3.05
----------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.53) (0.63) (0.65) (0.64) (0.66)
Net realized gains ..................................... (1.48) -- -- -- --
----------------------------------------------------------
Total distributions ..................................... (2.01) (0.63) (0.65) (0.64) (0.66)
----------------------------------------------------------
Redemption fees ......................................... --c -- -- -- --
----------------------------------------------------------
Net asset value, end of year ............................ $25.99 $20.63 $16.97 $18.10 $16.26
----------------------------------------------------------
Total return b .......................................... 36.07% 25.43% (2.51)% 15.74% 22.39%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $671,587 $550,176 $423,363 $431,749 $356,296
Ratios to average net assets:
Expenses ............................................... 0.92% 1.01% 0.98% 0.96% 1.04%
Net investment income .................................. 2.03% 2.64% 3.76% 3.96% 4.16%
Portfolio turnover rate ................................. 36.90% 27.34% 29.76% 37.26% 29.03%
<FN>
a Based on average daily shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charge.
c Amount is less than $0.01 per share.
</FN>
Annual Report | See notes to financial statements. | 15
Franklin Real Estate Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
----------------------------------------------------------
YEAR ENDED APRIL 30,
CLASS B 2005 2004 2003 2002 2001
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $20.45 $16.84 $17.99 $16.17 $13.81
----------------------------------------------------------
Income from investment operations:
Net investment income a ................................ 0.31 0.39 0.50 0.52 0.48
Net realized and unrealized gains (losses) ............. 6.83 3.72 (1.10) 1.82 2.45
----------------------------------------------------------
Total from investment operations ........................ 7.14 4.11 (0.60) 2.34 2.93
----------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.34) (0.50) (0.55) (0.52) (0.57)
Net realized gains ..................................... (1.48) -- -- -- --
----------------------------------------------------------
Total distributions ..................................... (1.82) (0.50) (0.55) (0.52) (0.57)
----------------------------------------------------------
Redemption fees ......................................... --c -- -- -- --
----------------------------------------------------------
Net asset value, end of year ............................ $25.77 $20.45 $16.84 $17.99 $16.17
----------------------------------------------------------
Total return b .......................................... 35.12% 24.43% (3.20)% 14.90% 21.51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $72,841 $56,334 $40,703 $26,650 $12,264
Ratios to average net assets:
Expenses ............................................... 1.66% 1.76% 1.74% 1.71% 1.79%
Net investment income .................................. 1.29% 1.89% 3.00% 3.11% 3.11%
Portfolio turnover rate ................................. 36.90% 27.34% 29.76% 37.26% 29.03%
<FN>
a Based on average daily shares outstanding.
b Total return does not reflect the contingent deferred sales charge.
c Amount is less than $0.01 per share.
</FN>
16 | See notes to financial statements. | Annual Report
Franklin Real Estate Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
----------------------------------------------------------
YEAR ENDED APRIL 30,
CLASS C 2005 2004 2003 2002 2001
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $20.37 $16.78 $17.91 $16.08 $13.73
----------------------------------------------------------
Income from investment operations:
Net investment income a ................................ 0.31 0.39 0.51 0.53 0.51
Net realized and unrealized gains (losses) ............. 6.79 3.70 (1.10) 1.80 2.40
----------------------------------------------------------
Total from investment operations ........................ 7.10 4.09 (0.59) 2.33 2.91
----------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.33) (0.50) (0.54) (0.50) (0.56)
Net realized gains ..................................... (1.48) -- -- -- --
----------------------------------------------------------
Total distributions ..................................... (1.81) (0.50) (0.54) (0.50) (0.56)
----------------------------------------------------------
Redemption fees ......................................... --c -- -- -- --
----------------------------------------------------------
Net asset value, end of year ............................ $25.66 $20.37 $16.78 $17.91 $16.08
----------------------------------------------------------
Total return b .......................................... 35.07% 24.50% (3.27)% 14.92% 21.48%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $189,468 $149,656 $114,474 $120,394 $96,364
Ratios to average net assets:
Expenses ............................................... 1.67% 1.76% 1.70% 1.71% 1.78%
Net investment income .................................. 1.28% 1.89% 3.04% 3.23% 3.36%
Portfolio turnover rate ................................. 36.90% 27.34% 29.76% 37.26% 29.03%
<FN>
a Based on average daily shares outstanding.
b Total return does not reflect the contingent deferred sales charge.
c Amount is less than $0.01 per share.
</FN>
Annual Report | See notes to financial statements. | 17
Franklin Real Estate Securities Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
----------------------------------------------------------
YEAR ENDED APRIL 30,
ADVISOR CLASS 2005 2004 2003 2002 2001
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $20.68 $17.02 $18.14 $16.30 $13.90
----------------------------------------------------------
Income from investment operations:
Net investment income a ................................ 0.56 0.58 0.67 0.66 0.63
Net realized and unrealized gains (losses) ............. 6.89 3.76 (1.10) 1.86 2.47
----------------------------------------------------------
Total from investment operations ........................ 7.45 4.34 (0.43) 2.52 3.10
----------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.59) (0.68) (0.69) (0.68) (0.70)
Net realized gains ..................................... (1.48) -- -- -- --
----------------------------------------------------------
Total distributions ..................................... (2.07) (0.68) (0.69) (0.68) (0.70)
----------------------------------------------------------
Redemption fees ......................................... --b -- -- -- --
----------------------------------------------------------
Net asset value, end of year ............................ $26.06 $20.68 $17.02 $18.14 $16.30
----------------------------------------------------------
Total return ............................................ 36.46% 25.68% (2.27)% 16.06% 22.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $39,990 $41,101 $27,532 $25,879 $9,438
Ratios to average net assets:
Expenses ............................................... 0.67% 0.76% 0.73% 0.71% 0.79%
Net investment income .................................. 2.28% 2.89% 4.01% 3.96% 4.06%
Portfolio turnover rate ................................. 36.90% 27.34% 29.76% 37.26% 29.03%
<FN>
a Based on average daily shares outstanding.
b Amount is less than $0.01 per share.
