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 94403-1906
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, 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: 4/30/06
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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APRIL 30, 2006
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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
SECURITIES FUND Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
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, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
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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[GRAPHIC OMITTED]
Not part of the annual report
Contents
SHAREHOLDER LETTER ..................................................... 1
ANNUAL REPORT
Franklin Real Estate Securities Fund .................................... 3
Performance Summary ..................................................... 7
Your Fund's Expenses .................................................... 12
Financial Highlights and Statement of Investments ....................... 14
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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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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This annual report for Franklin Real Estate Securities Fund covers the fiscal
year ended April 30, 2006.
PERFORMANCE OVERVIEW
Franklin Real Estate Securities Fund - Class A posted a +20.00% cumulative total
return for the year under review. The Fund underperformed its narrow benchmark,
the Dow Jones Wilshire Real Estate Securities Index, which returned +29.12%. 2
On the other hand, the Fund outperformed its broad benchmark, the Standard &
Poor's 500 Index (S&P 500), which returned +15.41% for the same period. 3 You
can find the Fund's long-term performance data in the Performance Summary
beginning on page 7.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended April 30, 2006, the U.S. economy advanced at a modest
pace. In fourth quarter 2005, gross domestic product growth slowed
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.
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.
3. 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 indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
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 18.
Annual Report | 3
due to several factors including declines in vehicle sales and defense spending.
Furthermore, slower export growth combined with greater demand for imported
goods and materials fueled a widening trade deficit. Economic growth picked up
again in first quarter 2006, driven by consumer, business and government
spending.
The labor market firmed as employment increased in most states and the
unemployment rate dropped from 5.1% to 4.7%. 4 Although labor costs increased
during the reporting period, hiring rebounded in many industries and personal
income grew.
Elevated energy and other commodity prices were a primary economic concern. Oil
prices remained high, largely due to potential supply disruptions and strong
growth in global demand, especially from China and India. Gasoline, medical and
pharmacy costs climbed substantially. Consumer confidence and spending remained
surprisingly strong but could weaken with the impact of higher prices and
slowing home-price appreciation. The core Consumer Price Index (CPI) rose 2.3%
for the 12 months ended April 30, 2006, which was higher than the 2.2% 10-year
average. 5
The Federal Reserve Board (Fed) raised the federal funds target rate from 2.75%
to 4.75% in eight quarter-point steps. The effects of the Fed's
credit-tightening campaign cooled the housing and real estate markets as the
cost of credit grew less attractive to most consumers who were already dealing
with near-record consumer debt burdens and historically high gas prices. When
Fed Chairman Ben Bernanke indicated the Fed might pause its rate tightening at
some future meeting, the stock market rallied.
In this environment, the blue chip stocks of the Dow Jones Industrial Average
reached a six-year high in April and posted a 12-month total return of +14.17%.
6 The broader S&P 500 and the technology-heavy NASDAQ Composite Index returned
+15.41% and +21.89%. 7 Small company stocks outperformed their
large-capitalization counterparts, and technology stocks saw their biggest
resurgence since 2003. Energy and materials stocks also performed well.
4. Source: Bureau of Labor Statistics.
5. Source: Bureau of Labor Statistics. Core CPI excludes food and energy costs.
6. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is price
weighted based on the average mar- ket price of 30 blue chip stocks of companies
that are generally industry leaders.
7. Source: Standard & Poor's Micropal. See footnote 3 for a description of the
S&P 500. The NASDAQ Composite Index measures all NASDAQ domestic and
international based common type stocks listed on The NASDAQ Stock Market. The
index is market value weighted and includes more than 3,000 companies.
4 | Annual Report
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, holdings that contributed to Fund performance
included Corporate Office Properties Trust, Digital Realty Trust and Provident
Senior Living Trust. Corporate Office Properties performed well during the
period. The company delivered some of the industry's strongest earnings growth.
Its management team executed a focused strategy of serving the U.S. government
and other stable tenants in the Washington, DC, area.
Digital Realty generated some of the sector's strongest returns during the
period. Company management succeeded in finding new acquisitions as well as
leasing a large portion of its portfolio's vacancies. We purchased the stock at
the initial public offering in 2004 at what was, in our opinion, an attractive
valuation due to concerns regarding the company's high concentration of
technology industry tenants. These concerns proved unfounded and the stock was
one of the industry's strong performers.
We invested in Provident during a private placement due to what we considered
were its attractive real estate assets and valuation. These factors resulted in
Ventas' acquisition of the company at a significant premium to our cost. We
continued to hold our Ventas position because we believed that the Provident
assets could be a major growth driver for its business over the next several
years.
The Fund also had some detractors from performance during the reporting period
including its St. Joe position. St. Joe's stock price declined as its resort
communities' growth began to moderate. While this stock hurt the Fund's recent
performance, St. Joe remained, in our view, well positioned to create
shareholder value over the long term. The company is the largest landowner in
Florida and its real estate holdings are unique. Its management has also shown
willingness to return cash to shareholders with growing dividends and share
repurchases over the past few years.
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 4/30/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Real Estate Investment Trusts 59.4%
Homebuilding 18.6%
Real Estate Development 7.4%
Financial Conglomerates 2.1%
Finance, Rental & Leasing 1.6%
Hotels, Resorts & Cruiselines 1.1%
Short-Term Investments & Other Net Assets 9.8%
Annual Report | 5
TOP 10 HOLDINGS
4/30/06
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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M.D.C. Holdings Inc. 4.8%
HOMEBUILDING
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The Macerich Co. 3.7%
REAL ESTATE INVESTMENT TRUSTS
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Forest City Enterprises Inc., A 3.4%
REAL ESTATE DEVELOPMENT
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Meritage Homes Corp. 3.0%
HOMEBUILDING
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Public Storage Inc. 2.7%
REAL ESTATE INVESTMENT TRUSTS
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ProLogis 2.6%
REAL ESTATE INVESTMENT TRUSTS
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Boardwalk REIT (Canada) 2.5%
REAL ESTATE INVESTMENT TRUSTS
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iStar Financial Inc. 2.5%
REAL ESTATE INVESTMENT TRUSTS
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Vornado Realty Trust 2.4%
REAL ESTATE INVESTMENT TRUSTS
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The St. Joe Co. 2.2%
REAL ESTATE DEVELOPMENT
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M.D.C. Holdings was a relatively weak performer during the Fund's fiscal year.
We began purchasing the stock after it had already declined significantly as we
believed it offered strong total return potential over the next few years.
M.D.C. successfully navigated previous housing cycles and consistently delivered
strong earnings growth. We continued to hold M.D.C. in line with our long-term
strategy. The company's strong balance sheet and extensive operating experience
seems to leave it well positioned to create value over the next few years, in
our opinion.
iStar Financial negatively impacted relative Fund performance during the period.
The company's earnings growth was somewhat weaker than expected as the company
invested in future growth initiatives and received relatively high loan
prepayment levels. We continue to believe that iStar has one of the industry's
highest quality management teams and that it is well positioned to generate
strong total returns over the longer term.
Thank you for your continued participation in Franklin Real Estate Securities
Fund. We look forward to serving your future investment needs.
[PHOTO 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, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
6 | Annual Report
Performance Summary as of 4/30/06
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
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
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CLASS A (SYMBOL: FREEX) CHANGE 4/30/06 4/30/05
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Net Asset Value (NAV) +$0.96 $26.95 $25.99
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DISTRIBUTIONS (5/1/05-4/30/06)
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Dividend Income $0.6150
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Short-Term Capital Gain $1.1695
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Long-Term Capital Gain $2.2586
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TOTAL $4.0431
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CLASS B (SYMBOL: FBREX) CHANGE 4/30/06 4/30/05
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Net Asset Value (NAV) +$0.85 $26.62 $25.77
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DISTRIBUTIONS (5/1/05-4/30/06)
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Dividend Income $0.4717
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Short-Term Capital Gain $1.1695
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Long-Term Capital Gain $2.2586
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TOTAL $3.8998
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CLASS C (SYMBOL: FRRSX) CHANGE 4/30/06 4/30/05
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Net Asset Value (NAV) +$0.84 $26.50 $25.66
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DISTRIBUTIONS (5/1/05-4/30/06)
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Dividend Income $0.4739
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Short-Term Capital Gain $1.1695
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Long-Term Capital Gain $2.2586
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TOTAL $3.9020
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ADVISOR CLASS (SYMBOL: FRLAX) CHANGE 4/30/06 4/30/05
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Net Asset Value (NAV) +$1.00 $27.06 $26.06
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DISTRIBUTIONS (5/1/05-4/30/06)
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Dividend Income $0.6674
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Short-Term Capital Gain $1.1695
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Long-Term Capital Gain $2.2586
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TOTAL $4.0955
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Annual Report | 7
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; ADVISOR CLASS: NO SALES CHARGES. CUMULATIVE
TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF
$10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. THE FUND MAY CHARGE A 2% FEE
ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
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CLASS A 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +20.00% +131.08% +275.58%
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Average Annual Total Return 2 +13.11% +16.85% +13.48%
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Value of $10,000 Investment 3 $11,311 $21,782 $35,401
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Avg. Ann. Total Return (3/31/06) 4 +21.17% +18.16% +13.86%
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CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
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Cumulative Total Return 1 +19.05% +122.61% +176.55%
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Average Annual Total Return 2 +15.05% +17.15% +14.89%
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Value of $10,000 Investment 3 $11,505 $22,061 $27,655
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Avg. Ann. Total Return (3/31/06) 4 +23.65% +18.48% +15.58%
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CLASS C 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +19.10% +122.65% +248.75%
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Average Annual Total Return 2 +18.10% +17.36% +13.31%
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Value of $10,000 Investment 3 $11,810 $22,265 $34,875
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Avg. Ann. Total Return (3/31/06) 4 +26.65% +18.67% +13.69%
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ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +20.28% +133.99% +291.45%
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Average Annual Total Return 2 +20.28% +18.53% +14.62%
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Value of $10,000 Investment 3 $12,028 $23,399 $39,145
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Avg. Ann. Total Return (3/31/06) 4 +28.90% +19.86% +15.01%
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
8 | Annual Report
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 (5/1/96-4/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN REAL
ESTATE
SECURITIES DOW JONES WILSHIRE REAL
DATE FUND - CLASS A S&P 500 6 ESTATE SECURITIES INDEX 6
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5/1/1996 $9,426 $10,000 $10,000
5/31/1996 $9,650 $10,257 $10,223
6/30/1996 $9,746 $10,297 $10,427
7/31/1996 $9,694 $9,842 $10,335
8/31/1996 $10,149 $10,050 $10,774
9/30/1996 $10,447 $10,615 $11,043
10/31/1996 $10,656 $10,908 $11,342
11/30/1996 $10,992 $11,731 $11,813
12/31/1996 $11,966 $11,499 $13,074
1/31/1997 $12,120 $12,217 $13,261
2/28/1997 $12,104 $12,313 $13,269
3/31/1997 $12,181 $11,808 $13,314
4/30/1997 $11,874 $12,512 $12,884
5/31/1997 $12,297 $13,273 $13,268
6/30/1997 $12,843 $13,868 $13,926
7/31/1997 $13,173 $14,971 $14,384
8/31/1997 $13,127 $14,133 $14,277
9/30/1997 $14,319 $14,906 $15,685
10/31/1997 $13,819 $14,409 $15,019
11/30/1997 $14,104 $15,075 $15,320
12/31/1997 $14,347 $15,334 $15,662
1/31/1998 $14,197 $15,503 $15,441
2/28/1998 $14,078 $16,621 $15,244
3/31/1998 $14,403 $17,471 $15,544
4/30/1998 $14,006 $17,647 $15,054
5/31/1998 $13,880 $17,344 $14,910
6/30/1998 $13,729 $18,048 $14,831
7/31/1998 $12,817 $17,856 $13,798
8/31/1998 $11,564 $15,277 $12,365
9/30/1998 $12,174 $16,256 $13,057
10/31/1998 $12,095 $17,577 $12,878
11/30/1998 $12,246 $18,642 $13,120
12/31/1998 $12,144 $19,716 $12,933
1/31/1999 $11,754 $20,540 $12,653
2/28/1999 $11,610 $19,902 $12,553
3/31/1999 $11,593 $20,698 $12,485
4/30/1999 $12,873 $21,499 $13,815
5/31/1999 $13,034 $20,992 $14,049
6/30/1999 $12,822 $22,156 $13,812
7/31/1999 $12,237 $21,466 $13,283
8/31/1999 $12,017 $21,359 $13,084
9/30/1999 $11,542 $20,774 $12,494
10/31/1999 $11,279 $22,088 $12,262
11/30/1999 $11,025 $22,537 $12,069
12/31/1999 $11,460 $23,864 $12,523
1/31/2000 $11,442 $22,665 $12,574
2/29/2000 $11,200 $22,237 $12,334
3/31/2000 $11,750 $24,411 $12,874
4/30/2000 $12,517 $23,676 $13,791
5/31/2000 $12,797 $23,192 $13,956
6/30/2000 $13,413 $23,764 $14,426
7/31/2000 $14,574 $23,393 $15,721
8/31/2000 $14,080 $24,845 $15,156
9/30/2000 $14,467 $23,533 $15,648
10/31/2000 $13,911 $23,434 $14,968
11/30/2000 $14,031 $21,587 $15,304
12/31/2000 $14,994 $21,693 $16,368
1/31/2001 $15,296 $22,463 $16,531
2/28/2001 $15,032 $20,416 $16,187
3/31/2001 $14,943 $19,123 $16,199
4/30/2001 $15,320 $20,608 $16,586
5/31/2001 $15,244 $20,746 $17,050
6/30/2001 $15,997 $20,241 $17,965
7/31/2001 $15,597 $20,042 $17,606
8/31/2001 $15,940 $18,789 $18,221
9/30/2001 $15,108 $17,272 $17,141
10/31/2001 $14,549 $17,601 $16,500
11/30/2001 $15,618 $18,951 $17,569
12/31/2001 $16,140 $19,117 $18,078
1/31/2002 $16,130 $18,838 $18,156