</FN>
18 | See notes to financial statements. | Annual Report
Franklin Real Estate Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2005
- ------------------------------------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
COMMON STOCKS 86.6%
FINANCE/RENTAL/LEASING 4.7%
CharterMac ............................................................... 661,400 $ 13,823,260
Doral Financial Corp. (Puerto Rico) ...................................... 862,400 12,116,720
Fannie Mae ............................................................... 370,400 19,983,080
-------------
45,923,060
-------------
FINANCIAL CONGLOMERATES 1.4%
Brascan Corp., A ......................................................... 364,700 13,136,494
Brascan Corp., A (Canada) ................................................ 19,800 715,395
-------------
13,851,889
-------------
REAL ESTATE DEVELOPMENT 7.7%
Brookfield Properties Corp. (Canada) ..................................... 473,760 12,028,766
Forest City Enterprises Inc., A .......................................... 416,500 26,301,975
a Killam Properties Inc. (Canada) .......................................... 2,604,700 5,483,579
a,bNorthstar Capital Investment Corp., 144A ................................. 100,000 1,150,000
The St. Joe Co. .......................................................... 433,700 30,181,183
-------------
75,145,503
-------------
REAL ESTATE INVESTMENT TRUSTS 72.8%
Alexandria Real Estate Equities Inc. ..................................... 50,000 3,441,000
Arden Realty Inc. ........................................................ 238,400 8,508,496
Avalonbay Communities Inc. ............................................... 284,700 20,498,400
Bedford Property Investors Inc. .......................................... 95,420 2,031,492
Boardwalk Real Estate Investment Trust (Canada) .......................... 1,331,500 19,972,500
Boston Properties Inc. ................................................... 151,350 10,060,235
Brandywine Realty Trust .................................................. 322,900 9,138,070
Capital Automotive ....................................................... 634,800 21,570,504
Capital Trust Inc., A .................................................... 298,900 10,066,952
Catellus Development Corp. ............................................... 634,980 17,588,946
Corporate Office Properties Trust ........................................ 609,400 16,027,220
Cousins Properties Inc. .................................................. 124,700 3,366,900
CRT Properties Inc. ...................................................... 411,700 9,506,153
Developers Diversified Realty Corp. ...................................... 115,700 4,910,308
c Digital Realty Trust Inc. ................................................ 1,239,500 17,687,665
Entertainment Properties Trust ........................................... 310,200 13,400,640
Equity Residential ....................................................... 920,400 31,615,740
Essex Property Trust Inc. ................................................ 32,100 2,437,995
Eurocastle Investment Ltd. (United Kingdom) .............................. 200,000 4,535,104
Extra Space Storage Inc. ................................................. 1,200,000 15,600,000
First Potomac Realty Trust ............................................... 288,500 6,465,285
General Growth Properties Inc. ........................................... 1,153,290 45,105,172
Glimcher Realty Trust .................................................... 100,000 2,517,000
GMH Communities Trust .................................................... 1,300,000 15,275,000
Host Marriott Corp. ...................................................... 1,021,000 17,173,220
iStar Financial Inc. ..................................................... 681,600 27,154,944
Kilroy Realty Corp. ...................................................... 276,100 12,046,243
Kimco Realty Corp. ....................................................... 179,000 9,914,810
Kite Realty Group Trust .................................................. 849,300 11,890,200
LaSalle Hotel Properties ................................................. 341,400 10,371,732
Annual Report | 19
Franklin Real Estate Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2005 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
REAL ESTATE INVESTMENT TRUSTS (CONT.)
Lexington Corporate Properties Trust ..................................... 420,300 $ 9,658,494
Liberty Property Trust ................................................... 466,600 18,584,678
Newcastle Investment Corp. ............................................... 554,200 16,343,358
Parkway Properties Inc. .................................................. 183,000 8,344,800
ProLogis ................................................................. 734,400 29,074,896
Provident Senior Living Trust, 144A ...................................... 1,073,000 20,132,163
PS Business Parks Inc. ................................................... 456,300 18,416,268
Public Storage Inc. ...................................................... 386,500 22,687,550
Ramco-Gershenson Properties Trust ........................................ 240,400 6,656,676
Regency Centers Corp. .................................................... 291,100 15,326,415
Saxon Capital Inc. ....................................................... 303,100 5,213,320
Simon Property Group Inc. ................................................ 455,263 30,079,226
Spirit Finance Corp. ..................................................... 26,500 274,275
a Taberna Realty Financial Trust, 144A ..................................... 890,800 8,908,000
Tanger Factory Outlet Centers Inc. ....................................... 234,600 5,433,336
The Macerich Co. ......................................................... 668,400 40,304,520
Trizec Properties Inc. ................................................... 495,000 9,895,050
U-Store-It Trust ......................................................... 664,300 11,611,964
Ventas Inc. .............................................................. 122,400 3,302,352
Vornado Realty Trust ..................................................... 377,800 28,882,810
-------------
709,008,077
-------------
TOTAL COMMON STOCKS (COST $576,774,895) .................................. 843,928,529
-------------
SHORT TERM INVESTMENT (COST $104,130,815) 10.7%
MONEY FUND
d Franklin Institutional Fiduciary Trust Money Market Portfolio ............ 104,130,815 104,130,815
-------------
TOTAL INVESTMENT (COST $680,905,710) 97.3% ............................... 948,059,344
OTHER ASSETS, LESS LIABILITIES 2.7% ...................................... 25,825,995
-------------
NET ASSETS 100.0% ........................................................ $973,885,339
=============
<FN>
a Non-income producing.