2/28/2002 $16,512 $18,475 $18,572
3/31/2002 $17,497 $19,170 $19,716
4/30/2002 $17,732 $18,008 $19,836
5/31/2002 $17,928 $17,876 $20,036
6/30/2002 $18,252 $16,603 $20,448
7/31/2002 $17,222 $15,309 $19,181
8/31/2002 $17,212 $15,409 $19,189
9/30/2002 $16,426 $13,736 $18,342
10/31/2002 $15,685 $14,944 $17,429
11/30/2002 $16,236 $15,823 $18,292
12/31/2002 $16,414 $14,894 $18,559
1/31/2003 $15,976 $14,504 $18,016
2/28/2003 $16,261 $14,286 $18,282
3/31/2003 $16,563 $14,424 $18,746
4/30/2003 $17,286 $15,612 $19,535
5/31/2003 $18,457 $16,434 $20,656
6/30/2003 $19,090 $16,644 $21,058
7/31/2003 $19,830 $16,937 $22,280
8/31/2003 $19,984 $17,267 $22,519
9/30/2003 $20,592 $17,084 $23,278
10/31/2003 $20,997 $18,050 $23,632
11/30/2003 $21,940 $18,209 $24,657
12/31/2003 $22,592 $19,163 $25,440
1/31/2004 $23,433 $19,515 $26,388
2/29/2004 $24,084 $19,786 $26,930
3/31/2004 $25,256 $19,488 $28,522
4/30/2004 $21,682 $19,182 $24,563
5/31/2004 $23,017 $19,445 $26,425
6/30/2004 $23,745 $19,823 $27,210
7/31/2004 $23,989 $19,167 $27,373
8/31/2004 $25,823 $19,244 $29,506
9/30/2004 $26,012 $19,452 $29,449
10/31/2004 $27,322 $19,749 $31,038
11/30/2004 $28,398 $20,548 $32,504
12/31/2004 $29,851 $21,247 $34,296
1/31/2005 $28,106 $20,729 $31,483
2/28/2005 $28,820 $21,165 $32,442
3/31/2005 $28,400 $20,791 $32,092
4/30/2005 $29,502 $20,397 $33,659
5/31/2005 $30,479 $21,045 $34,768
6/30/2005 $32,006 $21,075 $36,626
7/31/2005 $33,557 $21,859 $39,373
8/31/2005 $32,736 $21,659 $37,865
9/30/2005 $32,783 $21,835 $38,001
10/31/2005 $32,256 $21,470 $37,275
11/30/2005 $33,677 $22,282 $38,960
12/31/2005 $33,799 $22,290 $39,120
1/31/2006 $35,638 $22,880 $41,890
2/28/2006 $35,730 $22,942 $42,807
3/31/2006 $36,518 $23,227 $45,149
4/30/2006 $35,401 $23,539 $43,460
Total Returns 254.01% 135.39% 334.60%
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------
CLASS A 4/30/06
- ----------------------------------
1-Year +13.11%
- ----------------------------------
5-Year +16.85%
- ----------------------------------
10-Year +13.48%
- ----------------------------------
CLASS B (1/1/99-4/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN REAL
ESTATE
SECURITIES DOW JONES WILSHIRE REAL
DATE FUND - CLASS B S&P 500 6 ESTATE SECURITIES INDEX 6
- --------------------------------------------------------------------------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $9,679 $10,418 $9,784
2/28/1999 $9,553 $10,094 $9,706
3/31/1999 $9,539 $10,498 $9,654
4/30/1999 $10,587 $10,905 $10,682
5/31/1999 $10,712 $10,647 $10,863
6/30/1999 $10,531 $11,238 $10,680
7/31/1999 $10,049 $10,887 $10,271
8/31/1999 $9,860 $10,834 $10,117
9/30/1999 $9,462 $10,537 $9,661
10/31/1999 $9,246 $11,203 $9,481
11/30/1999 $9,029 $11,431 $9,332
12/31/1999 $9,375 $12,104 $9,683
1/31/2000 $9,360 $11,496 $9,723
2/29/2000 $9,153 $11,279 $9,537
3/31/2000 $9,594 $12,381 $9,954
4/30/2000 $10,224 $12,009 $10,664
5/31/2000 $10,438 $11,763 $10,791
6/30/2000 $10,941 $12,053 $11,155
7/31/2000 $11,878 $11,865 $12,156
8/31/2000 $11,473 $12,601 $11,719
9/30/2000 $11,780 $11,936 $12,099
10/31/2000 $11,318 $11,886 $11,573
11/30/2000 $11,409 $10,949 $11,834
12/31/2000 $12,185 $11,003 $12,656
1/31/2001 $12,423 $11,393 $12,782
2/28/2001 $12,200 $10,355 $12,516
3/31/2001 $12,123 $9,699 $12,526
4/30/2001 $12,423 $10,453 $12,825
5/31/2001 $12,346 $10,523 $13,183
6/30/2001 $12,957 $10,267 $13,891
7/31/2001 $12,624 $10,166 $13,614
8/31/2001 $12,887 $9,530 $14,089
9/30/2001 $12,205 $8,760 $13,254
10/31/2001 $11,752 $8,927 $12,758
11/30/2001 $12,604 $9,612 $13,585
12/31/2001 $13,022 $9,696 $13,978
1/31/2002 $13,006 $9,555 $14,039
2/28/2002 $13,307 $9,371 $14,361
3/31/2002 $14,083 $9,723 $15,245
4/30/2002 $14,273 $9,134 $15,338
5/31/2002 $14,416 $9,067 $15,493
6/30/2002 $14,671 $8,421 $15,811
7/31/2002 $13,839 $7,765 $14,831
8/31/2002 $13,823 $7,816 $14,838
9/30/2002 $13,182 $6,967 $14,182
10/31/2002 $12,584 $7,580 $13,477
11/30/2002 $13,012 $8,025 $14,144
12/31/2002 $13,152 $7,554 $14,350
1/31/2003 $12,783 $7,357 $13,930
2/28/2003 $13,013 $7,246 $14,136
3/31/2003 $13,234 $7,316 $14,495
4/30/2003 $13,816 $7,919 $15,105
5/31/2003 $14,743 $8,335 $15,971
6/30/2003 $15,234 $8,442 $16,283
7/31/2003 $15,812 $8,591 $17,227
8/31/2003 $15,928 $8,758 $17,412
9/30/2003 $16,404 $8,665 $17,999
10/31/2003 $16,711 $9,155 $18,273
11/30/2003 $17,451 $9,236 $19,065
12/31/2003 $17,957 $9,720 $19,671
1/31/2004 $18,612 $9,898 $20,404
2/29/2004 $19,117 $10,036 $20,823
3/31/2004 $20,033 $9,884 $22,054
4/30/2004 $17,192 $9,729 $18,993
5/31/2004 $18,234 $9,863 $20,432
6/30/2004 $18,801 $10,054 $21,040
7/31/2004 $18,987 $9,722 $21,166
8/31/2004 $20,425 $9,761 $22,814
9/30/2004 $20,562 $9,866 $22,771
10/31/2004 $21,580 $10,017 $23,999
11/30/2004 $22,420 $10,422 $25,133
12/31/2004 $23,561 $10,777 $26,519
1/31/2005 $22,164 $10,514 $24,343
2/28/2005 $22,704 $10,735 $25,085
3/31/2005 $22,364 $10,545 $24,814
4/30/2005 $23,230 $10,345 $26,026
5/31/2005 $23,979 $10,674 $26,884
6/30/2005 $25,160 $10,690 $28,320
7/31/2005 $26,371 $11,087 $30,444
8/31/2005 $25,702 $10,986 $29,278
9/30/2005 $25,726 $11,075 $29,383
10/31/2005 $25,300 $10,890 $28,822
11/30/2005 $26,388 $11,301 $30,125
12/31/2005 $26,470 $11,306 $30,249
1/31/2006 $27,894 $11,605 $32,390
2/28/2006 $27,946 $11,636 $33,099
3/31/2006 $28,548 $11,781 $34,910
4/30/2006 $27,655 $11,939 $33,604
Total Returns 176.55% 19.39% 236.04%
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------
CLASS B 4/30/06
- -----------------------------------------------
1-Year +15.05%
- -----------------------------------------------
5-Year +17.15%
- -----------------------------------------------
Since Inception (1/1/99) +14.89%
- -----------------------------------------------
Annual Report | 9
ADVISOR CLASS (5/1/96-4/30/06) 5
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 4/30/06
- ----------------------------------------------
1-Year +18.10%
- ----------------------------------------------
5-Year +17.36%
- ----------------------------------------------
10-Year +13.31%
- ----------------------------------------------
CLASS C (5/1/96-4/30/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN REAL
ESTATE
SECURITIES DOW JONES WILSHIRE REAL
DATE FUND - CLASS C S&P 500 6 ESTATE SECURITIES INDEX 6
- --------------------------------------------------------------------------------
5/1/1996 $10,000 $10,000 $10,000
5/31/1996 $10,231 $10,257 $10,223
6/30/1996 $10,318 $10,297 $10,427
7/31/1996 $10,263 $9,842 $10,335
8/31/1996 $10,732 $10,050 $10,774
9/30/1996 $11,043 $10,615 $11,043
10/31/1996 $11,258 $10,908 $11,342
11/30/1996 $11,608 $11,731 $11,813
12/31/1996 $12,625 $11,499 $13,074
1/31/1997 $12,780 $12,217 $13,261
2/28/1997 $12,756 $12,313 $13,269
3/31/1997 $12,821 $11,808 $13,314
4/30/1997 $12,494 $12,512 $12,884
5/31/1997 $12,936 $13,273 $13,268
6/30/1997 $13,501 $13,868 $13,926
7/31/1997 $13,837 $14,971 $14,384
8/31/1997 $13,779 $14,133 $14,277
9/30/1997 $15,024 $14,906 $15,685
10/31/1997 $14,492 $14,409 $15,019
11/30/1997 $14,778 $15,075 $15,320
12/31/1997 $15,030 $15,334 $15,662
1/31/1998 $14,853 $15,503 $15,441
2/28/1998 $14,727 $16,621 $15,244
3/31/1998 $15,055 $17,471 $15,544
4/30/1998 $14,626 $17,647 $15,054
5/31/1998 $14,492 $17,344 $14,910
6/30/1998 $14,324 $18,048 $14,831
7/31/1998 $13,366 $17,856 $13,798
8/31/1998 $12,054 $15,277 $12,365
9/30/1998 $12,685 $16,256 $13,057
10/31/1998 $12,592 $17,577 $12,878
11/30/1998 $12,735 $18,642 $13,120
12/31/1998 $12,624 $19,716 $12,933
1/31/1999 $12,214 $20,540 $12,653
2/28/1999 $12,053 $19,902 $12,553
3/31/1999 $12,035 $20,698 $12,485
4/30/1999 $13,356 $21,499 $13,815
5/31/1999 $13,516 $20,992 $14,049
6/30/1999 $13,284 $22,156 $13,812
7/31/1999 $12,678 $21,466 $13,283
8/31/1999 $12,437 $21,359 $13,084
9/30/1999 $11,937 $20,774 $12,494
10/31/1999 $11,661 $22,088 $12,262
11/30/1999 $11,393 $22,537 $12,069
12/31/1999 $11,827 $23,864 $12,523
1/31/2000 $11,808 $22,665 $12,574
2/29/2000 $11,547 $22,237 $12,334
3/31/2000 $12,104 $24,411 $12,874
4/30/2000 $12,893 $23,676 $13,791
5/31/2000 $13,166 $23,192 $13,956
6/30/2000 $13,801 $23,764 $14,426
7/31/2000 $14,979 $23,393 $15,721
8/31/2000 $14,466 $24,845 $15,156
9/30/2000 $14,850 $23,533 $15,648
10/31/2000 $14,274 $23,434 $14,968
11/30/2000 $14,389 $21,587 $15,304
12/31/2000 $15,361 $21,693 $16,368
1/31/2001 $15,663 $22,463 $16,531
2/28/2001 $15,391 $20,416 $16,187
3/31/2001 $15,293 $19,123 $16,199
4/30/2001 $15,663 $20,608 $16,586
5/31/2001 $15,576 $20,746 $17,050
6/30/2001 $16,340 $20,241 $17,965
7/31/2001 $15,918 $20,042 $17,606
8/31/2001 $16,252 $18,789 $18,221
9/30/2001 $15,394 $17,272 $17,141
10/31/2001 $14,820 $17,601 $16,500
11/30/2001 $15,899 $18,951 $17,569
12/31/2001 $16,426 $19,117 $18,078
1/31/2002 $16,406 $18,838 $18,156
2/28/2002 $16,778 $18,475 $18,572
3/31/2002 $17,759 $19,170 $19,716
4/30/2002 $18,000 $18,008 $19,836
5/31/2002 $18,181 $17,876 $20,036
6/30/2002 $18,511 $16,603 $20,448
7/31/2002 $17,446 $15,309 $19,181
8/31/2002 $17,425 $15,409 $19,189
9/30/2002 $16,620 $13,736 $18,342
10/31/2002 $15,853 $14,944 $17,429
11/30/2002 $16,405 $15,823 $18,292
12/31/2002 $16,572 $14,894 $18,559
1/31/2003 $16,115 $14,504 $18,016
2/28/2003 $16,406 $14,286 $18,282
3/31/2003 $16,686 $14,424 $18,746
4/30/2003 $17,412 $15,612 $19,535
5/31/2003 $18,585 $16,434 $20,656
6/30/2003 $19,200 $16,644 $21,058
7/31/2003 $19,942 $16,937 $22,280
8/31/2003 $20,088 $17,267 $22,519
9/30/2003 $20,681 $17,084 $23,278
10/31/2003 $21,070 $18,050 $23,632
11/30/2003 $22,006 $18,209 $24,657
12/31/2003 $22,647 $19,163 $25,440
1/31/2004 $23,466 $19,515 $26,388
2/29/2004 $24,104 $19,786 $26,930
3/31/2004 $25,264 $19,488 $28,522
4/30/2004 $21,678 $19,182 $24,563
5/31/2004 $22,998 $19,445 $26,425
6/30/2004 $23,705 $19,823 $27,210
7/31/2004 $23,941 $19,167 $27,373
8/31/2004 $25,750 $19,244 $29,506
9/30/2004 $25,927 $19,452 $29,449
10/31/2004 $27,215 $19,749 $31,038
11/30/2004 $28,267 $20,548 $32,504
12/31/2004 $29,699 $21,247 $34,296
1/31/2005 $27,942 $20,729 $31,483
2/28/2005 $28,638 $21,165 $32,442
3/31/2005 $28,197 $20,791 $32,092
4/30/2005 $29,282 $20,397 $33,659
5/31/2005 $30,229 $21,045 $34,768
6/30/2005 $31,725 $21,075 $36,626
7/31/2005 $33,247 $21,859 $39,373
8/31/2005 $32,411 $21,659 $37,865
9/30/2005 $32,431 $21,835 $38,001
10/31/2005 $31,902 $21,470 $37,275
11/30/2005 $33,280 $22,282 $38,960
12/31/2005 $33,375 $22,290 $39,120
1/31/2006 $35,177 $22,880 $41,890
2/28/2006 $35,243 $22,942 $42,807
3/31/2006 $35,993 $23,227 $45,149
4/30/2006 $34,875 $23,539 $43,460
Total Returns 248.75% 135.39% 334.60%
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------
ADVISOR CLASS 5 4/30/06
- --------------------------------------------------------
1-Year +20.28%
- --------------------------------------------------------
5-Year +18.53%
- --------------------------------------------------------
10-Year +14.62%
- --------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
FRANKLIN REAL
ESTATE
SECURITIES DOW JONES WILSHIRE REAL
DATE FUND - CLASS ADVISOR S&P 500 6 ESTATE SECURITIES INDEX 6
- --------------------------------------------------------------------------------
5/1/1996 $10,000 $10,000 $10,000
5/31/1996 $10,237 $10,257 $10,223
6/30/1996 $10,340 $10,297 $10,427
7/31/1996 $10,285 $9,842 $10,335
8/31/1996 $10,767 $10,050 $10,774
9/30/1996 $11,084 $10,615 $11,043
10/31/1996 $11,305 $10,908 $11,342
11/30/1996 $11,661 $11,731 $11,813
12/31/1996 $12,695 $11,499 $13,074
1/31/1997 $13,077 $12,217 $13,261
2/28/1997 $13,069 $12,313 $13,269
3/31/1997 $13,151 $11,808 $13,314
4/30/1997 $12,820 $12,512 $12,884
5/31/1997 $13,285 $13,273 $13,268
6/30/1997 $13,873 $13,868 $13,926
7/31/1997 $14,239 $14,971 $14,384
8/31/1997 $14,189 $14,133 $14,277
9/30/1997 $15,475 $14,906 $15,685
10/31/1997 $14,944 $14,409 $15,019
11/30/1997 $15,260 $15,075 $15,320
12/31/1997 $15,524 $15,334 $15,662
1/31/1998 $15,370 $15,503 $15,441
2/28/1998 $15,241 $16,621 $15,244
3/31/1998 $15,592 $17,471 $15,544
4/30/1998 $15,172 $17,647 $15,054
5/31/1998 $15,036 $17,344 $14,910
6/30/1998 $14,872 $18,048 $14,831
7/31/1998 $13,896 $17,856 $13,798
8/31/1998 $12,541 $15,277 $12,365
9/30/1998 $13,209 $16,256 $13,057
10/31/1998 $13,116 $17,577 $12,878
11/30/1998 $13,287 $18,642 $13,120
12/31/1998 $13,179 $19,716 $12,933
1/31/1999 $12,765 $20,540 $12,653
2/28/1999 $12,608 $19,902 $12,553
3/31/1999 $12,599 $20,698 $12,485
4/30/1999 $13,978 $21,499 $13,815
5/31/1999 $14,161 $20,992 $14,049
6/30/1999 $13,932 $22,156 $13,812
7/31/1999 $13,307 $21,466 $13,283
8/31/1999 $13,068 $21,359 $13,084
9/30/1999 $12,553 $20,774 $12,494
10/31/1999 $12,269 $22,088 $12,262
11/30/1999 $11,993 $22,537 $12,069
12/31/1999 $12,469 $23,864 $12,523
1/31/2000 $12,459 $22,665 $12,574
2/29/2000 $12,186 $22,237 $12,334
3/31/2000 $12,789 $24,411 $12,874
4/30/2000 $13,632 $23,676 $13,791
5/31/2000 $13,937 $23,192 $13,956
6/30/2000 $14,615 $23,764 $14,426
7/31/2000 $15,877 $23,393 $15,721
8/31/2000 $15,350 $24,845 $15,156
9/30/2000 $15,771 $23,533 $15,648
10/31/2000 $15,166 $23,434 $14,968
11/30/2000 $15,297 $21,587 $15,304
12/31/2000 $16,358 $21,693 $16,368
1/31/2001 $16,687 $22,463 $16,531
2/28/2001 $16,410 $20,416 $16,187
3/31/2001 $16,319 $19,123 $16,199
4/30/2001 $16,730 $20,608 $16,586
5/31/2001 $16,648 $20,746 $17,050
6/30/2001 $17,479 $20,241 $17,965
7/31/2001 $17,043 $20,042 $17,606
8/31/2001 $17,416 $18,789 $18,221
9/30/2001 $16,511 $17,272 $17,141
10/31/2001 $15,912 $17,601 $16,500
11/30/2001 $17,077 $18,951 $17,569
12/31/2001 $17,651 $19,117 $18,078
1/31/2002 $17,651 $18,838 $18,156
2/28/2002 $18,067 $18,475 $18,572
3/31/2002 $19,139 $19,170 $19,716
4/30/2002 $19,416 $18,008 $19,836
5/31/2002 $19,631 $17,876 $20,036
6/30/2002 $19,997 $16,603 $20,448
7/31/2002 $18,861 $15,309 $19,181
8/31/2002 $18,861 $15,409 $19,189
9/30/2002 $18,003 $13,736 $18,342
10/31/2002 $17,193 $14,944 $17,429
11/30/2002 $17,794 $15,823 $18,292
12/31/2002 $18,004 $14,894 $18,559
1/31/2003 $17,513 $14,504 $18,016
2/28/2003 $17,837 $14,286 $18,282
3/31/2003 $18,162 $14,424 $18,746
4/30/2003 $18,977 $15,612 $19,535
5/31/2003 $20,258 $16,434 $20,656
6/30/2003 $20,952 $16,644 $21,058
7/31/2003 $21,774 $16,937 $22,280
8/31/2003 $21,954 $17,267 $22,519
9/30/2003 $22,623 $17,084 $23,278
10/31/2003 $23,078 $18,050 $23,632
11/30/2003 $24,111 $18,209 $24,657
12/31/2003 $24,834 $19,163 $25,440
1/31/2004 $25,768 $19,515 $26,388
2/29/2004 $26,482 $19,786 $26,930
3/31/2004 $27,771 $19,488 $28,522
4/30/2004 $23,851 $19,182 $24,563
5/31/2004 $25,326 $19,445 $26,425
6/30/2004 $26,131 $19,823 $27,210
7/31/2004 $26,411 $19,167 $27,373
8/31/2004 $28,436 $19,244 $29,506
9/30/2004 $28,649 $19,452 $29,449
10/31/2004 $30,100 $19,749 $31,038
11/30/2004 $31,293 $20,548 $32,504
12/31/2004 $32,898 $21,247 $34,296
1/31/2005 $30,980 $20,729 $31,483
2/28/2005 $31,777 $21,165 $32,442
3/31/2005 $31,323 $20,791 $32,092
4/30/2005 $32,547 $20,397 $33,659
5/31/2005 $33,635 $21,045 $34,768
6/30/2005 $35,322 $21,075 $36,626
7/31/2005 $37,042 $21,859 $39,373
8/31/2005 $36,151 $21,659 $37,865
9/30/2005 $36,200 $21,835 $38,001
10/31/2005 $35,631 $21,470 $37,275
11/30/2005 $37,196 $22,282 $38,960
12/31/2005 $37,339 $22,290 $39,120
1/31/2006 $39,393 $22,880 $41,890
2/28/2006 $39,494 $22,942 $42,807
3/31/2006 $40,377 $23,227 $45,149
4/30/2006 $39,145 $23,539 $43,460
Total Returns 291.45% 135.39% 334.60%
10 | Annual Report
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.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated.