b See Note 9 regarding restricted securities.
c See Note 8 regarding holdings of 5% voting securities.
d See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
</FN>
20 | See notes to financial statements. | Annual Report
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2005
-------------
FRANKLIN
REAL ESTATE
SECURITIES
FUND
-------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .................................................. $561,900,895
Cost - Non-controlled affiliated issuers (Note 8) ............................ 14,874,000
Cost - Sweep Money Fund (Note 7) ............................................. 104,130,815
-------------
Total cost of investments .................................................... $680,905,710
-------------
Value - Unaffiliated issuers ................................................. $826,240,864
Value - Non-controlled affiliated issuers (Note 8) ........................... 17,687,665
Value - Sweep Money Fund (Note 7) ............................................ 104,130,815
-------------
Total value of investments ................................................... 948,059,344
Receivables:
Investment securities sold ................................................... 29,285,613
Capital shares sold .......................................................... 1,748,343
Dividends .................................................................... 1,446,536
-------------
Total assets ............................................................. 980,539,836
-------------
Liabilities:
Payables:
Investment securities purchased .............................................. 3,834,248
Capital shares redeemed ...................................................... 1,823,015
Affiliates ................................................................... 926,417
Other liabilities ............................................................. 70,817
-------------
Total liabilities ........................................................ 6,654,497
-------------
Net assets, at value ................................................... $973,885,339
-------------
Net assets consist of:
Undistributed net investment income ........................................... $ 73,937
Net unrealized appreciation (depreciation) .................................... 267,152,864
Accumulated net realized gain (loss) .......................................... 94,565,446
Paid-in capital ............................................................... 612,093,092
-------------
Net assets, at value ................................................... $973,885,339
-------------
Annual Report | See notes to financial statements. | 21
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2005
-------------
FRANKLIN
REAL ESTATE
SECURITIES
FUND
-------------
CLASS A:
Net assets, at value ........................................................... $671,586,848
-------------
Shares outstanding ............................................................. 25,843,816
-------------
Net asset value per share a .................................................... $25.99
-------------
Maximum offering price per share (net asset value per share / 94.25%) .......... $27.58
-------------
CLASS B:
Net assets, at value ........................................................... $ 72,841,200
-------------
Shares outstanding ............................................................. 2,826,945
-------------
Net asset value and maximum offering price per share a ......................... $25.77
-------------
CLASS C:
Net assets, at value ........................................................... $189,467,511
-------------
Shares outstanding ............................................................. 7,383,020
-------------
Net asset value and maximum offering price per share a ......................... $25.66
-------------
ADVISOR CLASS:
Net assets, at value ........................................................... $ 39,989,780
-------------
Shares outstanding ............................................................. 1,534,376
-------------
Net asset value and maximum offering price per share a ......................... $26.06
-------------
<FN>
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
</FN>
22 | See notes to financial statements. | Annual Report
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended April 30, 2005
-------------
FRANKLIN
REAL ESTATE
SECURITIES
FUND
-------------
Investment income:
Dividends
Unaffiliated issuers ........................................................ $ 24,962,998
Non-controlled affiliated issuers (Note 8) .................................. 505,886
Sweep Money Fund (Note 7) ................................................... 1,052,708
Other income (Note 10) ....................................................... 33,331
-------------
Total investment income ................................................. 26,554,923
-------------
Expenses:
Management fees (Note 3) ..................................................... 4,090,528
Distribution fees (Note 3)
Class A ..................................................................... 1,527,553
Class B ..................................................................... 670,322
Class C ..................................................................... 1,766,127
Transfer agent fees (Note 3) ................................................. 1,634,971
Custodian fees (Note 4) ...................................................... 18,600
Reports to shareholders ...................................................... 80,313
Registration and filing fees ................................................. 112,164
Professional fees ............................................................ 38,648
Trustees' fees and expenses .................................................. 17,325
Other ........................................................................ 34,021
-------------
Total expenses .......................................................... 9,990,572
Expense reductions (Note 4) ............................................. (1,127)
-------------
Net expenses ........................................................... 9,989,445
-------------
Net investment income ................................................. 16,565,478
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ....................................................... 146,889,024
Non-controlled affiliated issuers (Note 8) ................................. 50,129
Foreign currency transactions ............................................... (45,040)
-------------
Net realized gain (loss) .............................................. 146,894,113
-------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................................. 101,353,094
Translation of assets and liabilities denominated in foreign currencies ..... (770)
-------------
Net change in unrealized appreciation (depreciation) .................. 101,352,324
-------------
Net realized and unrealized gain (loss) ....................................... 248,246,437
-------------
Net increase (decrease) in net assets resulting from operations ............... $264,811,915
=============
Annual Report | See notes to financial statements. | 23
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended April 30, 2005 and 2004
------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
2005 2004
------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................... $ 16,565,478 $ 18,847,476
Net realized gain (loss) from investments and foreign currency transactions ......... 146,894,113 35,462,622
Net change in unrealized appreciation (depreciation) on investments and translation
of assets and liabilities denominated in foreign currencies ...................... 101,352,324 95,155,991