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 +208.36% and +12.83%.
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.
Annual Report | 11
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.
In this illustration, the estimated expenses paid this period are $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.
12 | Annual Report
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 11/1/05 VALUE 4/30/06 PERIOD* 11/1/05-4/30/06
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,097.50 $4.63
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.38 $4.46
- -----------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,093.10 $8.46
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.71 $8.15
- -----------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,093.20 $8.41
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.76 $8.10
- -----------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,098.70 $3.33
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.62 $3.21
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A: 0.89%;
B: 1.63%; C: 1.62%; and Advisor: 0.64%), multiplied by the average account value
over the period, multiplied by 181/365 to reflect the one-half year period.
Annual Report | 13
Franklin Real Estate Securities Trust
FINANCIAL HIGHLIGHTS
FRANKLIN REAL ESTATE SECURITIES FUND
----------------------------------------------------------------
YEAR ENDED APRIL 30,
CLASS A 2006 2005 2004 2003 2002
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 25.99 $ 20.63 $ 16.97 $ 18.10 $ 16.26
----------------------------------------------------------------
Income from investment operations:
Net investment income a .................... 0.50 0.49 0.55 0.63 0.66
Net realized and unrealized gains (losses) . 4.50 6.88 3.74 (1.11) 1.82
----------------------------------------------------------------
Total from investment operations ............ 5.00 7.37 4.29 (0.48) 2.48
----------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.61) (0.53) (0.63) (0.65) (0.64)
Net realized gains ......................... (3.43) (1.48) -- -- --
----------------------------------------------------------------
Total distributions ......................... (4.04) (2.01) (0.63) (0.65) (0.64)
----------------------------------------------------------------
Redemption fees ............................. -- c -- c -- -- --
----------------------------------------------------------------
Net asset value, end of year ................ $ 26.95 $ 25.99 $ 20.63 $ 16.97 $ 18.10
================================================================
Total return b .............................. 20.00% 36.07% 25.43% (2.51)% 15.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $808,892 $671,587 $550,176 $423,363 $431,749
Ratios to average net assets:
Expenses ................................... 0.88% d 0.92% d 1.01% 0.98% 0.96%
Net investment income ...................... 1.84% 2.03% 2.64% 3.76% 3.96%
Portfolio turnover rate ..................... 42.09% 36.90% 27.34% 29.76% 37.26%
a Based on average daily shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charges.
c Amount is less than $0.01 per share.
d Benefit of expense reduction is less than 0.01%.
14 | 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 B 2006 2005 2004 2003 2002
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 25.77 $ 20.45 $ 16.84 $ 17.99 $ 16.17
----------------------------------------------------------------
Income from investment operations:
Net investment income a .................... 0.30 0.31 0.39 0.50 0.52
Net realized and unrealized gains (losses) . 4.45 6.83 3.72 (1.10) 1.82
----------------------------------------------------------------
Total from investment operations ............ 4.75 7.14 4.11 (0.60) 2.34
----------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.47) (0.34) (0.50) (0.55) (0.52)
Net realized gains ......................... (3.43) (1.48) -- -- --
----------------------------------------------------------------
Total distributions ......................... (3.90) (1.82) (0.50) (0.55) (0.52)
----------------------------------------------------------------
Redemption fees ............................. -- c -- c -- -- --
----------------------------------------------------------------
Net asset value, end of year ................ $ 26.62 $ 25.77 $ 20.45 $ 16.84 $ 17.99
================================================================
Total return b .............................. 19.05% 35.12% 24.43% (3.20)% 14.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 71,458 $ 72,841 $ 56,334 $ 40,703 $ 26,650
Ratios to average net assets:
Expenses ................................... 1.63% d 1.66% d 1.76% 1.74% 1.71%
Net investment income ...................... 1.09% 1.29% 1.89% 3.00% 3.11%
Portfolio turnover rate ..................... 42.09% 36.90% 27.34% 29.76% 37.26%
a Based on average daily shares outstanding.
b Total return does not reflect the contingent deferred sales charges.
c Amount is less than $0.01 per share.
d Benefit of expense reduction is less than 0.01%.
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 C 2006 2005 2004 2003 2002
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 25.66 $ 20.37 $ 16.78 $ 17.91 $ 16.08
----------------------------------------------------------------
Income from investment operations:
Net investment income a .................... 0.30 0.31 0.39 0.51 0.53
Net realized and unrealized gains (losses) . 4.44 6.79 3.70 (1.10) 1.80
----------------------------------------------------------------
Total from investment operations ............ 4.74 7.10 4.09 (0.59) 2.33
----------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.47) (0.33) (0.50) (0.54) (0.50)
Net realized gains ......................... (3.43) (1.48) -- -- --
----------------------------------------------------------------
Total distributions ......................... (3.90) (1.81) (0.50) (0.54) (0.50)
----------------------------------------------------------------
Redemption fees ............................. -- c -- c -- -- --
----------------------------------------------------------------
Net asset value, end of year ................ $ 26.50 $ 25.66 $ 20.37 $ 16.78 $ 17.91
================================================================
Total return b .............................. 19.10% 35.07% 24.50% (3.27)% 14.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $192,172 $189,468 $149,656 $114,474 $120,394
Ratios to average net assets:
Expenses ................................... 1.62% d 1.67% d 1.76% 1.70% 1.71%
Net investment income ...................... 1.10% 1.28% 1.89% 3.04% 3.23%
Portfolio turnover rate ..................... 42.09% 36.90% 27.34% 29.76% 37.26%
a Based on average daily shares outstanding.
b Total return does not reflect the contingent deferred sales charges.
c Amount is less than $0.01 per share.
d Benefit of expense reduction is less than 0.01%.
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,
ADVISOR CLASS 2006 2005 2004 2003 2002
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 26.06 $ 20.68 $ 17.02 $ 18.14 $ 16.30
----------------------------------------------------------------
Income from investment operations:
Net investment income a .................... 0.58 0.56 0.58 0.67 0.66
Net realized and unrealized gains (losses) . 4.52 6.89 3.76 (1.10) 1.86
----------------------------------------------------------------
Total from investment operations ............ 5.10 7.45 4.34 (0.43) 2.52
----------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.67) (0.59) (0.68) (0.69) (0.68)
Net realized gains ......................... (3.43) (1.48) -- -- --
----------------------------------------------------------------
Total distributions ......................... (4.10) (2.07) (0.68) (0.69) (0.68)
Redemption fees ............................. -- b -- b -- -- --
----------------------------------------------------------------
Net asset value, end of year ................ $ 27.06 $ 26.06 $ 20.68 $ 17.02 $ 18.14
================================================================
Total return ................................ 20.28% 36.46% 25.68% (2.27)% 16.06%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............. $ 48,368 $ 39,990 $ 41,101 $ 27,532 $ 25,879
Ratios to average net assets:
Expenses ................................... 0.63% c 0.67% c 0.76% 0.73% 0.71%
Net investment income ...................... 2.09% 2.28% 2.89% 4.01% 3.96%
Portfolio turnover rate ..................... 42.09% 36.90% 27.34% 29.76% 37.26%
a Based on average daily shares outstanding.
b Amount is less than $0.01 per share.
c Benefit of expense reduction is less than 0.01%.
Annual Report | See notes to financial statements. | 17
Franklin Real Estate Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2006
- ------------------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------
COMMON STOCKS 90.2%
FINANCE/RENTAL/LEASING 1.6%
CharterMac LP ........................................... 612,300 $ 11,805,144
Doral Financial Corp. (Puerto Rico) ..................... 763,100 6,036,121
------------
17,841,265
------------
FINANCIAL CONGLOMERATES 2.1%
Brookfield Asset Management Inc., A (Canada) ............ 29,700 1,237,423
Brookfield Asset Management Inc., A (Canada) (USD Traded) 547,050 22,866,690
------------
24,104,113
------------
HOMEBUILDING 18.6%
Centex Corp. ............................................ 40,800 2,268,480
D.R. Horton Inc. ........................................ 662,000 19,873,240
a Hovnanian Enterprises Inc., A ........................... 585,700 23,293,289
KB HOME ................................................. 311,200 19,160,584
Lennar Corp., A ......................................... 363,300 19,956,069
M.D.C. Holdings Inc. .................................... 928,900 53,671,842
a Meritage Homes Corp. .................................... 516,500 33,872,070
a NVR Inc. ................................................ 10,300 7,776,500
Ryland Group Inc. ....................................... 113,100 7,137,741
Standard Pacific Corp. .................................. 258,600 8,200,206
a Toll Brothers Inc. ...................................... 400,500 12,876,075
------------
208,086,096
------------
HOTEL/RESORTS/CRUISELINES 1.1%
Starwood Hotels & Resorts Worldwide Inc. ................ 208,900 11,986,682
------------
REAL ESTATE DEVELOPMENT 7.4%
Brookfield Properties Corp. (Canada) .................... 473,760 15,207,696
Forest City Enterprises Inc., A ......................... 847,200 38,242,608
a Killam Properties Inc. (Canada) ......................... 96,200 249,591
a,b Killam Properties Inc., 144A (Canada) ................... 1,758,500 4,562,425
a,c NorthStar Capital Investment Corp. ...................... 100,000 998,000
The St. Joe Co. ......................................... 433,700 24,356,592
------------
83,616,912
------------
REAL ESTATE INVESTMENT TRUSTS 59.4%
Affordable Residential Communities ...................... 690,600 6,339,708
Ashford Hospitality Trust ............................... 842,000 9,800,880
BioMed Realty Trust Inc. ................................ 505,300 13,986,704
Boardwalk REIT (Canada) ................................. 1,331,500 28,360,950
Brandywine Realty Trust ................................. 478,000 13,532,180
Capital Trust Inc., A ................................... 298,900 9,295,790
CBL & Associates Properties Inc. ........................ 183,400 7,334,166
Cedar Shopping Centers Inc. ............................. 789,600 11,646,600
Corporate Office Properties Trust ....................... 421,500 17,492,250
Cousins Properties Inc. ................................. 103,900 3,267,655
Digital Realty Trust Inc. ............................... 626,900 17,678,580
Eagle Hospitality Properties Trust Inc. ................. 509,400 4,579,506
Education Realty Trust Inc. ............................. 303,800 4,532,696
18 | Annual Report
Franklin Real Estate Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2006 (CONTINUED)
- --------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
Entertainment Properties Trust .............. 195,600 $ 7,994,172
Eurocastle Investment Ltd. (Guernsey Islands) 100,411 3,852,095
Extra Space Storage Inc. .................... 1,012,300 15,913,356
First Potomac Realty Trust .................. 410,200 11,317,418
General Growth Properties Inc. .............. 384,890 18,070,586
GMH Communities Trust ....................... 1,412,500 17,373,750
HomeBanc Corp. .............................. 252,600 2,078,898
Host Hotels & Resorts Inc. .................. 1,013,637 21,306,640
iStar Financial Inc. ........................ 734,100 28,086,666
Kimco Realty Corp. .......................... 299,600 11,124,148
Kite Realty Group Trust ..................... 1,058,300 16,160,241
LaSalle Hotel Properties .................... 275,400 12,043,242
Lexington Corporate Properties Trust ........ 420,300 9,061,668
Liberty Property Trust ...................... 360,900 16,132,230
The Macerich Co. ............................ 561,700 41,127,674
Medical Properties Trust Inc. ............... 215,500 2,316,625
The Mills Corp. ............................. 35,100 1,120,041
MortgageIT Holdings Inc. .................... 1,010,300 11,598,244
Newcastle Investment Corp. .................. 728,000 16,314,480
Parkway Properties Inc. ..................... 183,000 7,246,800
Pennsylvania REIT ........................... 134,900 5,471,544
ProLogis .................................... 587,198 29,489,084
PS Business Parks Inc. ...................... 455,300 23,652,835
Public Storage Inc. ......................... 386,500 29,714,120
Ramco-Gershenson Properties Trust ........... 240,400 6,498,012
Redwood Trust Inc. .......................... 151,700 6,442,699
Regency Centers Corp. ....................... 218,800 13,804,092
Simon Property Group Inc. ................... 281,263 23,029,814
Strategic Hotels & Resorts Inc. ............. 841,900 19,094,292
Sunstone Hotel Investors Inc. ............... 232,100 6,670,554
b Taberna Realty Finance Trust, 144A .......... 890,800 11,803,100
Tanger Factory Outlet Centers Inc. .......... 234,600 7,690,188
U-Store-It Trust ............................ 854,600 15,622,088
Ventas Inc. ................................. 653,642 21,354,484
Vornado Realty Trust ........................ 283,700 27,133,068
--------------
665,556,613
--------------
TOTAL COMMON STOCKS (COST $728,162,821) ..... 1,011,191,681
--------------
Annual Report | 19
Franklin Real Estate Securities Trust
STATEMENT OF INVESTMENTS, APRIL 30, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (COST $113,309,845) 10.1%
MONEY MARKET FUND 10.1%
d Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.50% 113,309,845 $ 113,309,845
---------------
TOTAL INVESTMENTS (COST $841,472,666) 100.3% ....................... 1,124,501,526
OTHER ASSETS, LESS LIABILITIES (0.3)% .............................. (3,611,741)
---------------
NET ASSETS 100.0% .................................................. $ 1,120,889,785
===============
SELECTED PORTFOLIO ABBREVIATIONS
LP - Limited Partnership
REIT - Real Estate Investment Trust
a Non-income producing.
b Security was purchased pursuant to Rule 144A under the Securities Act of 1933
and may be sold in transactions exempt from registration only to qualified
institutional buyers or in a public offering registered under the Securities Act
of 1933. These securities have been deemed liquid under guidelines approved by
the Fund's Board of Trustees. At April 30, 2006, the value of these securities
was $16,365,525 representing 1.46% of net assets.
c See Note 9 regarding restricted securities.