------------------------------------
Net increase (decrease) in net assets resulting from operations ............... 264,811,915 149,466,089
------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .......................................................................... (13,241,134) (15,989,316)
Class B .......................................................................... (918,096) (1,287,641)
Class C .......................................................................... (2,385,294) (3,522,515)
Advisor Class .................................................................... (1,041,519) (1,157,863)
Net realized gains:
Class A .......................................................................... (36,256,895) --
Class B .......................................................................... (4,096,493) --
Class C .......................................................................... (10,745,223) --
Advisor Class .................................................................... (2,206,216) --
------------------------------------
Total distributions to shareholders ................................................ (70,890,870) (21,957,335)
------------------------------------
Capital share transactions (Note 2):
Class A ............................................................................. (10,051,257) 38,021,381
Class B ............................................................................. 2,138,636 6,862,038
Class C ............................................................................. 1,758,639 11,024,456
Advisor Class ....................................................................... (11,155,368) 7,778,430
------------------------------------
Total capital share transactions ................................................... (17,309,350) 63,686,305
------------------------------------
Redemption fees .................................................................... 6,971 --
------------------------------------
Net increase (decrease) in net assets ......................................... 176,618,666 191,195,059
Net assets
Beginning of year .................................................................. 797,266,673 606,071,614
------------------------------------
End of year ........................................................................ $973,885,339 $797,266,673
====================================
Undistributed net investment income included in net assets:
End of year ........................................................................ $ 73,937 $ 809,794
====================================
24 | See notes to financial statements. | Annual Report
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS
FRANKLIN REAL ESTATE SECURITIES FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Real Estate Securities Fund (the Fund) is a separate, non-diversified
series of Franklin Real Estate Securities Trust (the Trust), which is an
open-end investment company registered under the Investment Company Act of 1940.
The following summarizes the Fund's significant accounting policies.
A. SECURITIES VALUATION
Securities listed on a securities 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 and listed securities for
which there is no reported sale 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. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. If such an event occurs, the securities may be valued
using fair value procedures, which may include the use of independent pricing
services. All security valuation procedures are approved by the Fund's Board of
Trustees.
Annual Report | 25
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
D. 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.
Interest income and estimated expenses are accrued daily. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Distributions received by the Fund from 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.
26 | Annual Report
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
E. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
F. REDEMPTION FEES
Effective June 1, 2004, redemptions and exchanges of Fund shares held five
trading days or less may be subject to the Fund's redemption fee, which is 2% of
the amount redeemed. Such fees are retained by the Fund and accounted for as
additional paid-in capital.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Trust'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. However, based on experience, the
Fund expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
The Fund offers four classes of shares: Class A, Class B, Class C and Advisor
Class. Effective March 1, 2005, Class B shares are only offered to existing
Class B shareholders in the form of reinvested distributions and certain
exchanges from other Franklin Templeton Class B shares. Each class of shares
differs by its initial sales load, contingent deferred sales charges,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
Annual Report | 27
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
At April 30, 2005, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
-----------------------------------------------------------------
YEAR ENDED APRIL 30,
2005 2004
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
CLASS A SHARES:
Shares sold ...................... 7,484,439 $ 183,224,147 9,230,389 $ 191,433,534
Shares issued in reinvestment of
distributions ................... 1,808,952 45,697,870 728,989 14,577,701
Shares redeemed .................. (10,121,775) (238,973,274) (8,232,023) (167,989,854)
-----------------------------------------------------------------
Net increase (decrease) .......... (828,384) $ (10,051,257) 1,727,355 $ 38,021,381
-----------------------------------------------------------------
CLASS B SHARES:
Shares sold ...................... 458,788 $ 11,136,250 759,546 $ 15,535,001
Shares issued in reinvestment of
distributions ................... 178,568 4,509,296 56,562 1,125,375
Shares redeemed .................. (565,244) (13,506,910) (477,595) (9,798,338)
-----------------------------------------------------------------
Net increase (decrease) .......... 72,112 $ 2,138,636 338,513 $ 6,862,038
-----------------------------------------------------------------
CLASS C SHARES:
Shares sold ...................... 1,226,767 $ 29,708,774 1,880,843 $ 38,530,037
Shares issued in reinvestment of
distributions ................... 468,373 11,779,227 154,537 3,059,609
Shares redeemed .................. (1,659,895) (39,729,362) (1,508,306) (30,565,190)
-----------------------------------------------------------------
Net increase (decrease) .......... 35,245 $ 1,758,639 527,074 $ 11,024,456
-----------------------------------------------------------------
ADVISOR CLASS SHARES:
Shares sold ...................... 219,685 $ 5,501,408 502,936 $ 10,591,257
Shares issued in reinvestment of
distributions ................... 120,032 3,017,348 54,494 1,095,771
Shares redeemed .................. (792,613) (19,674,124) (188,212) (3,908,598)
-----------------------------------------------------------------
Net increase (decrease) .......... (452,896) $ (11,155,368) 369,218 $ 7,778,430
-----------------------------------------------------------------
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 Fund are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------
Franklin Advisers Inc. (Advisers) 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
28 | Annual Report
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Fund pays an investment management fee to Advisers based on the average
daily net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE AVERAGE 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 $10 billion
Fees are further reduced on net assets over $10 billion.
B. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
C. DISTRIBUTION FEES
The Fund reimburses Distributors up to 0.25%, 1.00%, and 1.00% per year of the
average daily net assets of Class A, Class B, and Class C, respectively, for
costs incurred in marketing the Fund's shares under a Rule 12b-1 plan. Under the
Class A distribution plan, costs exceeding the maximum for the current year
cannot be reimbursed in subsequent periods.
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Net sales charges received .............................. $313,576
Contingent deferred sales charges retained .............. $131,450
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $1,634,971, of which $952,773 was retained
by Investor Services.
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 year ended April 30, 2005, the
custodian fees were reduced as noted in the Statement of Operations.
Annual Report | 29
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
5. INCOME TAXES
The tax character of distributions paid during the years ended April 30, 2005
and 2004, was as follows:
-----------------------------
2005 2004
-----------------------------
Distributions paid from:
Ordinary income ....................... $17,586,043 $21,957,335
Long term capital gain ................ 53,304,827 --
-----------------------------
$70,890,870 $21,957,335
-----------------------------
At April 30, 2005, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments ...................................... $680,969,418
-------------
Unrealized appreciation .................................. $273,897,766
Unrealized depreciation .................................. (6,807,840)
-------------
Net unrealized appreciation (depreciation) ............... $267,089,926
-------------
Undistributed ordinary income ............................ $ 24,513,190
Undistributed long term capital gains .................... 70,189,901
-------------
Distributable earnings ................................... $ 94,703,091
-------------
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions and
partnership adjustments.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions and partnership adjustments.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended April 30, 2005 aggregated $309,660,653 and $488,134,799,
respectively.
30 | Annual Report
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Fund are reduced on assets invested in the
Sweep Money Fund, in an amount not to exceed the management fees paid by the
Sweep Money Fund.
8. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Fund at April 30, 2005 were as shown below.
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES NUMBER OF SHARES REALIZED
HELD AT BEGINNING GROSS GROSS HELD AT END VALUE INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR AT END OF YEAR INCOME GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
Digital Realty Trust Inc. ... -- 1,264,500 25,000 1,239,500 $17,687,665 $505,886 $50,129
---------------------------------------
TOTAL AFFILIATED SECURITIES (1.82% of Net Assets) .... $17,687,665 $505,886 $50,129
---------------------------------------
9. RESTRICTED SECURITIES
At April 30, 2005, investments in securities included issues that are restricted
and illiquid. Restricted securities are often purchased in private placement
transactions, are not registered under the Securities Act of 1933, may have
contractual restrictions on resale, and are valued under methods approved by the
Board of Trustees as reflecting fair value. A security may also be considered
illiquid if it lacks a readily available market or if its valuation has not
changed for a certain period of time. At April 30, 2005, the Fund held
investments in restricted and illiquid securities as follows:
- ------------------------------------------------------------------------------------------------------------
ACQUISITION
SHARES ISSUER DATE COST VALUE
- ------------------------------------------------------------------------------------------------------------
100,000 Northstar Capital Investment Corp., 144A .... 1/16/98 $ 1,993,250 $1,150,000
-----------
TOTAL RESTRICTED SECURITIES (0.11% of Net Assets) ................ $1,150,000
-----------
Annual Report | 31
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
10. REGULATORY MATTERS
INVESTIGATIONS AND SETTLEMENTS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, provided documents and information in response to
subpoenas and/or requests for documents, information and/or testimony. Beginning
in August 2004, the Company entered into settlements with certain of the
regulators and a governmental entity investigating the mutual fund industry
practices noted above. The Company believes that settlement of each of the
matters is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
Two of the settlement agreements, those with the SEC and the CAGO concerning
marketing support payments, provide that the distribution of settlement monies
are to be made to the relevant funds, not to individual shareholders. The CAGO
has approved the distribution plan pertaining to the distribution of the monies
owed under the CAGO settlement agreement and, in accordance with the terms and
conditions of that settlement, the monies were disbursed to the participating
funds and are recorded as other income in the current period. The SEC has not
yet approved the distribution plan pertaining to the SEC settlement. When
approved, disbursements of settlement monies under the SEC's settlement will be
made promptly in accordance with the terms and conditions of that order.
OTHER LEGAL PROCEEDINGS
On April 12, 2005, the Attorney General of West Virginia filed a complaint in
the Circuit Court of Marshall County, West Virginia against a number of
companies engaged in the mutual fund industry, including Franklin Resources,
Inc. and its subsidiary, Franklin Advisers, Inc., and certain other parties
alleging violations of the West Virginia Consumer Credit and Protection Act and
seeking, among other things, civil penalties and attorneys' fees and costs. To
the extent applicable to the Company, the complaint arises from activity that
occurred in 2001 and duplicates, in whole or in part, the allegations asserted
in the February 4, 2004 Massachusetts Administrative Complaint concerning one
instance of market timing (the "Administrative Complaint") and the SEC's
findings regarding market timing in its August 2, 2004 Order (the "SEC Order"),
both of which matters were previously reported.
32 | Annual Report
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
10. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
The Fund, in addition to the Company and other funds, and certain current and
former officers, employees, and directors have been named in multiple lawsuits
in different courts alleging violations of various federal securities laws and
seeking, among other relief, monetary damages, restitution, removal of fund
trustees, directors, advisers, administrators, and distributors, rescission of
management contracts and 12b-1 plans, and/or attorneys' fees and costs.
Specifically, the lawsuits claim breach of duty with respect to alleged
arrangements to permit market timing and/or late trading activity, or breach of
duty with respect to the valuation of the portfolio securities of certain
Templeton funds managed by Franklin Resources, Inc. subsidiaries, resulting in
alleged market timing activity. The majority of these lawsuits duplicate, in
whole or in part, the allegations asserted in the Administrative Complaint and
the SEC's findings regarding market timing in the SEC Order. The lawsuits are
styled as class actions, or derivative actions on behalf of either the named
funds or Franklin Resources, Inc.
The Fund, in addition to the Company and other funds, and certain current and
former officers, employees, and directors, have been named in multiple lawsuits
alleging violations of various securities laws and pendent state law claims
relating to the disclosure of marketing support payments and/or payment of
allegedly excessive commissions and/or advisory or distribution fees, and
seeking, among other relief, monetary damages, restitution, rescission of
advisory contracts, including recovery of all fees paid pursuant to those
contracts, an accounting of all monies paid to the named advisers, declaratory
relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are
styled as class actions or derivative actions brought on behalf of the named
funds.
The Company and fund management strongly believe that the claims made in each of
the lawsuits described above are without merit and intends to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. Public trust and confidence are critical to the Company's business and
any material loss of investor and/or client confidence could result in a
significant decline in assets under management by the Company, which would have
an adverse effect on future financial results. If it is determined that the
Company bears responsibility for any unlawful or inappropriate conduct that
caused losses to the Fund, it is committed to making the Fund or its
shareholders whole, as appropriate. The Company is committed to taking all
appropriate actions to protect the interests of its funds' shareholders.
Annual Report | 33
Franklin Real Estate Securities Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FRANKLIN REAL ESTATE SECURITIES FUND
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN REAL ESTATE SECURITIES
FUND
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Real Estate Securities
Fund (the "Fund") at April 30, 2005, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at April 30, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 10, 2005
34 | Annual Report
Franklin Real Estate Securities Trust
TAX DESIGNATION (UNAUDITED)
FRANKLIN REAL ESTATE SECURITIES FUND
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates $122,017,893 as a capital gain dividend for the fiscal year ended
April 30, 2005.
Under Section 854(b)(2) of the Code, the Fund designates up to a maximum of
$2,228,811 as qualified dividends for purposes of the maximum rate under Section
1(h)(11) of the Code for the fiscal year ended April 30, 2005. In January 2006,
shareholders will receive Form 1099-DIV which will include their share of
qualified dividends distributed during the calendar year 2005. Shareholders are
advised to check with their tax advisors for information on the treatment of
these amounts on their individual income tax returns.
Under Section 854(b)(2) of the Code, the Fund designates 4.07% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended April 30, 2005.
Annual Report | 35
Franklin Real Estate Securities Trust
BOARD MEMBERS AND OFFICERS
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Trust, principal occupations during the
past five years and number of portfolios overseen in the Franklin Templeton
Investments fund complex are shown below. Each board member will serve until
that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK H. ABBOTT, III (84) Trustee Since 1993 115 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Abbott Corporation (an investment company).
- ------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (73) Trustee Since 1993 143 Director, Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT F. CARLSON (77) Trustee Since 1998 51 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Member and past President, Board of Administration, California Public Employees Retirement Systems (CALPERS); and
FORMERLY, member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and
Chief Counsel, California Department of Transportation.
- ------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (72) Trustee Since 1993 144 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch
(until 2002) (Consultant (2003)).
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK W.T. LAHAYE (76) Trustee Since 1993 117 Director, The California Center for
One Franklin Parkway Land Recycling (redevelopment).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
- ------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (77) Trustee Since 1993 143 Director, Martek Biosciences
One Franklin Parkway Corporation, MedImmune, Inc.
San Mateo, CA 94403-1906 (biotechnology), and Overstock.com
(Internet services); and FORMERLY,
Director, MCI Communication
Corporation (subsequently known as
MCI WorldCom, Inc. and WorldCom,
Inc.) (communications services)
(1988-2002), White Mountains
Insurance Group, Ltd. (holding
company) (1987-2004) and Spacehab,
Inc. (aerospace services)
(1994-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company)
(2001-2004); Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking)
(1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987).
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**HARMON E. BURNS (60) Trustee and Since 1993 36 None
One Franklin Parkway Vice President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (72) Trustee and Since 1993 143 None
One Franklin Parkway Chairman of
San Mateo, CA 94403-1906 the Board
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be,
of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (64) Trustee, Trustee and 127 None
One Franklin Parkway President and President since
San Mateo, CA 94403-1906 Chief 1993 and Chief
Executive Executive Officer -
Officer - Investment
Investment Management
Management since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and
officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49
of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (53) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources,
Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (43) Treasurer Since July 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 34 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director and member of Audit and
Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the investment companies in Franklin
Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC (1997-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
MARTIN L. FLANAGAN (45) Vice President Since 1995 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin
Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice
President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.;
Executive Vice President, Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC;
Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief
Fort Lauderdale, Executive
FL 33394-3091 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the
investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
38 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (58) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief
Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000).
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC,
Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and
Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51
of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S.
Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court
(District of Massachusetts) (until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (68) Vice Since 2002 Not Applicable Not Applicable
600 Fifth Avenue President -
Rockefeller Center AML
New York, NY 10020-2302 Compliance
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch Chemicals,
Inc. and Lingnan Foundation; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (68) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of
the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and
Director, Templeton Asset Management Ltd. (until 1999).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 39
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN VETTER (53) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer
Suite 2100
Fort Lauderdale, FL
33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services,
LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
- ------------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the U.S. registered
investment companies within the Franklin Templeton Investments fund complex.
These portfolios have a common investment adviser or affiliated investment
advisers.
**Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested
persons of the Trust under the federal securities laws due to their positions as
officers and directors and major shareholders of Franklin Resources Inc.
(Resources), which is the parent company of the Trust's adviser and distributor.
Harmon E. Burns is considered to be an interested person of the Trust under the
federal securities laws due to his position as officer and director of
Resources. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD
BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE
BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR
OF MCCORMICK SELPH ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF
TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF
QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF
VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S. TELEPHONE INC. (1981-1984), FISHER
IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN
ADDITION, MR. LAHAYE SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF
PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A MEMBER
AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF
SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. LAHAYE
HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION
WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND
EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY
OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT TRUSTEE
AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION
RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
40 | Annual Report
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT
At a meeting held April 19, 2005, the Board of Trustees ("Board"), including a
majority of non-interested or independent Trustees, approved renewal of the
investment advisory contract for the Fund. In reaching this decision, the Board
took into account information furnished throughout the year at regular Board
meetings, as well as information prepared specifically in connection with the
annual renewal review process. Information furnished and discussed throughout
the year included investment performance reports and related financial
information for the Fund, as well as periodic reports on shareholder services,
legal compliance, pricing, brokerage commissions and execution and other
services provided by the Investment Manager ("Manager") and its affiliates.
Information furnished specifically in connection with the renewal process
included a report for the Fund prepared by Lipper Financial Services ("Lipper"),
an independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper report compared the Fund's investment
performance and expenses with those of other mutual funds deemed comparable to
the Fund as selected by Lipper. The Fund profitability analysis report discussed
the profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was information on a fund-by-fund basis listing
portfolio managers and other accounts they manage, as well as information on
management fees charged by the Manager including management's explanation of
differences where relevant and a three year expense analysis with an explanation
for any increase in expense ratios. Additional information accompanying such
report were a memorandum prepared by management describing enhancements to the
services provided to the Fund by the Franklin Templeton Investments
organization, as well as a memorandum relating to economies of scale.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. In approving
continuance of the investment advisory contract for the Fund, the Board,
including a majority of independent Trustees, determined that the existing
management fee structure was fair and reasonable and that continuance of the
investment advisory contract was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses the primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses of the Fund discussed later, the Board's opinion was based, in part,
upon periodic reports furnished them showing that the investment policies and
restrictions for the Fund were consistently complied with as well as other
reports periodically furnished the Board covering matters such as the compliance
of portfolio managers and other management personnel with the code of ethics
adopted throughout the Franklin Templeton fund complex, the adherence to fair
value pricing procedures established by the Board, and the accuracy of net asset
value calculations. The Board also noted the extent of benefits provided Fund
shareholders from being part of the Franklin Templeton family of funds,
including the right to
Annual Report | 41
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
exchange investments between the same class of funds without a sales charge, the
ability to reinvest Fund dividends into other funds and the right to combine
holdings in other funds to obtain a reduced sales charge. Favorable
consideration was given to management's efforts and expenditures in establishing
back-up systems and recovery procedures to function in the event of a natural
disaster, it being noted by the Board that such systems and procedures had
functioned smoothly during the hurricanes and blackout experienced last year in
Florida. Other factors taken into account by the Board were the Manager's best
execution trading policies, including a favorable third party report on
portfolio execution, as well as the compliance procedures and qualifications of
the Chief Compliance Officer established in accordance with recently adopted SEC
requirements. Consideration was also given to the experience of the Fund's
portfolio management team, the number of accounts managed and general method of
compensation. In this latter respect, the Board noted that a primary factor in
management's determination of the amount of a portfolio manager's bonus
compensation was the relative investment performance of the funds he or she
managed so as to be aligned with the interests of Fund shareholders. The Board
also took into account the transfer agent and shareholder services provided Fund
shareholders by an affiliate of the Manager, noting continuing expenditures by
management to increase and improve the scope of such services, periodic
favorable reports on such service conducted by third parties such as Dalbar, and
the firsthand experience of the individual Trustees who deal with the
shareholder services department in their capacities as shareholders in one or
more of the various Franklin Templeton funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
such performance was given to the Lipper report furnished for the contract
renewal. The Lipper report prepared for the Fund showed the investment
performance of its Class A shares during the year ending February 28, 2005, as
well as the previous ten years ending that date in comparison to a performance
universe consisting of all retail and institutional real estate funds as
selected by Lipper. The Board noted that the Fund's total return for the one
year period was in the second highest quintile of such group and on an
annualized basis was in the upper half of such universe for the previous three
year period, the second quintile of such universe for the previous five year
period, and the middle quintile of such universe during the previous ten year
period. The Board expressed its satisfaction with such performance.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fees and total expense ratios of the Fund compared with those of a
group of other funds selected by Lipper as its appropriate Lipper expense group
under the Lipper report. Prior to making such comparison, the Board relied upon
a survey showing that the scope of management advisory services covered under
the Fund's investment advisory contract was similar to those provided by fund
managers to other mutual fund groups which would be used as a basis of
comparison in the Lipper report. In reviewing comparative costs, emphasis was
given to the Fund's management fee
42 | Annual Report
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
in comparison with the effective management fee that would have been charged by
other funds within its Lipper expense group assuming they were the same size as
the Fund, as well as the actual total expenses of the Fund in comparison with
those of its Lipper expense group. The Lipper effective management fee analysis
includes administrative charges as being part of a management fee, and total
expenses, for comparative consistency, are shown by Lipper for Fund Class A
shares. The results of such expense comparisons showed that both the effective
management fee rate for the Fund, as well as its actual total expenses were in
the lowest quintile of its Lipper expense group. While realizing that other
factors such as the Manager's profitability and economies of scale bear on the
reasonableness of fees, the Board was satisfied with the management fee and
total expenses of the Fund in comparison to its expense group as shown in the
Lipper report.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. The Board also considered the extent to which the
Manager and its affiliates might derive ancillary benefits from fund operations,
including its interest in a joint venture entity which finances up-front
commissions paid to brokers/dealers who sold Fund Class B shares, as well as
potential benefits resulting from allocation of fund brokerage and the use of
"soft" commission dollars to pay for research. Specific attention was given to
the methodology followed in allocating costs to the Fund, it being recognized
that allocation methodologies are inherently subjective and various allocation
methodologies may each be reasonable while producing different results. In this
respect, the Board noted that the cost allocation methodology was consistent
with that followed in profitability report presentations for the Fund made in
prior years and that it had engaged on a biennial basis the Fund's independent
accountants to perform certain procedures specified by the Board solely for its
purpose and use. It was also noted that legal costs and payments incurred by
Franklin Templeton in resolving various legal proceedings arising from its U.S.