d See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
20 | See notes to financial statements. | Annual Report
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2006
---------------
FRANKLIN
REAL ESTATE
SECURITIES
FUND
---------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............................. $ 728,162,821
Cost - Sweep Money Fund (Note 7) ......................... 113,309,845
---------------
Total cost of investments ................................ $ 841,472,666
===============
Value - Unaffiliated Issuers ............................. $ 1,011,191,681
Value - Sweep Money Fund (Note 7) ........................ 113,309,845
---------------
Total value of investments ............................... 1,124,501,526
Receivables:
Investment securities sold ............................... 3,413,344
Capital shares sold ...................................... 1,867,974
Dividends ................................................ 1,296,169
---------------
Total assets ....................................... 1,131,079,013
---------------
Liabilities:
Payables:
Investment securities purchased .......................... 4,368,511
Capital shares redeemed .................................. 4,642,468
Affiliates ............................................... 1,011,034
Funds advanced by custodian ............................... 67,338
Accrued expenses and other liabilities .................... 99,877
---------------
Total liabilities .................................. 10,189,228
---------------
Net assets, at value ............................. $ 1,120,889,785
===============
Net assets consist of:
Paid-in capital ........................................... $ 718,529,509
Distributions in excess of net investment income .......... (63,753)
Net unrealized appreciation (depreciation) ................ 283,028,860
Accumulated net realized gain (loss) ...................... 119,395,169
---------------
Net assets, at value ............................. $ 1,120,889,785
===============
Annual Report | See notes to financial statements. | 21
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
April 30, 2006
------------
FRANKLIN
REAL ESTATE
SECURITIES
FUND
------------
CLASS A:
Net assets, at value ................................................ $808,891,732
============
Shares outstanding .................................................. 30,013,976
============
Net asset value per share a ......................................... $ 26.95
============
Maximum offering price per share (net asset value per share / 94.25%) $ 28.59
============
CLASS B:
Net assets, at value ................................................ $ 71,458,178
============
Shares outstanding .................................................. 2,683,929
============
Net asset value and maximum offering price per share a .............. $ 26.62
============
CLASS C:
Net assets, at value ................................................ $192,172,282
============
Shares outstanding .................................................. 7,251,077
============
Net asset value and maximum offering price per share a .............. $ 26.50
============
ADVISOR CLASS:
Net assets, at value ................................................ $ 48,367,593
============
Shares outstanding .................................................. 1,787,263
============
Net asset value and maximum offering price per share a .............. $ 27.06
============
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
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, 2006
-------------
FRANKLIN
REAL ESTATE
SECURITIES
FUND
-------------
Investment income:
Dividends:
Unaffiliated issuers .................................................. $ 25,038,699
Non-controlled affiliated issuers (Note 8) ............................ 386,579
Sweep Money Fund (Note 7) ............................................. 4,045,670
-------------
Total investment income ............................................. 29,470,948
-------------
Expenses:
Management fees (Note 3a) .............................................. 4,713,192
Distribution fees (Note 3c)
Class A ............................................................... 1,914,117
Class B ............................................................... 751,056
Class C ............................................................... 1,994,089
Transfer agent fees (Note 3e) .......................................... 1,775,823
Custodian fees (Note 4) ................................................ 17,268
Reports to shareholders ................................................ 108,294
Registration and filing fees ........................................... 130,630
Professional fees ...................................................... 27,815
Trustees' fees and expenses ............................................ 28,884
Other .................................................................. 20,348
-------------
Total expenses .................................................. 11,481,516
Expense reduction (Note 4) ...................................... (3,357)
-------------
Net expenses .................................................. 11,478,159
-------------
Net investment income ........................................ 17,992,789
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers .................................................. 140,523,677
Non-controlled affiliated issuers (Note 8) ............................ 10,472
Realized gain distributions from REITS ................................ 15,112,751
Foreign currency transactions ......................................... (13,257)
-------------
Net realized gain (loss) ........................................ 155,633,643
-------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................... 15,875,226
Translation of assets and liabilities denominated in foreign currencies 770
-------------
Net change in unrealized appreciation (depreciation) ........... 15,875,996
-------------
Net realized and unrealized gain (loss) ................................. 171,509,639
-------------
Net increase (decrease) in net assets resulting from operations ......... $ 189,502,428
=============
Annual Report | See notes to financial statements. | 23
Franklin Real Estate Securities Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------
FRANKLIN REAL ESTATE SECURITIES FUND
YEAR ENDED APRIL 30,
2006 2005
------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................. $ 17,992,789 $ 16,565,478
Net realized gain (loss) from investments and foreign currency transactions ....... 155,633,643 146,894,113
Net change in unrealized appreciation (depreciation) on investments and translation
of assets and liabilities denominated in foreign currencies ..................... 15,875,996 101,352,324
---------------------------------
Net increase (decrease) in net assets resulting from operations ............. 189,502,428 264,811,915
---------------------------------
Distributions to shareholders from:
Net investment income:
Class A ......................................................................... (16,153,779) (13,241,134)
Class B ......................................................................... (1,239,501) (918,096)
Class C ......................................................................... (3,347,396) (2,385,294)
Advisor Class ................................................................... (973,384) (1,041,519)
Net realized gains:
Class A ......................................................................... (89,736,661) (36,256,895)
Class B ......................................................................... (8,805,174) (4,096,493)
Class C ......................................................................... (23,769,819) (10,745,223)
Advisor Class ................................................................... (4,908,685) (2,206,216)
---------------------------------
Total distributions to shareholders ................................................ (148,934,399) (70,890,870)
---------------------------------
Capital share transactions: (Note 2)
Class A ........................................................................... 109,569,204 (10,051,257)
Class B ........................................................................... (4,464,431) 2,138,636
Class C ........................................................................... (4,828,674) 1,758,639
Advisor Class ..................................................................... 6,152,256 (11,155,368)
---------------------------------
Total capital share transactions ................................................... 106,428,355 (17,309,350)
---------------------------------
Redemption fees .................................................................... 8,062 6,971
---------------------------------
Net increase (decrease) in net assets ....................................... 147,004,446 176,618,666
Net assets
Beginning of year .................................................................. 973,885,339 797,266,673
---------------------------------
End of year ........................................................................ $ 1,120,889,785 $ 973,885,339
=================================
Undistributed net investment income/distributions in excess of net investment income
included in net assets:
End of year ........................................................................ $ (63,753) $ 73,937
=================================
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 Trust (the Trust) is registered under the
Investment Company Act of 1940 as a non-diversified, open-end investment
company, consisting of one fund, the Franklin Real Estate Securities Fund (the
Fund). 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.
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. 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. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Fund may be subject to foreign taxation. Foreign
taxes, if any, are recorded based on the tax regulations and rates that exist in
the foreign markets in which the Fund invests.
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)
E. 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 is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary.Permanent differences are
reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
Distributions received by the Fund from certain securities may be a return of
capital (ROC). Such distributions reduce the cost basis of the securities, and
any distributions in excess of the cost basis are recognized as capital gains.
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. Differences in class-level
expenses may result in payment of different per share distributions by class.
F. 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.
G. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
Annual Report | 27
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. However, based on experience, the
Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At April 30, 2006, 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,
2006 2005
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
CLASS A SHARES:
Shares sold .................... 7,707,962 $ 213,289,902 7,484,439 $ 183,224,147
Shares issued in reinvestment of
distributions ................. 3,788,757 98,831,145 1,808,952 45,697,870
Shares redeemed ................ (7,326,559) (202,551,843) (10,121,775) (238,973,274)
--------------------------------------------------------------
Net increase (decrease) ........ 4,170,160 $ 109,569,204 (828,384) $ (10,051,257)
==============================================================
CLASS B SHARES:
Shares sold .................... 109,658 $ 3,006,067 458,788 $ 11,136,250
Shares issued in reinvestment of
distributions ................. 352,731 9,102,330 178,568 4,509,296
Shares redeemed ................ (605,405) (16,572,828) (565,244) (13,506,910)
--------------------------------------------------------------
Net increase (decrease) ........ (143,016) $ (4,464,431) 72,112 $ 2,138,636
==============================================================
CLASS C SHARES:
Shares sold .................... 971,879 $ 26,538,610 1,226,767 $ 29,708,774
Shares issued in reinvestment of
distributions ................. 957,255 24,586,882 468,373 11,779,227
Shares redeemed ................ (2,061,077) (55,954,166) (1,659,895) (39,729,362)
--------------------------------------------------------------
Net increase (decrease) ........ (131,943) $ (4,828,674) 35,245 $ 1,758,639
==============================================================
ADVISOR CLASS SHARES:
Shares sold .................... 425,148 $ 11,388,149 219,685 $ 5,501,408
Shares issued in reinvestment of
distributions ................. 210,204 5,506,722 120,032 3,017,348
Shares redeemed ................ (382,465) (10,742,615) (792,613) (19,674,124)
--------------------------------------------------------------
Net increase (decrease) ........ 252,887 $ 6,152,256 (452,896) $ (11,155,368)
==============================================================
28 | Annual Report
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
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
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
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% In excess of $15 billion
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's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors up to 0.25% per year of Class A's average daily net
assets for costs incurred in connection with the sale and distribution of the
Fund's shares. Under the Class A reimbursement distribution plan, costs
exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.
Under the Fund's compensation distribution plans, the Fund pays Distributors for
costs incurred in connection with the sale and distribution of the Fund's shares
up to a certain percentage per year of its average daily net assets of each
class as follows:
Class B ............................. 1.00%
Class C ............................. 1.00%
Annual Report | 29
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 a .............................. $412,752
Contingent deferred sales charges retained ................ $137,270
a Net of commissions paid to unaffiliated broker/dealers
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $1,775,823, of which $1,060,009 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, 2006, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, realized currency losses occurring subsequent to October 31
may be deferred and treated as occurring on the first day of the following
fiscal year. At April 30, 2006, the Fund deferred realized currency losses of
$3,096.
The tax character of distributions paid during the years ended April 30, 2006
and 2005, was as follows:
-------------------------------
2006 2005
-------------------------------
Distributions paid from:
Ordinary income ..................... $ 62,868,472 $17,586,043
Long term capital gain .............. 86,065,927 53,304,827
-------------------------------
$148,934,399 $70,890,870
===============================
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of partnership adjustments.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, and partnership
adjustments.
30 | Annual Report
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
5. INCOME TAXES (CONTINUED)
At April 30, 2006, the cost of investments, net unrealized appreciation
(depreciation) and undistributed long term capital gains for income tax purposes
were as follows:
Cost of investments .......................................... $ 841,501,431
=============
Unrealized appreciation ...................................... $ 310,902,336
Unrealized depreciation ...................................... (27,902,241)
-------------
Net unrealized appreciation (depreciation) ................... $ 283,000,095
=============
Distributable earnings - undistributed long term capital gains $ 119,363,277
=============
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended April 30, 2006, aggregated $417,454,154 and $407,278,493,
respectively.