fund operations had not been allocated to the Fund for purposes of determining
profitability. Included in the analysis for the Fund were the revenue and
related costs broken down separately from the management, underwriting and
shareholder services functions provided by the Manager and its affiliates to the
Fund, as well as the relative contribution of the Fund to the profitability of
the Manager's parent. In reviewing and discussing such analysis, management
discussed with the Board its belief that costs incurred in establishing the
infrastructure necessary to the type of mutual fund operations conducted by the
Manager and its corporate affiliates may not be fully reflected in the expenses
allocated to the Fund in determining its profitability, as well as the fact that
the level of profits, to a certain extent, reflected operational cost savings
and efficiencies initiated by management. The Board also took into account
management's expenditures in improving shareholder services provided the Fund,
as well as the need to meet additional regulatory and compliance requirements
resulting from the Sarbanes-Oxley Act and recent SEC requirements. In addition,
the Board considered a third party study comparing the profitability of the
Manager's parent on an
Annual Report | 43
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
overall basis as compared to other publicly held managers broken down to show
profitability from management operations exclusive of distribution expenses, as
well as profitability including distribution expenses. Based upon their
consideration of all these factors, the Board determined that the level of
profits realized by the Manager under its investment advisory contract with the
Fund was not excessive in view of the nature, quality and extent of services
provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are
realized by the Manager as the Fund grows larger and the extent to which this is
reflected in the level of management fees charged. While recognizing that any
precise determination is inherently subjective, the Trustees noted that based
upon the Fund profitability analysis, it appears that as some funds get larger,
at some point economies of scale do result in the Manager realizing a larger
profit margin on management services provided such a fund. The Trustees also
noted that economies of scale are shared with a fund and its shareholders
through management fee breakpoints so that as a fund grows in size, its
effective management fee rate declines. The fee structure under the Fund's
investment advisory contract provides an initial fee of 0.625% on the first $100
million of assets; 0.50% on the next $150 million of assets and 0.45% on the
next $9.75 billion of assets, with breakpoints continuing in stages thereafter
until declining to a final breakpoint of 0.40% on assets in excess of $15
billion. The Fund had assets of approximately $1 billion at the end of 2004 and
management expressed its view that the existing fee schedule was low and
reflected anticipated economies of scale and pointed out the favorable effective
management fee and expense comparisons within its Lipper expense group. The
Board believes that to the extent any economies of scale may be realized by the
Manager and its affiliates, the schedule of fees under the investment advisory
contract provides a sharing of benefits with the Fund and its shareholders.
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust'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 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust'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.
44 | Annual Report
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
QUARTERLY STATEMENT OF INVESTMENTS
The Trust 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
1-800/SEC-0330.
Annual Report | 45
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 4,5
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement plans.
3. The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Formerly Franklin Short-Intermediate U.S. Government Securities Fund.
Effective 9/1/04, the fund's name changed; its investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/05 Not part of the annual report
[LOGO OMITTED]
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN REAL ESTATE
SECURITIES FUND
INVESTMENT MANAGER
Franklin Advisers, Inc.
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
192 A2005 06/05
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), 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 Frank W.T. LaHaye and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $49,531 for the fiscal year ended April 30, 2005 and $27,932 for the fiscal
year ended April 30, 2004.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
The aggregate fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial statements
were $0 for the fiscal year ended April 30, 2005 and $52,158 for the fiscal year
ended April 30, 2004. The services for which these fees were paid included
attestation services.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $17,060 for the fiscal year ended
April 30, 2005 and $0 for the fiscal year ended April 30, 2004. The services for
which these fees were paid included tax compliance and advise.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended April 30, 2005
and $367 for the fiscal year ended April 30, 2004. The services for which these
fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $4,500 for the fiscal year ended April 30,
2005 and $99,633 for the fiscal year ended April 30, 2004. The services for
which these fees were paid included review of materials provided to the fund
Board in connection with the investment management contract renewal process and
the review of the ICI transfer agent survey.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the
Fund by the auditors;
(iii)pre-approval of all non-audit related services to be provided to the
registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were pre-approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $21,560 for the fiscal year ended April 30, 2005 and $152,158
for the fiscal year ended April 30, 2004.
(h) The registrant's audit committee of the board of trustees has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
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 significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(A) Code of Ethics
(B) (1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(B) (2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial 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/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date June 20, 2005
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/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date June 20, 2005
By /s/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date June 20, 2005