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 and administrative
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, 2006 were as shown below:
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES NUMBER OF SHARES REALIZED
HELD AT BEGINNING GROSS GROSS HELD AT END VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR END OF YEAR INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
<c>
NON-CONTROLLED AFFILIATES
Digital Realty Trust Inc. .... 1,239,500 - 612,600 626,900 $ -- a $302,128 $ --
Kite Realty Group Trust ...... 849,300 209,000 - 1,058,300 -- a 84,451 10,472 b
-------------------------------------
TOTAL AFFILIATED SECURITIES (0.00% of Net Assets) $ -- $386,579 $ 10,472
=====================================
a As of April 30, 2006, no longer an affiliate.
b Realized gain distributions from REITS.
Annual Report | 31
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
9. RESTRICTED SECURITIES
At April 30, 2006, investments in securities included issues that are restricted
under the Securities Act of 1933 (the 1933 Act). Restricted securities are often
purchased in private placement transactions, and cannot be sold without prior
registration, unless the sale is pursuant to an exemption under the 1933 Act.
The Fund has registration rights for certain restricted securities held at
period end. The issuer generally incurs all registration costs.
At April 30, 2006, the Fund held investments in restricted securities, valued in
accordance with procedures approved by the Fund's Board of Trustees as
reflecting fair value, as follows:
- -------------------------------------------------------------------------------------------------
ACQUISITION
SHARES ISSUER DATE COST VALUE
- -------------------------------------------------------------------------------------------------
100,000 Northstar Capital Investment Corp., 144A 1/16/98 $1,993,250 998,000
===========
TOTAL RESTRICTED SECURITIES (0.09% of Net Assets)
10. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, 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 (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop a plan for distribution of the
respective settlement monies. The CAGO approved the distribution plan under the
CAGO Settlement and, in accordance with the terms and conditions of that
settlement, the monies were disbursed to the relevant funds in March 2005. The
SEC has not yet approved the distribution plans pertaining to the August 2, 2004
SEC Order or the December 13, 2004 SEC Order. However, subsequent to April 30,
2006, the SEC published the IDC's distribution plan pertaining to the December
13, 2004 SEC Order for public comment. When approved, disbursements of
settlement monies will be made promptly to the relevant funds, in accordance
with the terms and conditions of those orders.
32 | Annual Report
Franklin Real Estate Securities Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
10. REGULATORY MATTERS (CONTINUED)
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multidistrict litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend 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. If it is determined that the Company bears responsibility for
any unlawful or inappropriate conduct that caused losses to the Funds, it is
committed to making the Funds or their shareholders whole, as appropriate.
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, 2006, 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 audit 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, 2006 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 13, 2006
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 the maximum amount allowable but no less than $135,239,303 as a long
term capital gain dividend for the fiscal year ended April 30, 2006.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $20,267,554 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended April 30, 2006.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $4,133,518 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended April
30, 2006. In January 2007, shareholders will receive Form 1099-DIV which will
include their share of qualified dividends distributed during the calendar year
2006. 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 3.91% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended April 30, 2006.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $4,045,670 as interest related dividend for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended April 30, 2006.
Annual Report | 35
Franklin Real Estate Securities Trust
BOARD MEMBERS AND OFFICERS
The name, year of birth 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
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1993 141 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 (1928) Trustee Since 1998 57 None
One Franklin Parkway
San Mateo, CA 94403-1906
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, 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 (1932) Trustee Since 1993 142 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)).
- -----------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (1952) Trustee Since September 137 Director, Hess Corporation (formerly,
One Franklin Parkway 2005 Amerada Hess Corporation) (explo-
San Mateo, CA 94403-1906 ration and refining of oil and gas),
H.J. Heinz Company (processed foods
and allied products), RTI International
Metals, Inc. (manufacture and distri-
bution of titanium), Canadian National
Railway (railroad), and White
Mountains Insurance Group, Ltd.
(holding company).
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and
Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to
the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
- -----------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1993 115 Director, Center for Creative Land
One Franklin Parkway 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).
- -----------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (1928) Trustee Since 1993 141 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).
- -----------------------------------------------------------------------------------------------------------------------------------
JOHN B. WILSON (1959) Trustee Since February 38 None
One Franklin Parkway 2006
San Mateo, CA 94403-1906
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); and FORMERLY, Chief Operating
Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President -
Finance and Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President - Corporate Planning, Northwest
Airlines, Inc. (airlines) (1990-1992); Vice President and Partner, Bain & Company (1986-1990); and served on private and
non-profit boards.
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
**HARMON E. BURNS (1945) Trustee and Since 1993 21 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 45 of the investment companies in Franklin
Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Since 1993 141 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 42 of the investment companies in Franklin
Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
**RUPERT H. JOHNSON, JR. (1940) Trustee, Trustee since 124 None
One Franklin Parkway President 1993 and
San Mateo, CA 94403-1906 and Chief President and
Executive Chief 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 45
of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice
Vice President - AML
President Compliance since
- AML February 2006
Compliance
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- -----------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 31 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).
- -----------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 47 of the
investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
38 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) 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 Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 47 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) 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
47 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).
- -----------------------------------------------------------------------------------------------------------------------------------
KAREN L. SKIDMORE (1952) Vice President Vice President Not Applicable Not Applicable
One Franklin Parkway and Secretary since February
San Mateo, CA 94403-1906 2006 and
Secretary since
April 2006
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Templeton Funds Annuity
Company; and officer of 31 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 39
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL 33394-3091 Chief
Accounting
Officer
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987
and 1991-2004).
- -----------------------------------------------------------------------------------------------------------------------------------
* 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., which
is the parent company of the Fund'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 Franklin Resources, Inc.
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
FRANKLIN REAL ESTATE SECURITIES FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held April 18, 2006, the Board of Trustees ("Board"), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement 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, Inc. ("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 and its affiliates 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 was 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 management agreement 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 management agreement was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses some primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. 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 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 share
Annual Report | 41
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
holders from being part of the Franklin Templeton family of funds, including the
right to 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. Among other factors taken into account by the Board were the Manager's
best-execution trading policies, including a favorable report by an independent
portfolio trading analytical firm. Consideration was also given to the
experience of each 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 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 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 agreement
renewal. The Lipper report prepared for the Fund showed the investment
performance of its Class A shares during the one-year period ended January 31,
2006, as well as the previous ten years ended 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-lowest quintile of such universe and on an
annualized basis was in the middle quintile of such universe for the previous
three-year period, and the lowest quintile of such universe for the previous
five-year period and the second-lowest quintile for the previous ten-year
period. The Board found such performance to be acceptable, noting that the
Fund's total return during the one-year period exceeded 26% and on an annualized
basis exceeded 18% and 14%, respectively, for the previous five- and ten-year
periods as shown in such Lipper report.
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 services covered
42 | Annual Report
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
under the Fund's investment management agreement was similar to those provided
by fund managers to other mutual fund groups that would be used as a basis of
comparison in the Lipper reports. In reviewing comparative costs, emphasis was
given to the Fund's management fee 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 least expensive quintile of its
Lipper expense group. 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
each 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 financed 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 each 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 the Fund's independent registered public accounting firm
had been engaged by the Manager to perform certain procedures on a biennial
basis, specified and approved by the Manager and the Fund's Board solely for
their purposes and use in reference to the profitability analysis. Included in
the analysis were the revenue and related costs involved in providing services
to the Fund, as well as the Fund's relative contribution 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 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
Annual Report | 43
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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 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
its consideration of all these factors, the Board determined that the level of
profits realized by the Manager and its affiliates from providing services to
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 Board 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 Board 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
management agreement 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 2005 and management
expressed its view that the existing fee schedule reaches a relatively low rate
quickly as the Fund grows and anticipates economies of scale as shown in 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 management agreement provides a sharing of benefits with the Fund and
its shareholders.
44 | Annual Report
Franklin Real Estate Securities Trust
SHAREHOLDER INFORMATION (CONTINUED)
FRANKLIN REAL ESTATE SECURITIES FUND
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.
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 MidCap Value Fund
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
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
Templeton Income Fund
TAX-FREE INCOME 5
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 6
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 7
Colorado
Connecticut
Florida 7
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 6
Michigan 6
Minnesota 6
Missouri
New Jersey
New York 7
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 8
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. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
6. Portfolio of insured municipal securities.
7. 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).
8. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/05
Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o 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 A2006 06/06
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is 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 $20,908 for the fiscal year ended April 30, 2006 and $19,603 for the fiscal
year ended April 30, 2005.
(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.
There were no 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.
(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.
There were no 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.
(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 $638 for the fiscal year ended April 30, 2006
and $0 for the fiscal year ended April 30, 2005. 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 $175,223 for the fiscal year ended April
30, 2006 and $4,500 for the fiscal year ended April 30, 2005. 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 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 $175,861 for the fiscal year ended April 30, 2006 and $4,500 for
the fiscal year ended April 30, 2005.
(h) The registrant's audit committee of the board 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)(1) Code of Ethics
(a)(2) 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) 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 28, 2006
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 28, 2006
By /s/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date June 28, 2006